In this article
You get from enterprise value to the amount wired at closing in two stages: first subtract debt and debt-like items, add cash and adjust for working capital against the agreed target to reach equity value, then subtract transaction costs, the amounts held back, any rollover equity and any seller note to reach the cash that lands in the shareholders' accounts. In the worked example of this article, a $40,000,000 headline price becomes $33,950,000 of equity value and $23,100,000 wired on closing day.
The gap between the first number and the last is not a trick and not a sign that the deal went wrong. The headline in a letter of intent prices the business as if it had no debt and no spare cash. Everything after that is the translation of that price into what the owners of the shares are owed, and then into what they are owed today rather than later. Each line of the translation is defined in the purchase agreement, and most of the definitions are open to negotiation until the letter of intent is signed. After that, they are much harder to move.
This article follows one company through every line, with all the assumptions stated, so you can replace the figures with your own. It is general information for sellers of private companies and their advisors, not legal, tax or accounting advice; practice differs from one country to another, and the places where it differs most are flagged.
Worked example detailed below: every assumption is illustrative and stated in the section that builds the bridge.
What is the difference between enterprise value and equity value?
Enterprise value is the price of the whole business regardless of how it is financed, while equity value is the price of the shares, which is what the sellers are actually paid for. The first belongs to everyone who has a claim on the company, lenders included; the second belongs to the shareholders alone.
A buyer values a private company on its operations, most often as a multiple of earnings before interest, tax, depreciation and amortisation. A company earning $5,000,000 at a multiple of 8 is worth $40,000,000 as an operating business. That figure says nothing about the bank loan the company carries or the cash in its account, because neither changes what the operations earn. Two identical businesses, one with a loan and one without, have the same enterprise value and very different equity values.
A house sale works the same way. The house sells for its market price; the owner receives that price minus the mortgage that has to be repaid on the day. Nobody thinks the buyer paid less because the seller had a mortgage. The difference in a company sale is that "the mortgage" is not one loan with one balance: it is a list of items, and the parties have to agree on what belongs on the list.
That is why the letter of intent states an enterprise value and the purchase agreement defines a purchase price. The path from one to the other is called the equity bridge, or the enterprise-value-to-equity bridge.
What does "cash-free, debt-free" mean in a letter of intent?
"Cash-free, debt-free" means the headline price assumes the company is handed over with no financial debt and no surplus cash, so the price is reduced by the debt found at closing and increased by the cash found at closing. The phrase does not mean the seller must empty the bank account or repay every loan before the sale.
In practice the company keeps running until closing with its loans and its cash in place. On the day, the debt is measured and deducted from the price, usually because the buyer repays it directly out of the purchase money. The cash is measured and added to the price, because the buyer receives a company with that cash inside it.
The phrase also carries a third assumption that sellers tend to miss: the company is delivered with a normal level of working capital. A buyer who pays for a going concern expects enough stock, receivables and supplier credit to run it the day after closing without injecting money. The agreed normal level is the target, often called the peg, and the price moves up or down by the gap between the working capital actually delivered and that target.
What is the formula of the equity bridge?
The equity bridge is: equity value = enterprise value − debt − debt-like items + cash ± the difference between closing working capital and the target. Each term is measured at closing, or estimated a few days before it and corrected afterwards.
Debt means borrowed money: term loans, drawn credit lines, shareholder loans, with the interest accrued on them and any fee the lender charges for early repayment. Debt-like items are liabilities that are not loans but that the buyer will have to pay in cash for something that happened under the seller's ownership; the next section lists them. Cash means the cash the buyer can really use. A buyer will often argue that some of it is trapped: customer deposits, cash pledged as security, cash in a foreign subsidiary that cannot be brought home without tax, or the minimum float the business needs in the tills. Trapped cash is excluded from the bridge or counted at a discount.
The working capital term is the only one that can go either way. If the company is delivered with $200,000 more working capital than the target, the price rises by $200,000; if it is delivered $200,000 short, the price falls by $200,000. Because the adjustment is dollar for dollar, the level of the target matters as much as any other line: a target set $100,000 higher costs the seller exactly $100,000.
One rule keeps the bridge honest: an item is counted once. A liability treated as debt must be taken out of working capital, and the target must be computed on the same definition as the closing figure. A bonus accrual that is deducted as a debt-like item and also left inside the working capital calculation is charged to the seller twice. Checking for double counting is one of the most useful things a seller's accountant does before signing.
Which debt-like items do sellers not expect?
The debt-like items that surprise sellers are liabilities they never thought of as borrowing: accrued bonuses, unpaid taxes, deferred revenue, leases and the costs triggered by the sale itself. None of them is debt by law; each is debt-like only if the purchase agreement says so, and each is negotiated.
The buyer's reasoning is the same every time: "I will pay this in cash after closing, for a period when you owned the business, so it reduces what I pay you." The seller's reply depends on the item, and on whether the same cost was already reflected in the earnings the price was built on or in the working capital target.
| Item | Why a buyer calls it debt | What a seller can answer |
|---|---|---|
| Accrued bonuses and unpaid holiday pay | Earned before closing, paid in cash after | Ordinary operating cost; belongs in working capital at its normal level |
| Unpaid income taxes | Tax on profits the seller already took | Usually accepted; check the estimate and any refunds due |
| Deferred revenue | Cash collected for work the buyer must still deliver | Count only the cost of delivering, or keep it in working capital |
| Leases | Fixed payments that work like loan repayments | Depends on the accounting agreed; rent was already deducted from earnings |
| Transaction bonuses and sale costs | Caused by the sale, not by the business | Generally accepted as the seller's cost; agree the list |
| Overdue supplier bills and delayed investment | Spending pushed past closing to flatter cash | Show that payment terms and investment followed the usual pattern |
Deferred revenue is the most debated line in companies that bill in advance, such as software and maintenance businesses. A buyer may ask for the whole balance as debt; a seller will point out that the customers have paid for a service that costs far less than its price to deliver, and that advance billing is simply how the business runs. Outcomes range from no deduction to the full balance, with the cost of fulfilling the contracts as a frequent middle ground.
Leases depend on the accounting standard the agreement adopts. Under current accounting rules most leases sit on the balance sheet as a liability, which lets a buyer present office or equipment rent as debt. If the earnings used to set the price were measured after rent, deducting the lease liability as well charges the seller twice for the same premises. Many agreements therefore freeze the treatment of leases as it was before those rules, and count only finance leases, the ones that really are a way of buying equipment on credit.
How does the bridge work on a real set of numbers?
On the example company, a $40,000,000 enterprise value becomes $33,950,000 of equity value, and $23,100,000 of that reaches the shareholders by wire on closing day. The example is fiction, built to show every line; here are its assumptions.
The company earns $5,000,000 a year before interest, tax, depreciation and amortisation, and the letter of intent prices it at 8 times that figure, cash-free and debt-free. It has three shareholders: the founder with 70%, and two others with 20% and 10%. At closing it owes its bank $6,200,000, counting accrued interest, and holds $1,900,000 of cash, all of it usable. The parties have agreed four debt-like items: $450,000 of accrued bonuses, $380,000 of unpaid income taxes, $300,000 for deferred revenue (the estimated cost of delivering the services already billed, not the full balance) and $270,000 of finance leases. The working capital target is $4,500,000 and the estimate at closing is $4,150,000.
Below the equity value, the sellers bear three costs out of the price: a sell-side advisor fee of 2% of enterprise value, which is an illustrative assumption and not a market rate; $250,000 of legal and accounting fees; and $400,000 of transaction bonuses promised to managers, employer payroll charges included. The buyer keeps back 10% of the enterprise value for warranty claims and a further 1% to cover the working capital correction after closing. Finally, the shareholders reinvest $3,000,000 in the buyer's holding company and accept a $2,000,000 seller note, each in proportion to their shares.
| Line | Basis | Amount |
|---|---|---|
| Enterprise value (headline) | 8 × $5,000,000 | $40,000,000 |
| Bank debt repaid | Loan and accrued interest | −$6,200,000 |
| Accrued bonuses | Debt-like, agreed | −$450,000 |
| Unpaid income taxes | Debt-like, agreed | −$380,000 |
| Deferred revenue | Cost to deliver only | −$300,000 |
| Finance leases | Debt-like, agreed | −$270,000 |
| Cash | Usable cash at closing | +$1,900,000 |
| Working capital | $4,150,000 against a $4,500,000 target | −$350,000 |
| Equity value | Price of the shares | $33,950,000 |
| Advisor fee | 2% of $40,000,000 | −$800,000 |
| Legal and accounting fees | Fixed assumption | −$250,000 |
| Transaction bonuses | Fixed assumption | −$400,000 |
| Net to shareholders | Paid now, later or in kind | $32,500,000 |
| Warranty holdback | 10% of $40,000,000 | −$4,000,000 |
| Adjustment holdback | 1% of $40,000,000 | −$400,000 |
| Rollover equity | Reinvested in the buyer | −$3,000,000 |
| Seller note | Paid later by the buyer | −$2,000,000 |
| Cash wired at closing | To the three shareholders | $23,100,000 |
The wire is 57.75% of the headline price. Split by shareholding, the founder receives $16,170,000, the 20% holder $4,620,000 and the 10% holder $2,310,000, each before personal tax on the gain. The $16,900,000 between the headline and the wire has not all been lost, though, and the lines differ a great deal in nature, which is what the next section sorts out.
Where does the rest of the headline price go?
In the example, the money that does not reach the shareholders on closing day goes to four places: other parties paid at closing, the buyer as a price reduction, a holdback account, and deferred or reinvested value. Only the first two are gone for good; the last two are still owed to the sellers, with conditions.
The chart groups the lines of the bridge by destination. Its total is $41,900,000, the $40,000,000 headline plus the $1,900,000 of cash the company held, since both are being shared out.
Paid to others: $6,200,000 of bank debt and $1,450,000 of fees and transaction bonuses. Shareholders' own taxes are not included.
The largest group after the wire is money that was never the shareholders' to keep: the bank's loan and the costs of the sale. The smallest group, the debt-like items and the working capital shortfall, is the one negotiated hardest, because it is the only one that changes the total value of the deal rather than its timing.
The two remaining groups are value the sellers still hold. If no warranty claim is made, the working capital estimate proves right and the buyer repays the note, a further $6,400,000 arrives in cash after closing, bringing the cash total to $29,500,000, and the shareholders still own a $3,000,000 stake in the buyer's holding company. Each "if" is a real risk, and each has its own terms: how and when a holdback comes back, how the working capital figure is corrected after closing, and how an earn-out is paid when part of the price depends on future results are separate mechanisms with their own rules, and none of them should be counted as cash received.
What reduces equity value to the cash paid at closing?
Four things reduce equity value to the cash paid at closing: the transaction costs the sellers bear, the amounts held back as security, the part of the price reinvested as rollover equity, and the part lent to the buyer as a seller note. The first is a cost; the other three are price that is paid later, or in another form.
Transaction costs. The sell-side advisor's success fee, the lawyers' and accountants' fees and any bonuses promised to staff on a sale are the sellers' expenses. They are normally paid out of the purchase money on the day rather than by the shareholders afterwards, which is convenient for everyone and makes sure the professionals who carried the sale are paid when it closes. Agreements often list them as "transaction expenses" inside the price definition, next to debt.
Holdbacks and escrow. A buyer wants a pocket of money to claim against if a statement made by the sellers proves wrong, and a smaller one to settle the working capital correction. The money is either kept by the buyer (a holdback) or placed with a neutral escrow agent. Sizes vary widely with the deal. As a reference point for the United States, a review by the law firm Fasken of SRS Acquiom's deal terms studies reports a median general indemnification escrow of 10% of transaction value in deals without warranty insurance and 0.5% in deals with it, and a separate escrow for the price adjustment in 75% of 2024 deals that had an adjustment, with a median size of about 1% of transaction value. The example uses those two reference levels; your deal may sit well away from them.
Rollover equity. A financial buyer often asks the founder and the managers to keep a stake by exchanging part of their shares for shares in the new holding company. Nothing is wired for that part. Its value at closing equals its price, but afterwards it follows the fortunes of the new group, sits behind the acquisition debt and can usually be sold only when the buyer sells.
Seller note. A seller note, called vendor loan in some countries, is a loan from the sellers to the buyer for part of the price. It carries interest and a repayment date, and it normally ranks behind the bank that finances the acquisition, which means the bank can block its repayment if the business underperforms.
An earn-out, where part of the price depends on results after closing, comes on top of the bridge rather than inside it. The same review of SRS Acquiom's data reports that one third of 2024 private-target deals included one. An earn-out is not part of the equity value at closing and should be read as a possible addition, never as part of the wire.
How can the same headline price produce two different wires?
The same headline price produces different wires because offers differ in their definitions of debt, their working capital target and the share of the price paid in cash at closing. Comparing letters of intent on enterprise value alone compares the one number that is the same in both.
Take the example company and a second buyer who also writes $40,000,000. Offer B treats the full $1,200,000 deferred revenue balance as debt instead of $300,000, adds $900,000 of operating lease liabilities, sets the working capital target at $5,000,000 instead of $4,500,000, and asks for a $4,000,000 seller note instead of $2,000,000. Everything else is identical: the bank debt, the cash, the costs, the holdbacks and the rollover.
| Line | Offer A | Offer B |
|---|---|---|
| Enterprise value | $40,000,000 | $40,000,000 |
| Bank debt | −$6,200,000 | −$6,200,000 |
| Debt-like items | −$1,400,000 | −$3,200,000 |
| Cash | +$1,900,000 | +$1,900,000 |
| Working capital against target | −$350,000 | −$850,000 |
| Equity value | $33,950,000 | $31,650,000 |
| Transaction costs | −$1,450,000 | −$1,450,000 |
| Holdbacks, 10% and 1% | −$4,400,000 | −$4,400,000 |
| Rollover equity | −$3,000,000 | −$3,000,000 |
| Seller note | −$2,000,000 | −$4,000,000 |
| Cash wired at closing | $23,100,000 | $18,800,000 |
Offer B wires $4,300,000 less for the same headline. Of that gap, $2,300,000 is value given up for good, through $1,800,000 of extra debt-like items and a target $500,000 higher; the other $2,000,000 is cash that turns into a claim on the buyer.
A lower headline can also wire more. Suppose a third buyer offers $38,500,000, entirely in cash, on Offer A's definitions, and covers warranty claims with an insurance policy so that the warranty holdback falls to 0.5% of the price, with the same 1% adjustment holdback. The equity value is $32,450,000, lower than Offer A by the $1,500,000 difference in headline. Costs come to $1,420,000 because the 2% advisor fee applies to a smaller price, the two holdbacks total $577,500, and there is no rollover and no note. The wire is $30,452,500, which is $7,352,500 more than Offer A pays on the day, in exchange for less total value and no stake in the future of the business. Which offer is better depends on what the sellers want, and that choice can only be made with the three bridges side by side. The cost of the insurance policy and who bears it are left out of this comparison and would need to be added.
What should you ask for in the letter of intent to protect the wire?
To protect the wire, ask for the bridge itself in the letter of intent: a list of what counts as debt, a definition of cash, a working capital target with its method, and the cash paid at closing stated as a number. A letter of intent is mostly non-binding, but it is the reference both sides come back to, and a point written there is rarely reopened without a reason.
Sellers have the most influence before exclusivity is granted. Once one buyer has the exclusive right to negotiate, every undefined term is settled without competition, usually after due diligence has given the buyer new arguments.
| Term | What to ask for | Effect on the wire |
|---|---|---|
| Debt and debt-like items | A closed list, with leases and deferred revenue addressed by name | Stops new deductions appearing after due diligence |
| Cash | All cash counted, with any trapped cash identified now | Each dollar excluded is a dollar off the price |
| Working capital target | The figure, or the method: for example the average of the last 12 months | Dollar-for-dollar effect on the price |
| Accounting basis | The company's past practice, applied consistently | Prevents a change of method from moving the numbers |
| Holdback | Percentage, duration and who holds it | Sets how much is paid later, and when |
| Form of payment | Cash at closing as a stated amount; terms of any rollover, note or earn-out | Separates the price from the wire |
| Transaction costs | Which costs each side bears | Avoids the buyer's costs landing in the bridge |
| Worked bridge | An illustrative calculation attached, based on the latest balance sheet | Shows both sides the same arithmetic |
The working capital target deserves particular care in seasonal businesses. An average over twelve months is a common starting point because it removes the season, but a company that closes at its seasonal low will then show a shortfall that has nothing to do with how it was run. The parties can agree a target that follows the month of closing instead.
The last row is the simplest protection of all. A one-page illustrative bridge attached to the letter, built on the most recent month-end figures, forces every definition to be tested on real numbers before either side has spent much on lawyers. Sell-side advisors build this page routinely; if yours has not shown you one, ask for it before you compare offers.
Do closing accounts and a locked box lead to the same result?
Closing accounts and a locked box use the same bridge but fix it at different moments: closing accounts measure debt, cash and working capital at closing and correct the price afterwards, while a locked box fixes them at an earlier balance sheet date and does not adjust the price again. Which one applies changes how certain the wire is, not how it is built.
With closing accounts, also called completion accounts, the wire on the day is based on an estimate. The buyer then prepares the final figures within an agreed period after closing, the sellers review them, and the difference is paid one way or the other; the adjustment holdback exists to fund that payment. According to the law firm Lewis Silkin, a closing accounts mechanism is generally used in the United States, and the review of SRS Acquiom's studies cited above reports that more than 90% of private-target deals there include a purchase price adjustment.
With a locked box, the bridge is run once, on accounts drawn up at a date before signing, and the equity price is written into the agreement as a fixed figure. From that date the business is run for the buyer's benefit. In return the sellers promise that no value has left the company for their benefit since that date (no dividends, no unusual bonuses, no fees paid to their own entities), apart from payments listed in advance, and they repay any such "leakage" dollar for dollar. Because the sellers wait for their money while the buyer already enjoys the profits, the price often carries a daily amount or an interest rate from the locked box date to closing. Lewis Silkin describes the locked box as increasingly used in share purchase agreements governed by English law, particularly in auctions, while closing accounts remain common in the United Kingdom as well.
For a seller, a locked box gives a known price at signing and no dispute over accounts after closing. It also means the debt-like items and the working capital level are negotiated entirely up front, on historical accounts, with no later correction if the business has since improved.
How does the money reach each recipient on closing day?
On closing day the buyer's payment is distributed according to a funds flow memo, a schedule agreed by both sides that lists every recipient, the exact amount and the bank details for each transfer. The shareholders are one group of recipients among several, and they are usually paid in the same hour as everyone else.
The buyer does not send the equity value to the sellers and leave them to settle the rest. In the example, the buyer's cash outlay is $35,150,000: the $33,950,000 equity value, plus the $6,200,000 needed to repay the bank, less the $3,000,000 paid in shares and the $2,000,000 paid by note. That sum is then sent to its final recipients, by the buyer directly or through a paying agent or the lawyers' client accounts, depending on the country and the size of the shareholder group.
- Payoff letters and invoices are collectedIn the days before closing, the bank issues a payoff letter stating the amount that clears its loan on the closing date, here $6,200,000, and each advisor issues a final invoice. These documents fix the figures in the memo.
- The funds flow memo is signed offBoth sides and their lawyers check that the recipients' amounts add up to the buyer's payment, and bank details are confirmed by a phone call to a known number, a standard precaution against payment fraud.
- The lender is repaid$6,200,000 goes to the bank, which releases its security over the company's assets so the buyer receives the business free of the old loan.
- Advisors are paid$1,050,000 goes to the sellers' professionals: $800,000 to the sell-side advisor and $250,000 to the lawyers and accountants.
- Transaction bonuses are funded$400,000 goes to the company, which pays the managers through payroll so that the usual withholdings are made.
- The holdback is set aside$4,400,000 goes to the escrow agent, or stays with the buyer under the agreement: $4,000,000 for warranty claims and $400,000 for the working capital correction.
- Shareholders are paid$23,100,000 goes to the three shareholders in proportion to their shares: $16,170,000, $4,620,000 and $2,310,000. The rollover shares and the seller note are issued at the same time.
The five cash amounts add up to the $35,150,000 the buyer pays, which is the control every funds flow memo must pass. Where several classes of shares, options or preferred returns exist, the last step is itself a calculation set by the company's articles and shareholder agreements, and it is prepared and checked well before the day.
The memo is worth reading as closely as the bridge. It is the only document in which the seller sees, as bank transfers, every figure negotiated over the previous months, and an error caught the day before costs a correction to a spreadsheet, whereas an error caught the day after costs a request to return money.
Can every recipient be paid in one transaction?
Every recipient can be paid at the same moment when the shares of a payment are fixed before the payer pays and the payment is then routed to all of them at once. That is a description of a payment router, a different tool from an escrow account or a paying agent, and one that suits some deals and not others.
Shaka is a payment router of this kind. Each party's share of a deal is agreed, and can be signed by each recipient, before the client pays; the client pays once; and the router pays every party their share in one transaction. It routes the amount and never holds the funds, and because the payment is made onchain it is final and each party can see that the others were paid. A deal has at most 20 recipients. The example closing has eight: the bank, the sell-side advisor, the lawyers, the accountants, the company for the bonuses, and the three shareholders, on the simplifying assumption that the full holdback is kept by the buyer under the agreement.
A router does not replace what an escrow agent does. Money that must be kept aside for months and released on conditions needs someone to hold it, and that role belongs to an escrow or paying agent. The two cover different moments of the same deal: one distributes what is due today, the other looks after what is due later. In the same way, the lawyers and advisors who build the funds flow memo are the ones who decide the shares; a router only carries out what they have agreed.
Whatever the method of payment, the work that protects the seller is done earlier and on paper: a headline price translated line by line, each definition tested on real figures, and a wire amount known before the letter of intent is signed rather than discovered in the week of closing.
