Maximising value – what you can do in the run up to a transaction… pt 2
Following on from the first article on calculating headline value, below I’ve set out some thoughts on what to look out for in a deal process when it comes to the bridge from Enterprise value to Equity value.
Enterprise to Equity value bridge
Headline value or Enterprise value is only half of the story – next we need to look at the bridge to Equity value in the business. On a simple basis this is a deduction for the net debt in the business, sadly it is never ever simple!!
Equity value = Enterprise Value +/– net debt or debt-like items +/– an adjustment for normalised working capital
Net debt and debt-like items
Debt like items can be subjective and often need to be negotiated between buyer and seller. It’s a key part of any transaction and where value can be gained or lost.
One example is deferred tax: A buyer will most likely treat a deferred tax balance as debt as it will become payable as it unwinds. Alternatively, if you are a business that continually invests in fixed assets then it’s likely the balance will never unwind and may actually grow – treatment normally comes down to a negotiation and can depend on how strong your negotiation position is.
Another example is where you may have a number of leasehold properties – without boring you (too much) the accounting standard that relates to dilapidations is quite broad and some business will have a provision for the cost of all potential dilapidations on a lease and others may only recognise higher risk dilapidations so it can vary how they are treated in a deal.
Other, less complex debt-like items can be bad and doubtful debts, or old unsellable stock items – what can you do to clear these and realise the value pre-transaction?
Normalised working capital
The next area of subjectivity is around working capital, making sure that the business has the correct or ‘normal’ amount of working capital on D-day to continue to trade post deal. Depending on the circumstances, if you are planning for a deal well in advance you can influence the level of working capital in a business and if you can lower it, extract that value.
Set a new ‘normal’ level:
- Are your customers paying you as early as they could be? Have you got a grasp on credit control?
- Do you carry the optimum amount of stock or could it be lowered?
- Are you paying you creditors on industry standard terms? Or do you pay everyone on 30 days regardless of the terms you agreed?
I’ll pick up on how you can influence the value a buyer will pay next time.
______________________________________________________________________
Road to Exit in Newcastle is taking a break for the summer but will be back in October:
“Making It Happen: Avoiding Common Pitfalls”
If you would like to register now you can do so at the link below: