A smarter way to get deals done from enterprise value to equity price


Nick Andrews and Patrick O’Brien, Co-heads of SPA Advisory, Grant Thornton UK LLP 

The successful signing and completion of an M&A deal is dependent on numerous factors, a key one being agreement between principals on the price to be paid for the business. The focus invariably centres on the “headline price” or “enterprise value” offered, usually derived from a multiple of profits and/or from a discount of forecast future cash flows. However, as headline offers are typically on a cash-free, debt-free basis assuming a normal level of working capital, the final equity price that drives what is actually paid and received can be very different.

Determining the equity value

Adjusting the headline price for certain assets and liabilities in the balance sheet seems a straightforward concept, but what constitutes cash, debt or working capital, and determining a normal level of working capital, can be divisive. There is often no right answer, and it is not uncommon for buyers and sellers to be apart from each other in their interpretations by as much as 20 per cent of the headline price.

In the absence of definitive rules or standards for completion price adjustment mechanisms and with such high values at stake, parties to a transaction often cite market practice when establishing the equity price and drafting the sale and purchase agreement (SPA). However, there has been limited publicly available data to determine what market practice means – until now.

Market best practice

In its pioneering international survey, Grant Thornton UK LLP obtained the views of almost 600 participants from over 400 organisations internationally. Taken alongside the ICAEW’s best practice guideline,Completion Mechanisms – determining the final equity value in transactions(authored by Grant Thornton) gives principals and their advisers a point of reference to help them reach agreement and successfully complete deals, while protecting value and avoiding SPA disputes post-deal.

Please contact Grant Thornton to discuss their research or for advice on your deals.