The calculation from enterprise value to equity value is called the equity bridge. Bank loans, shareholder loans, lease liabilities and debt-like items such as pension provisions are deducted. Free cash is added. In addition, there is often an adjustment if net working capital deviates from the agreed target value.
For owners of mid-sized companies, equity value is the figure that really matters. Two offers with the same enterprise value can lead to very different payouts. The difference lies in the definition of what counts as debt and what counts as free cash. These definitions are set out in the purchase agreement and deserve close scrutiny.
The calculation is made either as at a past reference date (locked box) or as at the closing date (closing accounts). Equity value must be distinguished from net proceeds after tax and transaction costs. Only the latter shows what the seller actually keeps.
Example
Hypothetical example: Enterprise value is €12.0 million. €3.5 million of bank loans and €1.0 million of pension provisions are deducted, and €1.5 million of free cash is added. Equity value is €9.0 million, or €8.8 million after a working capital reduction of €0.2 million.