Understanding Enterprise Value, Equity Value and Cash on Closing in an M&A transaction: A Cheat Sheet for HealthTech Founders

When an M&A deal is announced for a small to medium-sized European HealthTech company, the headline number is almost always the Enterprise Value (EV). This represents the total value of the business itself, regardless of how it's financed. However, the money you as a founder and shareholder will actually receive is the Equity Value, which is derived from the EV after adjusting for a few key items on the balance sheet.

This process is often called the "bridge" from EV to Equity Value.

Enterprise Value (EV)

Enterprise Value is the total price a buyer would pay to acquire your company's entire operations, including all assets and liabilities. It's the standard metric for comparing companies because it removes the effects of different capital structures (i.e., varying levels of debt and cash). The EV is typically calculated as a multiple of your company's revenue or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

The formula is: Enterprise Value=Equity Value+Net Debt

Net Debt: This is the most crucial adjustment for small businesses. It's calculated as Total Debt minus Cash and Cash Equivalents.

The "cash-free, debt-free" deal structure is common in Europe for small to medium-sized M&A, particularly for tech companies. It means the buyer wants to acquire the operating business as a clean slate, without the burden of its liabilities or the benefit of its cash.

Equity Value

Equity Value is the final value of the company that belongs exclusively to its shareholders. This is the amount of money you and your investors will receive at the closing of the deal. The key is to subtract any financial obligations from the EV.

The formula to get to the final payment is: Equity Value=Enterprise Value−Total Debt+Cash on Hand

This formula can be rewritten as: Equity Value=Enterprise Value−Net Debt

This demonstrates that any debt on your balance sheet will reduce the amount of cash that goes to shareholders, while any cash on hand will increase it.

Cash on Closing

Cash on closing is the amount of money your company has in its bank account on the day the transaction closes. In a typical "cash-free, debt-free" M&A structure, this cash does not stay with the company to be used by the new owner. Instead, it is distributed to shareholders or used to pay off the company's debt and transaction fees.

Impact on the Founder: For a HealthTech founder, having a strong cash position is beneficial. It directly increases the Equity Value you receive. However, a high level of debt will decrease it.

Locked Box vs. Completion Accounts: In European deals, there are two main mechanisms for this adjustment:

Locked Box: A "locked box" date is set before closing, and the company's value is fixed at that point, assuming no cash or debt changes hands afterward. This provides price certainty for both parties.

Completion Accounts: The final price is adjusted based on a calculation of cash, debt, and working capital on the day of closing. This is more common in smaller deals and can lead to post-closing price negotiations.

Understanding these concepts is vital to ensure you are accurately valuing your company and can negotiate a deal that provides a fair return for your hard work and innovation.

To discuss any of these points and how Nelson Advisors can help your Healthtech company, please email [email protected]