The short answer
The price people talk about in a transaction is almost never the amount that moves. What is negotiated is an enterprise value for the operating business. What is paid is an equity value for the shares. Four building blocks sit in between: net debt, the working capital adjustment, the chosen mechanism – locked box or closing accounts – and the deferred parts such as earn-out, holdback and vendor loan.
Every one of them is negotiable, and in practice every one is settled more often through definitions than through amounts. Which is why the mechanics belong in the preparation, not in the week before signing.
The bridge: from enterprise value to equity value
The basic calculation is always the same: enterprise value minus net debt, plus or minus the deviation of working capital from the agreed target, gives equity value. The deferred parts – money that arrives later or not at all – then come off that.
Enterprise value is normally a multiple of adjusted EBITDA. Both factors are negotiated: the multiple through market conditions and the quality of the business, the adjusted EBITDA through normalisation. Failing to push through an adjustment of 300,000 euros does not cost 300,000 at a multiple of eight – it costs 2.4 million in enterprise value. That is why this is where negotiation is hardest.
Block 1: net debt
Companies are usually handed over cash-free and debt-free. What counts as debt is not defined in law, so it becomes a list the buyer draws up and the seller disputes. Undisputed: loans, overdrafts, shareholder loans and finance leases. Disputed: the debt-like items – pension obligations, unpaid bonuses, holiday and overtime accruals, deferred capital expenditure, tax arrears, the seller's transaction costs and legal risks.
The reverse direction matters too. Not all cash counts as surplus: pledged balances, deposits and the operating cash buffer are regularly excluded.
Block 2: the working capital adjustment
Working capital transfers with the business, because the buyer has to keep trading the day after completion. The actual balance is compared with a target, normally derived from the average of month-end balances over the last twelve to 24 months.
Two points decide six-figure amounts here. First, seasonality: hand over on a date with high receivables and you deliver working capital above target and get it reimbursed – the reverse costs you. Second, the boundary with net debt: each item may be counted only once. Double-counting a holiday accrual – once as a debt-like item, once inside the target – is the most common arithmetic error at the seller's expense.
Block 3: locked box or closing accounts
The mechanism decides which date is measured.
| Locked box | Closing accounts | |
|---|---|---|
| Reference date | a past balance sheet date before signing | the day of completion |
| Price at signing | fixed | provisional, adjustment follows |
| Risk until completion | with the buyer, protected by a leakage ban | with the seller |
| Effort after completion | none | completion accounts, review period, possibly an expert determination |
| Fits | audited figures, a short gap, an auction | carve-outs, weak data, a long gap |
Locked box brings two terms that have to be in the agreement: leakage – any transfer of value to the seller between the reference date and completion, deducted euro for euro – and value accrual, the compensation for the fact that the earnings of that interim period economically belong to the buyer.
Block 4: earn-out, holdback, vendor loan
Whatever does not move immediately reduces the price economically, even when the press release counts it in.
- Earn-out: a performance-linked payment over one to three years. What matters is not the size but the contractual definition of the measurement base and the protection against buyer interference.
- Holdback or escrow: security for warranty claims, usually tied up for as long as the warranties run.
- Vendor loan: part of the price is deferred and carries interest. Whether that is a good trade depends on the rate and on the ranking against the buyer's banks.
- Rollover: the seller stays invested with a stake. Common in private equity deals – economically, giving up immediate liquidity for a share in the second sale.
A worked example
Illustrative figures, not mandate data. A company with adjusted EBITDA of 5 million euros is valued at a multiple of 8: enterprise value 40 million. Deduct 6 million of bank debt and 1.5 million of debt-like items, add back 1 million of free cash. Working capital is 0.8 million below target. That leaves an equity value of 32.7 million. Of that, 3 million is held back for 24 months and 4 million is structured as an earn-out. So 25.7 million moves at completion – against the 40 million discussed throughout the process.
Five mistakes that regularly cost money
The target is accepted unchecked. Without your own working capital series across 24 month ends you can neither test nor dispute the buyer's proposal.
Items are counted twice. Once in net debt, once in working capital. The error is arithmetically provable – but only if both lists sit side by side.
The mechanism does not match the data. A locked box on accounts that are themselves still in progress shifts the risk entirely to the seller as soon as the buyer finds corrections in the review.
The earn-out cannot be measured. After integration it is often no longer possible to establish which revenue belongs to the acquired business. Separate accounting for it belongs in the agreement and, from day one, in the books.
Leakage is not documented. Under a locked box every payment to shareholders between the reference date and completion counts. Without a running record checked against the permitted leakage list, you end up arguing about deductions with no evidence.
What the finance function has to prepare
Four documents decide the negotiating position: your own net debt schedule with evidence and a rationale per item; the working capital series across at least 24 month ends together with your own derivation of the target; the ability to produce interim accounts to any given date at short notice; and, where there is an earn-out, a booking structure that keeps the acquired business separately identifiable for the long run. All four are part of exit readiness and do not come together in four weeks.
Frequently asked questions
What is the difference between enterprise value and equity value?
Enterprise value is the value of the operating business, independent of how it is financed. Equity value is the value of the shares and therefore the amount the buyer pays for the company. Net debt and the working capital adjustment are the bridge between the two.
Locked box or closing accounts - which is better?
A locked box gives price certainty and avoids disputes after completion, but it presupposes reliable accounts at the reference date and a manageable gap to completion. Closing accounts are cleaner for carve-outs, weak data or strongly fluctuating working capital, at the cost of effort and uncertainty after the deal.
How is the working capital target calculated?
Usually as the average of month-end balances over the last twelve to 24 months, adjusted for one-off effects. In a seasonal business the completion date matters as well, because the actual balance on that date is measured against the average.
What counts as leakage?
Any transfer of value to the seller between the reference date and completion: distributions, bonuses to shareholders, fees to related parties, waivers of receivables. They are normally deducted from the price in full. Payments that are expressly allowed are listed individually in the agreement as permitted leakage.
Is an earn-out worth it for the seller?
Only if the measurement base is defined arithmetically in the agreement, the buyer cannot influence it through allocations or accounting changes, and separate accounting for the acquired business is secured. Without one of those, an earn-out is economically closer to a discount than to a further payment.
When do net debt and working capital enter the negotiation?
The definitions are negotiated with the sale and purchase agreement, so after the financial due diligence and before signing. The numbers behind them arise earlier - assemble them only in the contract phase and you are negotiating under time pressure over amounts that move the price directly.
Read on
- Financial due diligence – the six review areas and what a buyer requests in each.
- Cutting working capital – the operational levers behind the target.
- Exit readiness – twelve months of lead time and the order of the work.
- Finance for private equity portfolio companies – scope and ways of working.
- Interim CFO references – mandates with brief, scope and result.
Sources and status
Based on the purchase price mechanisms customary in German and European transactions, together with nugrow's own mandate experience in exit preparation, funding rounds and post-merger integration. The worked example is illustrative and does not come from a mandate. As of September 2026. This article does not replace legal or tax advice.
