Our LOI quotes a purchase price of fifteen million dollars on a cash-free, debt-free basis, but the closing settlement statement shows our net cash proceeds are significantly lower. How do buyers bridge the gap between headline Enterprise Value and actual Equity Value at closing, and how do we avoid surprises?

Question

Tyler Smith · Accepted Answer

Enterprise Value reflects the total value of the operating business. Equity Value is the actual cash distributed to your bank account on closing day. The path between the two is where sellers lose millions if they do not understand the standard closing waterfall.

To bridge Enterprise Value to Equity Value, buyers apply four core adjustments:

- Debt and debt-like items. In addition to paying off bank mortgages, SBA loans, and equipment notes, buyers classify accrued bonuses, unpaid property taxes, underfunded pensions, PTO balances, and customer deposits as debt that reduces cash at close dollar for dollar.

- Transaction expenses. Seller legal fees, broker commissions, accounting costs, and quality of earnings fees must be paid out of deal proceeds at closing.

- Net Working Capital adjustment. If your closing working capital falls short of the negotiated target peg, the shortfall is deducted directly from your cash proceeds.

- Indemnification and working capital escrows. Buyers typically hold back eight to twelve percent of total proceeds in third-party escrow accounts for twelve to twenty-four months.

To eliminate closing surprises, negotiate the specific definition of debt-like items during the LOI stage. Explicitly define what counts as funded debt versus ordinary working capital liabilities. Model your estimated closing statement thirty days before close using your latest balance sheet so you enter final negotiations with absolute clarity on net wire proceeds.