A business owner receives a bid for their company. The buyer says SEK 100 million.
It sounds clear. It sounds concrete. It sounds like the amount that will be paid to the seller. But when the agreement is finally drafted and the numbers are run through, it turns out that the payment for the shares becomes SEK 82 million.
For many owners, this is one of the most difficult parts of a business sale to understand. Not because the numbers themselves are advanced, but because the words are used in a way that is not always explained clearly enough.
The buyer often talks about Enterprise Value. The seller ultimately cares about Equity Value. The difference between them is the so-called equity bridge.
Enterprise Value Is Not Always What the Seller Receives
When a bid is submitted in an M&A process, it is often stated as Enterprise Value, or EV. It is the value of the business itself: the operations, the machine that generates revenue and profit.
EV is normally independent of exactly how the company is financed on the closing date. That is why it is often said that the valuation is done on a cash-free and debt-free basis.
But the seller is not selling an abstract business. The seller is selling the shares in an actual company, with an actual balance sheet. That company may have bank loans, cash, accounts receivable, accounts payable, and inventory. It may be unusually well financed or unusually tight on working capital.
That is where the equity bridge comes in.
From the Value of the Business to the Value of the Shares
A simplified formula often looks like this:
Equity Value = Enterprise Value - net debt +/- working capital adjustment In a more contract-oriented formulation, it can be expressed as follows:
Purchase Price = EV - Net Debt + (actual working capital - normalised working capital) Here, it is important to keep track of the signs. Net Debt normally does not mean just "debt". It means debt minus cash.
If the company has SEK 50 million in debt and SEK 100 million in cash, Net Debt is minus SEK 50 million. In the formula, Net Debt is subtracted, which means that a negative net debt becomes a plus:
EV - (-50) = EV + 50
That is why a company with more cash than debt gives the seller a higher Equity Value, while a company with more debt than cash gives the seller a lower Equity Value.
The formula translates the buyer's bid on the business into the amount that is actually paid for the shares. More debt than cash reduces the payment to the seller. More cash than debt increases it. Lower working capital than the normal level reduces the payment, while higher working capital than the normal level increases it.
It is not an after-the-fact adjustment. It is the mechanics that ensure the buyer receives the company that the valuation was based on.
A Simple Example
Assume the buyer offers an Enterprise Value of SEK 100 million. On the closing date, there is SEK 20 million in interest-bearing debt and SEK 5 million in cash. Net debt is then SEK 15 million.
Also assume that the company's normal working capital (usually calculated as an average over the past 12 months) amounts to SEK 15 million, but that the actual working capital on the closing date is only SEK 12 million. Then working capital is SEK 3 million too low.
The equity bridge becomes:
100 - 15 - 3 = 82
The seller has thus received a bid that in their head may be perceived as SEK 100 million. But the payment for the shares becomes SEK 82 million.
If the balance sheet had instead looked different, the effect could have gone the other way. Assume the company had SEK 50 million in debt and SEK 100 million in cash. Then Net Debt is minus SEK 50 million.
If working capital is at the normal level at the same time, the equity bridge becomes:
100 - (-50) + 0 = 150
The same Enterprise Value of SEK 100 million can thus give an Equity Value of SEK 150 million if the company has net cash of SEK 50 million.
It is not because anyone has changed their mind. It is because SEK 100 million was the value of the business on a cash-free and debt-free basis with normalised working capital. It was not the same thing as the value of the shares in the company with the actual balance sheet on the closing date.
Why Working Capital Plays Such a Big Role
Working capital is a word that makes many people stop listening. But in practice, it is about something very concrete: the fuel the company needs to continue operating.
Accounts receivable must come in. Suppliers must be paid. Inventory must be available. Prepaid revenue must be delivered against. The business must have enough capital tied up in day-to-day operations to function normally.
That is why the buyer does not only look at cash. Without a working capital adjustment, a seller could in theory improve cash before closing by, for example, reducing inventory, delaying payments to suppliers, or pushing in customer payments earlier than usual. On paper, the company would then look more cash-strong, but the buyer would take over a business that quickly needs to be replenished with capital.
The working capital adjustment is there to avoid that kind of distortion. It is intended to ensure that the company is handed over with a normal level of operational financing.
It also ensures that the purchase price lands closer to the economic reality regardless of when during the year the transaction is completed. Many companies have natural cycles: inventory is built up ahead of peak season, accounts receivable vary, and payments come in clusters.
Without a normalised level, the price risks being affected too much by the very day the company is taken over. With a well-thought-out working capital mechanism, the closing balance is instead compared to how the company normally needs to be financed over time.
The Important Thing Is Not Just the Number, but the Definitions
This is where many negotiations become difficult. The parties may agree on Enterprise Value but still disagree on what the shares are worth. The reason is that almost everything in the equity bridge requires definitions.
What counts as debt? What counts as cash? Should holiday pay liability, bonus, factoring, leasing, taxes, pension items, transaction costs, or intra-group receivables be treated as debt, working capital, or something else?
Which accounts are included in working capital? Should normalised working capital be based on the last twelve months, an annual report, a budget, or a special average that adjusts for seasonality?
These are not legal details in the margin. They are direct purchase price issues. An incorrectly set working capital level can move significant value between buyer and seller.
Completion Accounts or Locked Box
There are two common ways to handle this in the agreement.
One is completion accounts. Then a preliminary purchase price is often paid on the closing date. After closing, a closing balance sheet is prepared and the purchase price is adjusted when cash, debt, and working capital have been determined.
The other is locked box. Then the equity bridge is made based on a historical balance sheet before signing. The price is written into the agreement and is normally not adjusted after closing. The buyer is instead protected through leakage provisions, i.e. rules that prevent value from being extracted from the company between the locked box date and closing.
Locked box thus does not remove the equity bridge. It only moves the point in time when the bridge is made.
What the Seller Should Understand Early
A bid that looks high can turn out to be significantly less attractive when the equity bridge is calculated. That is why the purchase price mechanism should be understood already at the LOI stage, not first when the share purchase agreement is on the table.
Once the parties start negotiating definitions in the agreement, much of the commercial expectation has already settled. Then it can be difficult to explain to a seller why what sounded like SEK 100 million was not SEK 100 million in their wallet.
In a business sale, the price is never just a number. It is a number, a balance sheet, and a set of definitions. It is only when all three are understood together that the seller knows what the bid really means.