Equity Value: What the Seller Actually Ends Up Receiving

Equity value is what reaches the sellers once the net debt the buyer takes on is deducted from enterprise value. Enterprise value of Rs 1,320 crore less net debt of Rs 180 crore gives Rs 1,140 crore, and the completion adjustments then move that to Rs 1,137 crore. A further Rs 60 crore is conditional, so the maximum of Rs 1,197 crore is not a receipt.

Ask somebody who has just sold a business what the transaction was worth and the answer is usually the largest number in the documents. Ask the same person what actually arrived in the bank account and the answer is a different number, a smaller one, offered after a slightly longer pause. The gap between those two answers is not a rounding difference and it is not a fee. The gap is a structural feature of how a business changes hands.

Take it out of the transaction and onto an ordinary street. A flat is advertised at Rs 96,00,000/- and it sells at exactly that figure. The household selling it does not receive Rs 96,00,000/-. There is Rs 13,00,000/- still outstanding on the home loan, and that has to be settled out of the proceeds before a single rupee reaches the people who lived there. The household walks away with Rs 83,00,000/-. Both numbers are true, both describe the same sale, and only one of them buys the next flat. The price of a thing and the amount its seller receives are two separate figures, and only the second one can be spent.

A company is sold the same way, with one difference that matters. The borrowings do not have to be repaid on the day. The buyer can simply take them on and carry them forward. A buyer who agrees to carry Rs 180 crore of somebody else's obligation will hand over Rs 180 crore less in cash, so the effect on the sellers is identical. Nothing about that is a negotiation and nothing about it is generous or harsh. The deduction is arithmetic that has already happened by the time anybody sits down to argue.

Harivansh Packaging Limited, a listed maker of rigid and flexible packaging, is buying all of Sundarban Polymers Private Limited, an unlisted maker of flexible packaging films. Devyani Kulkarni is the chief financial officer of Harivansh Packaging Limited and Ashwin Rege leads its transaction team.

What is equity value in a purchase, and who ends up receiving it?

Equity valueWhat reaches the people who held the shares, once the buyer has accounted for the borrowings that travel with the business. is the amount that reaches the people who held the shares. The definition worth carrying is stated from the receiving end rather than as the last line of a formula. Textbook treatments almost always write it the other way round, as enterprise value minus net debt, and something quietly goes wrong when they do. A reader who meets the idea as a subtraction starts treating the result as a leftover, as whatever happens to remain once the important quantities have been dealt with.

Equity value is not a leftover. Equity value is the entire reason the sellers agreed to anything. Every other figure in a purchase is a working number, and equity value is the one figure that describes a transfer of money to identified people on an identified day. Nobody sells a business to achieve an enterprise value. Sellers sell to receive an amount, and equity value is that amount.

So who receives it? The people on the share register of the business being sold, in the proportions in which they sit on it. Not the business itself. The business is what changes hands rather than what is paid, and it receives nothing. Not the lenders to the business, whose position is dealt with inside the bridge rather than out of the sellers' proceeds. Not the buyer's shareholders, who are on the other side of the whole arrangement. The considerationThe total of what a buyer gives in return for a business, in whatever form it is given: cash, shares, deferred amounts or a mixture. moves from one set of shareholders to another, and every other party in the room is either advising, lending or approving.

The household version is worth holding on to throughout. When the flat sells, the bank is repaid, the household receives the balance, and nobody would describe the balance as a residual figure of secondary interest. The balance is the whole point of selling. The only reason the transaction version reads differently is that it is normally written down as an equation rather than as a payment.

How does enterprise value turn into the amount the sellers receive?

Through one deduction, run once, in the open. Enterprise value describes the whole business measured without regard to how it happens to be funded. The business being valued carries borrowings, and those borrowings do not disappear because the shares changed hands. Somebody still has to carry them, and after completion that somebody is the buyer. So the buyer deducts what it is taking on, and pays the rest to the sellers. Practitioners call that single movement the bridgeThe short chain of additions and subtractions that carries one transaction figure across to another, set out line by line so that each step can be checked..

The enterprise value agreed for Sundarban Polymers Private Limited is Rs 1,320 crore, or 10.0 times the Rs 132 crore of earnings before interest, tax, depreciation and amortisation (EBITDA) the business earned. How that multiple was chosen, what a peer set is, and how a business is valued at all are covered separately. Take the Rs 1,320 crore as a fact written into an agreement and follow what happens to it next.

Next is the deduction of net debtBorrowings less cash held. Repay every lender, use every rupee of cash to do it, and one number stands for what a business would have to settle., which for Sundarban Polymers is Rs 180 crore. Rs 1,320 crore less Rs 180 crore is Rs 1,140 crore, and that is what the sellers agreed to receive. The deduction is not a discount and it is not the buyer winning a point in a negotiation: it is the buyer assuming an obligation, and the sellers giving up exactly the amount of that obligation.

Nobody argues about this step, and the reason is worth sitting with. If the buyer refused to take the borrowings on, the sellers would have to clear them out of their own proceeds, and they would end up with the same Rs 1,140 crore by a longer route. The deduction is not a transfer of value between the two sides at all. The deduction is a statement about who holds an existing obligation the morning after completion. The number that gets argued about is the Rs 1,320 crore, and by the time the bridge is being run, that argument is already finished.

Why does the bridge have to be run twice?

Because the agreement is signed on one day and the money moves on another, and a business does not stand still in between. The figures the bridge used at signing were the best available at the time, and by the time the shares actually transfer, the real ones are known. So the same bridge is run again on the real ones. A purchase runs its bridge twice, once on assumed figures at signing and once on actual figures at completionThe day the shares and the money change hands. Conditions have to be satisfied in between, so completion comes later than signing, sometimes by months., and only the second run produces an amount that moves.

The two things that move are the ones the agreement singles out. The first is working capitalThe short term operating money a business has tied up: stock and amounts owed to it, less what it owes its suppliers.. The agreement fixes that at a normalised level called a pegA figure written into the agreement as the normal level of something, against which the actual level at completion is measured.. The second is net debt, assumed at one figure and turning out to be another. Both were defined in the documentation. A clause created each adjustment, so the wording of that clause decides its size.

The results on this purchase are these, and they are used as results rather than derived. The working capital adjustment adds Rs 12 crore. The net debt adjustment takes Rs 15 crore away. The net is minus Rs 3 crore, so the equity value paid is Rs 1,137 crore rather than the Rs 1,140 crore agreed. How each of those two was computed, what the peg was measured against and why a buyer insists on one at all are covered under completion adjustments.

Notice how small the net movement is, and resist the conclusion that follows most naturally from it. Rs 3 crore against Rs 1,140 crore is a quarter of one per cent. Reading Rs 3 crore as evidence that the exercise barely matters would be easy. The truth is the opposite. The net is small because two adjustments of Rs 12 crore and Rs 15 crore happened to point in opposite directions and largely cancelled. A buyer who had checked only the working capital would have been wrong by Rs 12 crore, and one who had checked only the net debt would have been wrong by Rs 15 crore. Neither would have been wrong by Rs 3 crore. The smallness of the net is the result of doing both, never a reason to skip either.

What do the sellers actually hold at the end of completion day?

One number. Rs 1,137 crore, received, with no condition attached to it and nothing left to be proved. The answer is short on purpose. The discipline of a completion statement is to say what is in hand and stop there.

Everything else that the agreement mentions about money is, on that evening, still a possibility. There is a further Rs 60 crore in the documents, payable if Sundarban Polymers Private Limited reaches EBITDA of Rs 145 crore in the first full year after completion. The test sits 9.8 per cent above the Rs 132 crore the business earned in the year the transaction was struck. An arrangement of that shape is called an earn-outA part of the price payable later, and only if a stated result is achieved after the buyer has taken over the business., and it is a perfectly ordinary feature of a purchase.

The sellers hold a specific, single, unconditional number at the end of completion day, and everything else in the price is a possibility with a date and a test attached to it. The two are not the same kind of object and no arithmetic makes them the same kind of object. One has already happened. The other is a description of circumstances under which something might happen later, written by people who did not know then and do not know now whether those circumstances will arise.

Does a conditional payment count as part of what a seller receives?

The honest answer is that it counts as part of what a seller may receive, and that the difference between may and does is the entire subject of this block. The difference is not a pedantic distinction and not a matter of conservative accounting temperament. The difference changes what the sellers can actually do on the Monday after completion.

Work through the practical consequences one at a time. The Rs 60 crore is not there, so it cannot be spent. A lender asked to advance against the Rs 60 crore is being asked to take a view on a business the sellers no longer control, so it cannot be lent against on the terms that Rs 60 crore of cash could be. The condition is a level of EBITDA the business has never yet reached, so the amount cannot be relied upon in planning. And it may simply never arrive, in which case nothing has gone wrong and nobody has broken anything: the agreement worked exactly as written.

A conditional amount is part of what the sellers may receive and no part of what they hold. The practical test is simple. They cannot spend it, cannot lend against it on the same terms, and may never see it at all. Notice that the sellers are also, by this point, the party with the least influence over the outcome. The business is being run by somebody else. The result that triggers the payment will be produced under decisions the sellers do not make, and measured against a definition written into a document that most of them will never read line by line.

The everyday version is a commission that depends on next year's sales at a shop the salesperson has just left. The commission might come. The commission is written down. The commission is not money, and a household that has already committed it has committed a possibility rather than an amount.

Why is the maximum figure a permission rather than a receipt?

Rs 1,137 crore and Rs 60 crore together come to Rs 1,197 crore. The Rs 1,197 crore is real, in the sense that it appears in the documents and describes something true. The figure describes the most the agreement allows to be paid across the whole arrangement. A maximum is a statement about what the agreement permits, and describing a permission as a receipt is exactly the error of describing a credit limit as money in an account.

The credit limit comparison is worth taking seriously rather than treating as a figure of speech. Nobody with a Rs 2,00,000/- limit on a card and Rs 6,400/- in the account would answer a question about how much money they have with the larger figure. The two numbers are not competing estimates of the same quantity. One is a ceiling on a possible future event, and the other is a balance. Yet the same person, reading a purchase summary, will read Rs 1,197 crore as the outcome of the transaction without hesitating.

Part of why this happens is that a maximum reads like a fact. A maximum is precise, it is derived from the documents, and it is bigger, and those three things make it the figure a headline reaches for. Precision is not the same as having happened. The correct sentence about this purchase has two clauses and refuses to collapse into one: the sellers received Rs 1,137 crore, and the agreement permits up to Rs 1,197 crore.

What is left for the sellers once the borrowings have been settled?

The question gets asked constantly and almost never gets answered, so answer it plainly. Nothing further is deducted. The Rs 1,137 crore is what reaches the people who held the shares of Sundarban Polymers Private Limited, and the borrowings of the business have already been accounted for inside the bridge, at the point where Rs 195 crore of actual net debt came off the enterprise value at completion.

The sellers' proceeds are already net of the company's borrowings, so there is no second deduction waiting later and no smaller figure hiding behind the one just computed. This is worth stating because the instinct built up over the earlier blocks is to keep looking for the next reduction. Here there is not one. The bridge did that work in a single visible step. A formula would have folded the same step out of sight.

The individual sellers may owe something on their own account, and that is a different matter entirely, outside everything the transaction figures show. Whatever any particular seller has to settle personally out of the money received sits in that seller's own affairs, not in the purchase. No figure produced by this transaction contains it, and a summary that quietly nets something like it against the proceeds has mixed two sets of books that were never in the same place.

How does the whole bridge look, run end to end?

Here is the complete movement, both runs, with the receipts kept separate from the permissions. Each line is caused by the line above it, so read it as a sequence rather than as a table of results.

A percentage drifts loose from what it measures exactly here, so both readings out of that table need their base named beside them. The completion adjustments moved the price by Rs 3 crore, or 0.26 per cent of the Rs 1,140 crore headline. The conditional amount is Rs 60 crore, or 5.28 per cent of the Rs 1,137 crore received. The second open item is roughly twenty times the size of the first, and it is the first one that a purchase summary almost always reports.

The order of attention is worth pausing on. The completion adjustment gets attention because it is precise, computable and finished. The conditional amount gets less attention because it is uncertain. Uncertainty is a strange reason to look away from the larger of two open items. A note that reports the adjustment and mentions the conditional amount in passing has reported the smaller thing carefully and the bigger thing loosely.

One check ties the two directions together. Rs 1,137 crore received, plus the Rs 195 crore of net debt actually assumed at completion, is Rs 1,332 crore. Rs 1,332 crore is enterprise value at completion, and the same figure comes from the other direction by taking the Rs 1,320 crore agreed at signing and adding the Rs 12 crore working capital movement. Two routes, one number. A bridge is for exactly that.

How do the people around a transaction actually read these two figures?

Four readers, four different first questions, and it is instructive that none of them asks the same thing first. A lender to Harivansh Packaging Limited starts with the unconditional figure, the amount the buyer has to fund on the day. Rs 1,137 crore has to come from somewhere, and a lender sizing a facility against a maximum of Rs 1,197 crore would be sizing against an amount that may never be drawn, at a date nobody can name.

An analyst covering the buyer starts from the opposite end and asks about the conditional amount, the part still capable of surprising anybody. The Rs 1,137 crore is settled and will not move again. The Rs 60 crore is an open item sitting on the buyer's side of the arrangement, and it will either land or not land in a future period. Reading only the settled figure would mean treating a finished question as the interesting one.

A seller asks a third question. What can I do on Monday? The question has exactly one answer and it is Rs 1,137 crore. Everything the seller can commit, place, lend or spend comes out of that figure and nothing comes out of the other one. Devyani Kulkarni, on the buying side, asks a fourth question again. What must the transaction team still track? The condition attached to the Rs 60 crore has to be measured, at a date, against a definition, and Ashwin Rege will be asked for that measurement long after everybody has stopped thinking about the transaction.

The household version of all four sits in one sentence. When a plot of land is sold with part of the money to come later if a boundary matter is resolved, the person lending against the sale looks at what arrived, the person gossiping about it quotes the full figure, and the person who has to live on the proceeds knows precisely which number is real. Every reader of a transaction is asking about a different figure, and the fastest way to misread a purchase is to assume that a single number can answer all four questions.

What the arithmetic cannot settle

Whether Rs 1,137 crore was a good outcome for the people who received it is not settled here. The refusal looks like a dodge and is not one. Whether the amount was a good outcome depends on what the sellers would otherwise have done with a business they no longer hold, and no figure produced by this transaction contains that.

The arithmetic is checkable to the rupee, and every line of it has been worked in the open. The merit depends on a version of events that did not happen, so the merit is not checkable at all. Arithmetic and merit are different kinds of question. The first is answered here. The second is named rather than dressed in the clothes of the first.