Building a Consideration Analysis: Every Element, One Basis

A transaction-consideration analysis lists every element a buyer transfers, tags each with its date and its condition, puts all of them on one basis, and totals twice: once for what is committed and once for the maximum. The schedule closes by naming which total any quoted multiple used. The analysis is a schedule rather than a valuation, and it gives two numbers because a purchase carrying a conditional element has two.

What is a consideration analysis, and what is it not?

The point is clearest away from transactions altogether. A buyer agrees to buy a neighbour's delivery tempo. Rs 4,00,000/- is paid on the day the papers are signed, and the buyer has also agreed that if the vehicle clears its fitness renewal in six months without any work being needed, another Rs 50,000/- will be handed over. Somebody asks what was paid for the tempo. There are two honest answers, Rs 4,00,000/- and Rs 4,50,000/-, and there is no single honest answer. Anybody who insists on one number is asking the buyer to hide either the money certainly parted with or the money that might still have to be found.

A consideration analysisA schedule listing every separate thing a buyer transfers to the sellers, each with the date it moves and the condition attached to it, totalled once for what is certain and once for the most that can ever become payable. is that same sheet of paper, written out properly, for a purchase where the amounts are larger and there are more lines. A schedule of what the buyer transfers can be checked line by line, and checking it line by line is the entire reason it exists. The schedule does not decide the price and does not test whether the price was sensible. Price and merit live in other work, and valuation in a transaction context takes them up separately.

Most of the trouble in practice comes from somebody quietly expecting the analysis to be something it is not, so it pays to be blunt about what it is not. The analysis is not a valuation: no discount rate is chosen, no peer set is assembled, no multiple is constructed. The analysis is not an accounting exercise: how the amount finally paid is split across identified intangibles after completion belongs to the accounting treatment of a purchase, covered separately. The analysis is not a forecast: no line on the schedule estimates what will happen. And it is not an opinion: the analysis records what the agreement says, and if two people build the schedule from the same agreement they should produce identical paper.

Devyani Kulkarni, the chief financial officer of Harivansh Packaging Limited, put the point to her team in one line when they started the schedule for the purchase of Sundarban Polymers Private Limited. Nobody in that room decides a number, she said. The work is copying, dating and adding. Anybody who finds themselves deciding has wandered into somebody else's job.

What is the procedure, in order?

Seven steps, run in this sequence on any purchase. The order is not decoration and it is not a preference. Each step produces exactly one output, and the step after it consumes that output and nothing else. Taken out of order, a step is left with nothing to work on, or worse, a step quietly invents the input it was supposed to be handed.

1. Pull every element from the agreementEvery separate thing the buyer transfers, taken from the signed document rather than from any summary of it.
   Checking: is every line on the list traceable to a clause somebody can point at?
2. Write the date beside each elementThe day the money is expected to move. An element with no date is not yet an element.
   Checking: does every line carry a date, and does the analysis stop where one is missing?
3. Write the condition beside each elementUnconditional, conditional on time alone, or conditional on a result.
   Checking: has each line been given exactly one of the three tags, and no line been left blank?
4. State each amount at its own dateAmounts struck at different moments stay at their own moments, with the moment written beside them.
   Checking: has any amount been quietly treated as though it were payable today?
5. Total the unconditional elementsThis is the committed total, and it is the figure a reader should reach for when only one number is possible.
   Checking: does this total include anything that could still turn out to be nil?
6. Total everything at its full amountThis is the maximum total: what the agreement permits, with conditional elements at full value and unweighted.
   Checking: has any probability been applied to a conditional element on the way into this total?
7. Name the total behind every multipleEvery multiple, every goodwill figure and every comparison in the paperwork is tied back to a line in the schedule.
   Checking: can a reader find the numerator of every quoted multiple on the schedule itself?

Notice that not one of these seven steps computes anything harder than an addition. A schedule exists to record, not to compute. The hard work, deciding what Sundarban Polymers Private Limited was worth and what Harivansh Packaging Limited was willing to pay, happened before the agreement was signed and is settled elsewhere. The discipline of recording is what is left, and recording fails far more often than the arithmetic does.

Where do the elements come from, and why not the announcement?

Step one has one rule and it is unpopular. An announcement carries the figure somebody chose to lead with. The agreement carries every figure, so the list is built from the agreement and never from the announcement. A schedule built from a press statement will be short by exactly the elements the statement chose not to mention. Which ones those are cannot be known: the missing lines leave no gap behind them. A short schedule looks exactly like a complete one.

The purchase makes this concrete. From the agreement, Harivansh Packaging Limited is acquiring 100 per cent of Sundarban Polymers Private Limited. The price is expressed as an enterprise value of Rs 1,320 crore, or 10.0 times the Rs 132 crore of earnings before interest, tax, depreciation and amortisation (EBITDA) that Sundarban Polymers earned. Where the 10.0 times came from is settled in the valuation work that sits below this sequence. Rs 1,320 crore is not a line on the consideration schedule at all. Nobody transfers that amount to the sellers.

Deducting the target's net debt of Rs 180 crore gives an equity value of Rs 1,140 crore, and that is the amount that actually moves to the people selling their shares. Then the agreement's own completion mechanics move it twice more: up by Rs 12 crore for working capital delivered above the agreed level, and down by Rs 15 crore because net debt at completion turned out to be Rs 195 crore rather than the Rs 180 crore assumed. Plus Rs 12 crore and minus Rs 15 crore is a net minus Rs 3 crore, so the amount payable at completion is Rs 1,137 crore. How those two adjustments are defined and computed is the subject of purchase price mechanics later in this sequence; here they are simply two recorded amounts that the agreement produced.

So the list from step one has two lines and only two: Rs 1,137 crore payable at completion, and an earn-out of Rs 60 crore payable if Sundarban Polymers reaches Rs 145 crore of EBITDA in the first year after the purchase. Rs 145 crore is 9.8 per cent above the Rs 132 crore it earned. Two lines is a short schedule, and short schedules are common. The number of lines is never the test. The test is whether every line came out of the agreement.

What happens to an element with no date?

Step two writes a date beside every element. Not a quarter, not a phrase, a date, meaning the day the money is expected to move. On this purchase that is easy for the first line: Rs 1,137 crore moves on the completion date. The second line is only slightly harder: Rs 60 crore, if it is payable at all, moves after the first full year of Sundarban Polymers being held by Harivansh Packaging, once that year's EBITDA has been determined.

An element with no date is not yet an element, it is an intention, and the analysis stops until somebody supplies the date. The rule sounds severe, and it is severe on purpose. The alternative is worse. An undated line eventually gets treated as payable now by whoever is moving fastest, and once it has been treated that way in one spreadsheet, it stays that way in every spreadsheet built from it. Stopping is cheap on the day the schedule is being drafted and expensive at any point afterwards.

There is a household version of this that everybody has lived through. Somebody in the house says the roof work will cost about a lakh and the workers will be paid when they finish. When is that? Nobody knows, so the lakh sits in the mental budget as though it were leaving the account this month, and the month's plan is wrong. The fix at home is the same as the fix in a transaction: the date is obtained, and if the date cannot be obtained, that fact is written down. A missing date, recorded as missing, is itself a finding worth having.

An elementOne separate thing the buyer transfers under the agreement, kept as its own line on the schedule because it has its own amount, its own date and its own condition. keeps its own line for exactly this reason. The schedule is built around dates and conditions rather than around the drafting of the document, so two amounts that move on different days are two elements even when the agreement describes them in one sentence.

Which condition tag can end at zero?

Step three writes the condition beside every element, meaning what has to be true before the money moves. Three tags cover almost everything a schedule will ever meet: unconditional, conditional on time alone, and conditional on a result. One tag per element, no blanks, and no element carrying two.

An unconditionalTagged so when nothing has to happen first: the element moves on the date written beside it, and the only question is when, never whether. element moves on its date and nothing has to be achieved first. An element conditional on time alone also moves in full, just later: a deferred instalment payable eighteen months after completion with nothing attached to it is a certainty with a delay. An element conditional on a resultTagged so when the payment depends on something being achieved that has not happened yet, which means the amount can turn out to be the full sum or nothing at all. is different in kind: something must be achieved before it moves.

The difference matters because of one property. Only an element conditional on a result can end at zero. Time passes whatever happens; a date arrives whether the business does well or badly, so a time-conditional amount is a question about when, not about whether. A result-conditional amount is a question about whether. On this purchase, the Rs 60 crore earn-out is the only line carrying the third tag, and it is the reason the schedule needs two totals rather than one.

What does putting elements on one basis actually mean?

Step four is the one most often misread. The phrase one basisStating every amount at the moment it is actually struck, with that moment written beside it, so that no amount is silently treated as though it were payable on some other day. sounds like it must mean converting everything to today's money. It does not. In a schedule, putting elements on one basis means that every amount is stated at its own moment and the moment is written beside it, rather than amounts struck at different moments being silently treated as though they were all struck on the same day.

The silent treatment is the whole danger. Nobody sets out to pretend a payment due in fourteen months is the same as one due next week. The silent treatment happens by addition. Somebody adds Rs 1,137 crore and Rs 60 crore, gets Rs 1,197 crore, and from that moment the schedule contains one number in which two different dates have been dissolved. The two dates are not wrong in the total; they have simply stopped existing.

Discounting a deferred amount is a legitimate additional presentation and never a replacement for showing the amount and its date. If somebody wants a present value column beside the amount column, that is a reasonable thing to add, and on a purchase with a long deferral it is often useful. A present value column can never take the place of the two columns it sits beside. Replace them and the schedule has lost both of the things it exists to record: how much, and when. And a present value column brings something into the schedule that nothing else on it carries: a chosen rate. A chosen rate is a judgement rather than a record.

On this purchase Harivansh Packaging did not add a present value column, and the reason Ashwin Rege gave the team is the cleanest one available: applying a rate would be a valuation exercise, and this document is a schedule. The Rs 60 crore is shown as Rs 60 crore, after the first full year, conditional on a result. Anybody who wants it discounted has everything they need to do it themselves. Leaving a reader in exactly that position is what a schedule is for.

Why does the analysis total twice rather than once?

Steps five and six are one idea split into two lines, and the split is the rule. Step five totals only the unconditional elements. On this purchase that is a single line, so the committed totalThe sum of the elements that will move whatever happens. It is the figure to quote when only one number is possible, because it cannot fall. is Rs 1,137 crore. Step six totals everything, conditional elements included at their full amounts, so the maximum totalThe sum of every element at its full amount, conditional ones included and unweighted. It is what the agreement permits, not what anybody expects. is Rs 1,137 crore plus Rs 60 crore, or Rs 1,197 crore.

Before that second total is computed, there is a temptation worth naming. The earn-out needs EBITDA of Rs 145 crore against the Rs 132 crore Sundarban Polymers actually earned, a rise of 9.8 per cent. Somebody in the room will suggest that a 9.8 per cent rise looks likely, or looks difficult, and that the maximum total should reflect that. The maximum total is not a forecast and not an expectation: it is what the agreement permits, shown at full amount precisely because weighting it would smuggle in a probability nobody has stated.

Think about what a weighted total would actually be. Suppose somebody applies 60 per cent and writes Rs 1,173 crore. Where did the 60 per cent come from? Nowhere in the agreement. The schedule records the output and not the shrug, so six months later nobody reading it can tell whether the number reflects a considered view or a shrug. A full-amount maximum has the opposite property: it says only what the document says, and every reader can apply their own view afterwards if they want one.

There is one arithmetic trap in step six that is worth handling before it bites. The maximum total is built on the committed total of Rs 1,137 crore, struck after the completion adjustments, and not on the Rs 1,140 crore headline equity value that existed before them. Rs 1,137 crore plus Rs 60 crore is Rs 1,197 crore, and the Rs 1,200 crore that comes from adding the earn-out to the unadjusted figure reconciles with nothing else on the schedule. The gap is small, and small is exactly what makes it dangerous. A figure wrong by Rs 3 crore in a purchase of this size never looks wrong. The figure only refuses to tie.

Which total did that multiple use?

Step seven is where a schedule stops being a list and becomes a check. Every multiple, every goodwill figure and every comparison anywhere in the transaction paperwork gets tied back to a named line on the schedule. A multiple whose numeratorThe figure on the top of a multiple. In a transaction it is usually an enterprise value or an equity value, and which one it is has to be named before the multiple means anything. cannot be traced to a line in the schedule is a number nobody can verify.

Worked through on this purchase, the schedule supports three enterprise value numerators, all of them correct and all of them describing different things. At signing, the enterprise value is Rs 1,320 crore. At completion, the equity value actually paid is Rs 1,137 crore and the net debt actually assumed is Rs 195 crore, so the enterprise value is Rs 1,332 crore. The completion enterprise value reconciles the other way too, as the Rs 1,320 crore at signing plus the Rs 12 crore of working capital delivered above the agreed level. Two different roads reach the same answer, and that is worth checking. Add the earn-out at its full amount and the maximum enterprise value is Rs 1,392 crore.

There is a second half to this step that catches people out, and it concerns what sits under the multiple rather than on top of it. The maximum enterprise value of Rs 1,392 crore is 10.55 times the Rs 132 crore Sundarban Polymers actually earned, and it is 9.60 times the Rs 145 crore the earn-out payment is conditioned on. Both are true, both are arithmetically correct, and they describe different things. A document quoting one multiple for a purchase with an earn-out has not said which EBITDA it used, and the schedule must always force the answer out. The habit that follows from step seven is small and permanent: never write a multiple without naming both its numerator and its denominator.

What does the finished schedule look like?

Here is the output of all seven steps on the purchase of Sundarban Polymers Private Limited by Harivansh Packaging Limited. Two element lines, four columns, two totals, and one memorandum line that is deliberately not part of either total.

The memorandum line deserves a word. A lot of otherwise careful schedules go wrong on that line. Net debt is not consideration. Nobody hands Rs 195 crore to the people selling Sundarban Polymers; the borrowings simply come across with the business. Net debt sits on the schedule anyway, clearly marked as a memorandum, for one reason only: without it nobody can build an enterprise value numerator from this document, and step seven requires that they can. Enterprise value is never the amount paid to sellers, and a schedule that blurs the two has broken the one distinction it existed to preserve.

What can somebody else do with a finished schedule?

The seven steps are done. The work closes not with another step but with a test, and the test is about a person rather than about a number. The schedule goes to somebody who was not in the transaction, with the agreement and nothing else, and that person should be able to rebuild both totals and place every quoted multiple without asking a single question. If they have to ask, a step was skipped rather than a figure being wrong, and the fix is to go back to the step rather than to argue about the figure.

Going back to the step rather than arguing about the figure is the most useful habit in the whole procedure. When a schedule fails the handover test, the instinct is to check the arithmetic, and the arithmetic is almost always fine. Nobody ever asks what two plus two comes to. The question is which of these totals was used, or when this one is payable, or whether this is the amount or somebody's view of the amount. Each of those is a step that did not produce its output: step seven, step two, step six. ReconciliationChecking that a figure can be arrived at down two independent routes and comes out the same both times, which is what makes a schedule checkable rather than merely tidy. is what a good schedule buys, and it is bought one step at a time.

Notice that the reconciliation on this purchase already works in both directions. The enterprise value at completion of Rs 1,332 crore can be built as Rs 1,137 crore plus Rs 195 crore, or as Rs 1,320 crore plus Rs 12 crore. Two roads, one destination. When a schedule does that, the person receiving it stops needing to trust the person who built it. Both of them end up in a far better position.

What breaks if the analysis totals only once?

Now the failure, and it is the most instructive case in the whole procedure. The failure costs nothing on the day it happens and a great deal afterwards. A transaction team totals the elements once, produces a single number, and puts it at the top of every internal document. The number is not wrong. The number is Rs 1,197 crore, and Rs 1,197 crore is a real figure from a real schedule. Missing is the label saying that Rs 60 crore of it is conditional.