On a Tuesday afternoon someone you don’t know calls you. They say they work for a group that buys companies in your sector, that they have seen your accounts and like what they see. Then comes the line: “We would be talking about something like €5 million.”
You hang up and start doing sums. The house, the children, retirement, that trip you keep postponing. Five million. The number sticks.
What almost nobody explains on that call is that those €5 million are not what you will receive. They are the start of a calculation you have not yet seen.
In 30 seconds
- The price you are quoted is called enterprise value: what the business is worth as if it were sold with no debt and no cash. It is not what lands in your pocket.
- From enterprise value you subtract the debt, working capital adjustments and anything deferred or conditional.
- Two offers with the same headline can leave you with very different amounts. Compare them by what you receive on signing day and by the likelihood of receiving the rest.
Five million, of what?
When someone says “five million”, they almost always mean the enterprise value: what the business itself is worth, as if it were sold with no debt and no cash in the till.
Think of selling a house with a mortgage. If you are offered €500,000 and you still owe €200,000 to the bank, you do not walk away with €500,000: you walk away with €300,000. A company works the same way. There are just more things to adjust.
The three adjustments that change the number
- Net debt. Loans, credit lines, leasing and any debt that carries a cost are deducted, and the cash you hold is added. If you owe €900,000 and have €300,000 in the bank, net debt is €600,000.
- Working capital. Every business needs a cushion to operate: what customers owe you, stock, what you owe suppliers. The buyer sets a “normal” level. If at closing you have less, the difference comes off the price. If you have more, it is added.
- What you don’t receive on signing. It is common for part of the price to be held back for some months as a guarantee, or to depend on the results of the following years (the so-called earn-out). That money exists in the contract, but not in your account.
Then come taxes, which depend on how you sell (as an individual or through a company), and the costs of the transaction. We leave them out of the figures below so the essentials are visible.
Two “€5 million” offers
Imagine a company that earns €1 million a year before interest, taxes, depreciation and amortisation (known as EBITDA) and has €600,000 of net debt. You receive two offers:
- Offer A: €5 million. You receive 90% on signing and 10% after twelve months, provided nobody makes a claim. The agreed working capital matches what you have.
- Offer B: €5.5 million. It looks better. But the buyer sets a higher “normal” working capital, which takes €200,000 off, and 30% of the price is tied to the company reaching €1.3 million of EBITDA within two years.
Let’s start with offer A and see how €5 million turns into what you receive:
And now the two offers, side by side:
- What you receive on signing
- Held back or tied to future results
- Net debt and working capital adjustment
On signing day, offer A pays you 3.96 million and offer B, 3.29. The “lower” offer gives you €670,000 more on signing. For B to end up beating A you would have to collect almost 80% of the variable payment.
Is that possible? Yes. Is it up to you? Once the company is sold, no.
Two offers with the same headline can leave you hundreds of thousands of euros apart.
A deferred payment is not bad faith, but read it carefully
The buyer cannot check today what your company will do tomorrow. That is why they ask for part of the price to depend on results and for you to stay involved. That is normal, and sometimes the only way to close.
The problem is not that it exists. The problem is whether it is achievable. A variable payment that requires 30% growth when you are growing at 5% is not a price: it is a hope.
And it is not yet an offer
One more detail. First offers are usually letters of intent, which are normally not binding. The price is confirmed after the buyer reviews your accounts, your contracts and your litigation, which is called due diligence. If they find something unexpected, they can ask for a discount or walk away.
That is why it pays to arrive at that review with your homework done: tidy accounts and a price you have calculated yourself before the buyer does. An independent valuation is for that.
Five questions before you get carried away
- Is that number the enterprise value, or what I will receive for my shares?
- Is it calculated with no debt and no cash? Which debts count, exactly?
- What level of working capital do they consider normal, and how will they measure it?
- How much do I receive on signing and how much later? Under what conditions?
- Is it a binding offer or a letter of intent subject to due diligence?
If the buyer answers all five clearly, you are on the right track. If they hesitate, you are also learning something.
A question for you: if someone told you “five million” today, could you say how much would really reach your account on signing day?
Hypothetical example with invented figures to explain the mechanism. It does not correspond to any real transaction, nor is it a price offer. Excludes taxes and transaction costs, which depend on each case.
