Module 3 · Chapter 8
Valuation: How Businesses Are Priced
The bankers build the model; you draft the contract that delivers its output. This chapter gives you just enough valuation — multiples, discounted cash flow, and the all-important bridge from enterprise value to equity value — to negotiate the right points for the right reasons.
8.1Why a lawyer needs valuation literacy
Nobody will ever ask you, as the lawyer, to value the target. The price is the client’s decision, guided by its corporate finance advisers, and you should resist any urge to have opinions about it in meetings. But here is the uncomfortable truth: the SPA is the machinery that delivers the valuation, and you are the machine-builder. If you do not understand how the number was put together, you cannot tell which clauses protect it and which are ornamental — and you will negotiate the wrong points with complete conviction.
A junior who doesn’t know whether the headline number is an enterprise value or an equity value can cheerfully concede a definition of “debt” that costs the client a seven-figure sum. Meanwhile the same junior fights to the last email over a warranty that was never likely to be claimed on. Valuation literacy is not about doing the maths; it is about knowing where the money actually moves.
Start with a distinction that sounds philosophical but is intensely practical: valuation is an opinion; price is a fact. A company — like a house, or a violin — is ultimately worth what a willing buyer will pay a willing seller. The models in this chapter do not reveal a company’s “true” value, because there isn’t one. What they produce is defensible arguments about what a sensible buyer might pay. The final number lands where those arguments meet negotiating leverage, competitive tension and each side’s appetite for the deal. That is why two equally rigorous bankers can value the same business €15m apart and both keep their jobs.
Key point
You don’t set the price — but you draft the machinery that delivers it. Every line of the financial model eventually lands somewhere in the SPA: in a definition of debt or cash, in the leakage list, in an indemnity, in a completion payment. Understanding the model tells you which drafting battles are worth having, and which concessions are quietly expensive.
8.2The main methods, in plain English
In practice bankers never rely on one method. They run several, get a range from each, and triangulate — presenting the client a chart of overlapping ranges (nicknamed a “football field”) from which a landing zone is picked. Four methods cover almost everything you will meet.
(a) Trading comparables. Find listed companies similar to the target, observe what the stock market pays for their earnings, and apply the same ratio to the target. The ratio is called a multiple — price expressed as a multiple of some measure of performance. The workhorse measure is EBITDA: earnings before interest, tax, depreciation and amortisation — a rough proxy for the cash the operating business throws off, before financing costs and accounting choices muddy the water. If listed payments processors trade at around 12× EV/EBITDA and the target’s EBITDA is €5m, comparables suggest an enterprise value of roughly €60m. For businesses with no meaningful profits — loss-making, fast-growing platforms burning cash to win market share — the market shifts to multiples of what does exist: revenue, or even payment volumes processed. That is not recklessness; it is a bet, priced by reference to peers, that revenue today becomes profit later.
(b) Precedent transactions. Instead of asking what the market pays for shares in similar companies, ask what buyers actually paid to acquire whole companies like the target. These precedent transactions capture something trading prices don’t: the control premium. That is the extra a buyer pays, over the price of scattered minority shares, for the right to control the whole business, appoint the board and take the cash. Precedent multiples therefore tend to run higher than trading multiples.
(c) Discounted cash flow (DCF). The purist’s method: a business is worth the cash it will generate in the future, converted into today’s money. The conversion matters because €1m arriving in five years is worth less than €1m today: you would rather have money now, and the future money might never arrive. So each year’s forecast cash flow is scaled down (“discounted”) at a rate reflecting time and risk, and the pieces are added up. The method’s strength is that it forces everyone to think about what actually drives the business; its weakness is that the answer is exquisitely sensitive to the assumptions fed in.
(d) Asset and net-asset-value (NAV) approaches. For businesses that are essentially a balance sheet with a small engine attached — property companies, lending books, investment holding companies — the sensible question is what the assets are worth, minus the liabilities. NAV is rarely the lead method for an operating fintech, whose real value (customers, software, a regulatory licence) barely appears on its balance sheet.
| Method | Best for | Main weakness |
|---|---|---|
| Trading comparables | Businesses with good listed peers — payments processors on EV/EBITDA; loss-making, high-growth platforms on revenue or volume multiples | No peer is truly comparable, market moods move the answer, and it prices minority shares — no control premium |
| Precedent transactions | Seeing what buyers actually paid for whole companies like the target, control premium included | Deal data is patchy and stale, and every precedent had its own story — auction heat, distress, synergies — baked into the price |
| Discounted cash flow | Businesses with forecastable cash flows; testing what you must believe for a price to make sense | Hugely sensitive to assumptions — small changes to growth or the discount rate swing the value wildly |
| Asset / NAV | Balance-sheet businesses: property, lending books, investment companies | Misses going-concern value — customers, brand, licences and software rarely sit on the balance sheet at their real worth |
8.3Enterprise value vs equity value — the bridge
Now the concept this chapter exists to teach. When someone says a business is “valued at €50m”, a deal lawyer’s first question is: fifty million of what? There are two candidate meanings, and confusing them is the most expensive mistake available to a junior on a deal.
Enterprise value (EV) is the value of the operating business itself — the machine that serves customers and generates cash — regardless of how it happens to be financed. Equity value is what the shareholders actually receive for their shares. The two differ because businesses carry debt and hold cash. Think of a house worth €500,000 with a €200,000 mortgage: the house (the “enterprise”) is worth €500,000, but the seller walks away with €300,000. The mortgage doesn’t change what the house is worth; it changes who gets the money.
Valuation methods based on EBITDA produce enterprise values, because EBITDA is measured before interest — it ignores financing. That is why offers in heads of terms are typically expressed as an enterprise value “on a cash-free, debt-free basis”. The buyer is saying “this is what the machine is worth to me; we will adjust for whatever debt and cash it comes with”. Getting from EV to the price actually paid for the shares is called the equity bridge: start with EV, subtract debt, add cash, subtract debt-like items, and adjust if the business comes with more or less working capital than it needs.
Debt and cash are (relatively) easy. The battleground is debt-like items: things that are not called “borrowings” in the accounts but behave exactly like debt, because they will drain cash out of the business after completion for reasons that pre-date it. Deal-real examples:
- Unpaid deferred consideration from the target’s own past acquisitions — it bought a business two years ago and still owes the final instalment. The buyer inherits that bill.
- Accrued but unpaid bonuses (plus employer taxes) earned by staff for pre-completion service, payable after completion out of the buyer’s pocket.
- Dilapidations — the cost of putting leased premises back into repair at the end of the lease, quietly accruing all along.
- An expected regulatory fine for pre-completion conduct — a liability of uncertain size and timing, but plainly attached to the seller’s period of ownership.
Finally, working capital. A business needs fuel in the tank — receivables, payables and cash timing at a “normal” level — to run day to day. If it is handed over drained (say the seller squeezed suppliers and delayed spending before the sale), the buyer must refill the tank, effectively paying twice. So bridges include a working-capital normalisation: the price adjusts by the amount the target’s working capital departs from an agreed normal level.
Watch out
“Cash-free, debt-free” sounds like a mechanism. It isn’t — it is shorthand, and it defers every hard question. Is an overdraft debt? Are lease liabilities? Are the accrued bonuses? Which cash is genuinely “free”? Everything turns on the definitions that later implement the bridge — and each item moves the price euro for euro. A €500k item reclassified as “debt-like” takes €500k straight off what the sellers receive, with none of the uncertainty of a warranty claim. That is why these arguments are fought so hard.
Example — Project Sunrise
In due diligence Atlas learned of the Legacy AML Matter. A CBI inspection had found failures in the Target’s automated transaction monitoring, with a backlog of unreviewed alerts, a remediation programme required and a fine plausible. An expected regulatory fine is a classic equity-bridge argument, and Atlas’s first instinct was exactly that — treat the likely fine and remediation cost as a debt-like item and pay less for the shares. Meridian resisted: the amount and timing were speculative, and a price cut is money gone forever even if no fine ever lands. The compromise left the headline price alone and gave Atlas a specific indemnity instead (clause 10.2, capped at €8m): euro-for-euro cover if the risk materialises, nothing off the price if it doesn’t. Same risk, different tool — Chapter 12 tells that story in full.
8.4A worked bridge, with round numbers
Here is the bridge from the diagram as a table — the form you will actually see it in, usually as the last page of a banker’s deck or a tab of the CFO’s spreadsheet. Read the third column carefully: it is the reason this chapter is in a law course.
| Bridge line | €m | …and the negotiation it hides |
|---|---|---|
| Enterprise value | 50.0 | The output of everything in section 8.2 — multiples, DCF, auction tension. |
| Less: borrowings | (8.0) | What counts as “debt”? Bank loans, obviously — but overdrafts, lease liabilities, shareholder loans? |
| Plus: cash | 3.0 | Is it genuinely free — or trapped as regulatory capital, stuck in a foreign subsidiary, or already promised elsewhere? |
| Less: debt-like items | (2.0) | The fight zone: accrued bonuses, deferred consideration, dilapidations, expected fines — each label is worth its face value. |
| Equity value — price for the shares | 43.0 | What the sellers actually receive (before any working-capital adjustment). |
Every line of that table becomes a negotiation, and most of the negotiating is done not by shouting about the €50m but by arguing, item by patient item, about the middle rows. Sellers’ advisers scrutinise every proposed “debt-like” label; buyers’ advisers go hunting for new ones in the diligence findings (Chapter 7 is, among other things, the sourcing expedition for this list). The Sunrise parties ran exactly this exercise on Solaris’s numbers; their bridge landed at €42m.
8.5Regulated targets: some cash is not free
The bridge treats cash as money the buyer effectively gets back on day one — pay €1 more for €1 in the bank, because you could take it straight out. For a regulated target that logic partly fails, and fintech deals turn on knowing where.
Regulated firms must maintain minimum regulatory capital — in EU parlance, own funds: a floor of capital the firm must hold at all times as a condition of its authorisation. Solaris, as a MiCA-authorised CASP, must maintain prescribed minimum own funds, and the SPA contains a warranty that it does (Schedule 3, paragraph 5.4). A buyer cannot complete on Friday and sweep the bank account on Monday: stripping cash below the regulatory floor would put the target in breach of its authorisation on day one of the buyer’s ownership. Cash covering the requirement is trapped cash: it exists, but it cannot be extracted. A well-built bridge refuses to pay full value for it, either by excluding it from “cash” or by treating the capital requirement as a permanent working-capital-style need of the business.
Two adjacent traps. First, safeguarded client money and custodied client crypto-assets are not the target’s cash at all — they belong to clients and should never appear in the bridge, however impressive they make the bank statements look. Second, cash can be trapped in the ordinary corporate sense too: sitting in a foreign subsidiary from which it can only be paid up as a dividend with tax leakage on the way. “How much of the cash is actually free?” is a question the lawyers and the accountants answer together.
8.6Synergies — and who pays for them
Synergies are the extra value a particular buyer can create from the target that the target cannot create alone: closing duplicate functions, cross-selling to the buyer’s customers, moving the target’s volumes onto the buyer’s cheaper infrastructure. They explain a puzzle you will meet constantly — how a buyer can rationally pay more than any standalone valuation supports.
The starting position on who benefits is simple: buyer-specific synergies are not paid away to the seller. The buyer prices the target on a standalone basis and aims to keep for its own shareholders the value only it can create. Why should the seller be paid for savings that depend entirely on the buyer’s existing business? But that position survives only as long as the buyer is alone. In a competitive auction, bidders who want to win are forced to put part of their synergy value into the price, and a well-run sell-side process is designed to make them do exactly that.
This is also why who the buyer is changes the price. A strategic buyer (a trade buyer, like Atlas) has synergies to spend and can out-bid on fundamentals. A financial buyer (a private equity fund) has few synergies and prices to hit its fund’s target return, powered by debt — generous when debt is cheap, disciplined when it isn’t. Knowing which species of buyer sits opposite tells you a lot about how the negotiation will run; Chapter 2 introduced the cast, and Chapter 14 returns to the tactics.
8.7From the model to the contract
After months of modelling, triangulating and bridge-arguing, the entire valuation of Solaris collapses into one clause — and, within it, one number:
Read in the SPA →“The consideration for the Shares is €42,000,000 (the “Consideration”), plus the Locked Box Interest, less the amount of any Leakage notified and agreed or determined before Completion.”
Notice what that figure is. It is an equity value. The parties agreed an enterprise value for Solaris, then negotiated the whole bridge — debt, cash, debt-like items, working capital, trapped regulatory capital — before signing. They used the audited Accounts drawn up to the Locked Box Date, 31 December 2025. The number was then fixed, “struck” as at that date. Everything after it is protection rather than recalculation. The locked box covenants stop value leaking out to the seller between the Locked Box Date and completion. The Locked Box Interest of €4,000 a day compensates the seller for the profits the business earns while the price stands still. How that machinery works — and its great rival, completion accounts — is Chapter 9.
Your job as the lawyer is fidelity: the SPA’s definitions and mechanics must implement the bridge the clients actually agreed. If the bridge assumed transaction bonuses were the seller’s cost, the Permitted Leakage schedule had better say precisely which bonuses, up to what amount. If the bridge deducted an item as debt-like, the number in clause 3.1 should already reflect it — and nobody should be able to claim for it twice. The CFO’s spreadsheet and the SPA must describe the same deal; when they quietly diverge, the gap surfaces after completion as a dispute.
Drafting note
Before signing, get the final bridge (or the funds-flow statement) and reconcile it line by line against the SPA. For every deduction, ask: where does the contract implement this — a definition, a leakage item, an indemnity, a completion deliverable? A bridge line with no clause behind it is a claim someone will make later; a clause with no bridge line behind it may be double-counting. This tedious half-day is one of the most valuable things a junior can do on a deal.
8.8Fairness opinions and the advisers’ role
Finally, a word of orientation on who does what. The corporate finance advisers — Harborne & Co on the sell side of Sunrise — build the models, run the process and advise their client on price. On larger deals, and routinely in US public M&A, a board may also commission a fairness opinion. This is a letter from an investment bank stating that the consideration is fair, from a financial point of view, to the company or its shareholders. It is best understood as governance protection for the directors who must approve the deal, not a guarantee of a good bargain. Lawyers never opine on value. But the board minutes you draft will record that the board considered the price with the benefit of its financial advice.
Test yourself on the bridge below, then carry the €42m into Chapter 9 to see how the SPA keeps it safe between the Locked Box Date and completion.