# m-a.wiki - full corpus

> A machine-readable reference for M&A deal math: LBO returns and the four-way value-creation bridge, accretion/dilution with breakeven-PE rules, the enterprise-to-equity purchase price bridge, agreement mechanics, and valuation cross-checks. Every entry that involves arithmetic states the formula and works it with numbers that tie.

Reviewed: 2026-08-27
License: CC BY 4.0
Source: https://m-a.wiki
Change feed: https://m-a.wiki/changes.json

## LBO returns math
Reviewed: 2026-08-27
Canonical: https://m-a.wiki/lbo/ (JSON: https://m-a.wiki/lbo.json)

A leveraged buyout return is fully determined by six numbers: the entry multiple, the amount of debt raised, the growth in EBITDA, the cash generated and applied to debt, the exit multiple, and the holding period. Everything else in an LBO model is a route to one of those six. The base case used throughout this section is a single set of assumptions carried consistently: entry EBITDA of 100.0, entry multiple 10.0x, transaction fees 3.0 percent of enterprise value, debt of 500.0 at 6.0 percent cash interest, unlevered free cash flow of 60 percent of EBITDA, EBITDA growth of 5.0 percent per year, a 100 percent cash sweep, a five-year hold, and a 10.0x exit. Every table and every worked figure below derives from exactly those inputs, so the bridge ties to the cent.

### Sources and uses
The funding identity of an acquisition. Total uses - the purchase price plus every fee, refinancing, and cash injection required at close - must equal total sources. In a sponsor deal the equity check is solved as the residual, which is why the equity number moves whenever any other line moves.

Formula: E_0 = EV_0 + fees + refinanced debt + cash to balance sheet - new debt - rollover equity - assumed liabilities

Fees are the line most often left out of a quick model, and they are pure equity leakage: they buy no asset and never come back. At 3 percent of EV on a 5.0x-levered deal they consume 5.7 percent of the equity check before day one.,If the target's existing debt is being refinanced rather than assumed, the refinancing appears in uses at its payoff amount including any make-whole or call premium, not at book value. Reading the payoff figure off the balance sheet understates uses.,Rollover equity from a selling management team is a source, not a discount to price. It reduces the sponsor's cheque without reducing the enterprise value paid, so it lowers the sponsor's absolute dollars at risk while leaving the entry multiple unchanged.

### Entry enterprise value and the entry multiple
The entry multiple is enterprise value divided by an EBITDA measure. Which EBITDA measure is used determines what the multiple means, and the two conventions are not interchangeable.

Formula: EV_0 = x_entry * EBITDA_0

A 10.0x multiple on adjusted EBITDA of 100.0 and an 11.5x multiple on reported EBITDA of 87.0 are the same enterprise value. Comparing an entry multiple against anything requires knowing which denominator each side used.,Add-backs matter twice, not once: they set the entry multiple and they usually set the leverage covenant denominator in the credit agreement. An add-back that is generous at signing is a covenant cushion for the life of the loan.,The exit multiple in a model is almost always applied to a differently-constructed EBITDA than the entry multiple, because five years later there is no add-back story. That asymmetry, not multiple contraction in the market, is the most common source of a model that flatters entry and punishes exit.

### MOIC
Multiple on invested capital. Total value returned to the sponsor divided by total capital invested, ignoring time. A pure measure of dollars made per dollar risked.

Formula: MOIC = (sum of distributions + residual value) / sum of contributions

MOIC is the only returns metric that cannot be manipulated by timing. That is its entire value in a diligence conversation and the reason it is quoted alongside IRR rather than instead of it.,MOIC is blind to the cost of the hold. A 2.0x over three years and a 2.0x over eight years are the same MOIC and very different investments.,Where a deal has multiple equity injections, MOIC uses the sum of contributions undiscounted. Two 100.0 injections four years apart count as 200.0 of invested capital even though they are not economically equivalent.

### IRR from MOIC, and when the identity holds
For a single cash outflow at inception and a single inflow at exit, IRR is the geometric annualisation of MOIC. The identity fails the moment there is an interim cash flow.

Formula: IRR = MOIC^(1/t) - 1; equivalently MOIC = (1 + IRR)^t

The 2.5x-in-five-years shorthand for a 20 percent IRR is exact to two decimals: 1.20^5 = 2.4883.,IRR is a rate, not an amount. A short, small, high-IRR deal can be worth less in dollars than a long, large, lower-IRR one, which is why fund-level dollar metrics exist alongside it.,IRR implicitly assumes interim distributions are reinvested at the IRR itself. In a fund that receives a distribution and holds it in cash, the realised compound return is lower than the reported IRR. This is the reason MOIC is quoted next to it, not because MOIC is a better metric.

### Four-way value-creation attribution
The standard decomposition of the change in sponsor equity value into EBITDA growth, multiple expansion, debt paydown, and a reconciling item for fees and other leakage. Each component answers a different question about whether the return was earned or bought.

Formula: E_t - E_0 = (EBITDA_t - EBITDA_0)*x_entry + (x_exit - x_entry)*EBITDA_t + (D_0 - D_t) - fees

The cross-term between growth and multiple change has to be assigned to one component or the other, and the convention above assigns it to multiple expansion by valuing the multiple change on exit EBITDA. Valuing growth at the exit multiple instead and multiple change at entry EBITDA also ties, and produces a different-looking split of the same total. Ask which convention a bridge uses before comparing two of them.,Multiple expansion is the only component the sponsor does not control. A bridge in which it is the largest bar is a bridge that describes a market, not an operating result.,Debt paydown and EBITDA growth are not independent: growth generates the cash that pays the debt. Presenting them as separate levers overstates how substitutable they are.,Splitting EBITDA growth further into revenue growth and margin expansion is the standard next level: revenue effect = (Rev_t - Rev_0)*margin_0*x_entry, margin effect = Rev_t*(margin_t - margin_0)*x_entry. Those two sum to the growth bar only if the cross-term is assigned explicitly.

### Debt paydown and the cash sweep
The amount of debt retired over the hold, which is the free cash flow after cash interest, cash taxes, capital expenditure, working capital, and mandatory amortisation, multiplied by the sweep percentage in the credit agreement.

Formula: D_n = D_(n-1) - sweep% * (uFCF_n - cash interest_n - mandatory amortisation_n); cash interest_n = r_d * D_(n-1)

Paydown accelerates over the hold even at constant EBITDA, because interest falls as the balance falls. The year-5 sweep in the base case is 71 percent larger than the year-1 sweep on EBITDA only 22 percent higher.,This is exactly why the sweep is the last thing a lender concedes: every dollar of sweep the borrower keeps compounds into future interest the borrower keeps paying.,Floating-rate debt makes the schedule a function of the forward curve, not a constant. A model with a flat rate assumption understates the dispersion of the equity outcome far more than it misstates the base case.,Interest deductibility is capped in the United States at a percentage of adjusted taxable income under IRC section 163(j). Above the cap, incremental leverage costs the full pre-tax rate and the tax shield stops scaling, which flattens the IRR benefit of leverage at exactly the point a model naively shows it accelerating.

### Exit multiple required for a target IRR
Inverting the return calculation to solve for the exit multiple that delivers a specified IRR, holding the operating case and the debt schedule fixed. This is the single most useful number in an LBO model because it converts a return target into a testable claim about the world.

Formula: x_exit = [E_0 * (1 + IRR_target)^t + D_t] / EBITDA_t

Stated this way the conversation changes. A 20 percent target on this base case requires buying at 10.0x and selling at 12.5x - a 25 percent multiple expansion - which is a bet on the exit environment, not on the company.,The mirror question, required EBITDA at a constant multiple, is EBITDA_t = [E_0*(1+IRR)^t + D_t] / x_entry. At the 20 percent target that is 159.77, or 9.8 percent annual growth against the 5.0 percent base case.,Because D_t itself depends on the operating case, solving for exit multiple and solving for growth are not independent. Do one at a time and say which is held fixed.

### Why leverage raises IRR less than it looks like it should
Additional debt reduces the equity check, which mechanically raises the return multiple on a given exit equity value. It also raises cash interest, which reduces the sweep and leaves more debt outstanding at exit, which reduces exit equity. The net effect is positive but much smaller than the first effect alone.

Formula: dE_t/dD_0 = -1 + (cumulative interest saved or incurred), so IRR gain is second-order in D_0

Tripling the debt multiple from 3.0x to 6.0x moves IRR by 335 basis points in this base case, not by the 1,250 basis points the equity-check effect alone suggests. Interest eats most of it.,Leverage widens the distribution symmetrically while shifting the mean modestly. The reason sponsors use it is not that it raises expected IRR much; it is that it lets a given fund own more enterprise value.,Below roughly 3.0x in this base case the sweep exhausts the debt before exit and the model starts accumulating cash instead. At that point additional deleveraging stops adding to equity value and the leverage lever is simply switched off.,The leverage benefit also compresses when the exit is bad. At an 8.0x exit the 6.0x structure returns 7.19 percent against 6.70 percent for the 3.0x structure - a 49 basis point advantage, down from 335 basis points at a 10.0x exit - while the absolute equity value at exit falls from 1,009.8 to 608.3. Leverage pays least in exactly the outcome it makes more likely.

### Dividend recapitalisation - IRR up, MOIC down
Re-levering the company mid-hold to distribute cash to the sponsor pulls proceeds forward in time. Because the distributed cash is replaced with debt that accrues interest, total dollars returned fall while the time-weighted return rises. The two headline metrics move in opposite directions.

Formula: IRR solves -E_0 + Div/(1+IRR)^s + E_t'/(1+IRR)^t = 0, where E_t' = E_t - Div*(1+r_d)^(t-s)

This is the clearest case where quoting one metric is a choice about what to hide. A recap improves IRR and destroys MOIC, and both are true.,The magnitude of the divergence scales with the gap between the deal IRR and the cost of the new debt. Recapping at 6 percent to advance cash on a 13 percent deal helps the rate; recapping at 12 percent barely moves it.,A recap also permanently raises the exit leverage, which raises the probability that the exit equity is zero. The IRR improvement is priced in expectation; the risk increase is not visible in either metric.,Recap capacity is a covenant question, not a modelling question. Restricted payment baskets and the leverage test that gates them determine whether the recap in a model can actually be done.

#### Sources and uses at entry
Base case. EBITDA_0 = 100.0, x_entry = 10.0, so EV_0 = 1,000.0. Fees are 3.0 percent of EV_0. Uses must equal sources; the sponsor equity check is the plug.

| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Purchase of enterprise value (10.0x x 100.0) | 1,000.0 | New term debt (5.0x EBITDA_0) | 500.0 |
| Transaction and financing fees (3.0% of EV_0) | 30.0 | Sponsor equity (plug) | 530.0 |
| Total uses | 1,030.0 | Total sources | 1,030.0 |

#### Debt schedule and cash sweep
Unlevered free cash flow is 60 percent of EBITDA. Cash interest is 6.0 percent of the beginning debt balance. All cash after interest sweeps to debt. Figures are rounded for display; the totals below use unrounded values.

| Year | Beginning debt | EBITDA | Unlevered FCF | Cash interest | Debt paydown | Ending debt |
|---|---|---|---|---|---|---|
| 1 | 500.00 | 105.00 | 63.00 | 30.00 | 33.00 | 467.00 |
| 2 | 467.00 | 110.25 | 66.15 | 28.02 | 38.13 | 428.87 |
| 3 | 428.87 | 115.76 | 69.46 | 25.73 | 43.73 | 385.14 |
| 4 | 385.14 | 121.55 | 72.93 | 23.11 | 49.82 | 335.32 |
| 5 | 335.32 | 127.63 | 76.58 | 20.12 | 56.46 | 278.87 |
| Cumulative | - | 580.19 | 348.11 | 126.98 | 221.13 | 278.87 |

#### Value-creation attribution across exit multiples
The four-way bridge from sponsor equity in to sponsor equity out. EBITDA growth is (EBITDA_t - EBITDA_0) x x_entry. Multiple expansion is (x_exit - x_entry) x EBITDA_t. Debt paydown is D_0 - D_t. Fees are the entry fees, which are a permanent leakage from equity value. The four components sum exactly to E_t - E_0 in every row. E_0 = 530.0, EBITDA_t = 127.6282, D_t = 278.8655.

| x_exit | EBITDA growth | Multiple expansion | Debt paydown | Entry fees | Sum = E_t - E_0 | E_t | MOIC | IRR |
|---|---|---|---|---|---|---|---|---|
| 8.0x | +276.3 | -255.3 | +221.1 | -30.0 | +212.2 | 742.2 | 1.400x | 6.97% |
| 9.0x | +276.3 | -127.6 | +221.1 | -30.0 | +339.8 | 869.8 | 1.641x | 10.41% |
| 10.0x | +276.3 | 0.0 | +221.1 | -30.0 | +467.4 | 997.4 | 1.882x | 13.48% |
| 11.0x | +276.3 | +127.6 | +221.1 | -30.0 | +595.0 | 1,125.0 | 2.123x | 16.25% |
| 12.0x | +276.3 | +255.3 | +221.1 | -30.0 | +722.7 | 1,252.7 | 2.364x | 18.77% |

#### MOIC to IRR, single outflow and single inflow
IRR = MOIC^(1/t) - 1. Valid only when there is one cash out at t = 0 and one cash in at t. Any interim distribution breaks the identity. Figures are IRR in percent.

| MOIC | 3 years | 4 years | 5 years | 6 years | 7 years |
|---|---|---|---|---|---|
| 1.5x | 14.47 | 10.67 | 8.45 | 6.99 | 5.96 |
| 2.0x | 25.99 | 18.92 | 14.87 | 12.25 | 10.41 |
| 2.5x | 35.72 | 25.74 | 20.11 | 16.50 | 13.99 |
| 3.0x | 44.22 | 31.61 | 24.57 | 20.09 | 16.99 |

#### Leverage sensitivity
Base case with x_exit held at 10.0x. Only D_0 changes; the equity check absorbs the difference, and interest changes with the balance, so the sweep amount changes too. EV_0 = 1,000.0, fees 30.0, EBITDA_t = 127.6282.

| D_0 (x EBITDA_0) | Sponsor equity E_0 | Cumulative paydown | D_t | E_t | MOIC | IRR |
|---|---|---|---|---|---|---|
| 3.0x (300.0) | 730.0 | 288.8 | 11.2 | 1,265.1 | 1.733x | 11.62% |
| 4.0x (400.0) | 630.0 | 255.0 | 145.0 | 1,131.2 | 1.796x | 12.42% |
| 5.0x (500.0) | 530.0 | 221.1 | 278.9 | 997.4 | 1.882x | 13.48% |
| 6.0x (600.0) | 430.0 | 187.3 | 412.7 | 863.6 | 2.008x | 14.97% |

#### EBITDA growth sensitivity
Base case with x_exit held at 10.0x and D_0 at 500.0. Growth affects both the exit enterprise value and the cash available to sweep, so it moves the answer twice.

| g | EBITDA_t | Cumulative paydown | D_t | E_t | MOIC | IRR |
|---|---|---|---|---|---|---|
| 0.0% | 100.00 | 169.1 | 330.9 | 669.1 | 1.262x | 4.77% |
| 3.0% | 115.93 | 199.5 | 300.5 | 858.8 | 1.620x | 10.13% |
| 5.0% | 127.63 | 221.1 | 278.9 | 997.4 | 1.882x | 13.48% |
| 8.0% | 146.93 | 255.7 | 244.3 | 1,225.0 | 2.311x | 18.24% |

## Accretion and dilution
Reviewed: 2026-08-27
Canonical: https://m-a.wiki/accretion-dilution/ (JSON: https://m-a.wiki/accretion-dilution.json)

Accretion and dilution is one division problem: pro forma net income over pro forma share count, compared against standalone EPS. Every consideration structure is a different way of changing the numerator and the denominator, and each has a closed-form breakeven condition that tells you the answer before you build the model. The worked example throughout this section is one pair of companies carried consistently. Acquirer: net income 500.0, fully diluted shares 250.0, so EPS 2.00; share price 30.00, so P/E 15.0x. Target: net income 100.0, fully diluted shares 100.0, so EPS 1.00; offer price 24.00 per share, so offer equity value 2,400.0 and offer P/E 24.0x. Marginal tax rate 25 percent. Incremental debt cost 6.0 percent pre-tax. Run-rate pre-tax synergies where used are 40.0.

### Pro forma EPS
Combined net income divided by combined share count, adjusted for every earnings and share effect of the transaction. The construction, not the concept, is where deals are won and lost in a board presentation.

Formula: EPS_pf = (NI_A + NI_T + Syn*(1-tau) - Cash*r_d*(1-tau) - AmortStepUp*(1-tau) + OtherAdj) / (S_A + Stock/P_A)

Pro forma financial information filed with the SEC follows Regulation S-X Article 11, which distinguishes transaction accounting adjustments from management's adjustments for synergies and requires the latter to be disclosed separately. A board deck that folds synergies silently into the numerator is not following the standard investors will see.,Target net income must be re-based to the acquirer's tax rate and capital structure before it is added. Adding a target's as-reported net income when the target had a different effective tax rate double-counts or omits tax that the deal changes.,Stub periods are a common quiet error. A deal closing mid-year contributes a partial year of target earnings and a partial year of interest, and the weighted average share count uses the issuance date. First-year accretion computed on a full-year basis is not what will be reported.

### Accretion or dilution percentage
The percentage change in the acquirer's EPS caused by the transaction. Positive is accretive, negative is dilutive. The sign, not the magnitude, is what most boards react to, which is why the sign is worth deriving in closed form rather than reading off a model.

Formula: Accretion = EPS_pf / EPS_A - 1

Accretion is not value creation. Buying earnings at a lower P/E than your own is accretive whether or not the business is worth what you paid, and issuing stock at a low multiple to buy a better business at a higher one is dilutive and can be correct.,The metric is exquisitely sensitive to the acquirer's own share price, which the acquirer does not control. A stock deal that is accretive at a 30.00 share price is dilutive at 24.00 for reasons that have nothing to do with the target.,First-year dilution followed by year-three accretion is the standard shape of an integration-heavy deal. Quote the year in which the number is measured or the number is meaningless.

### Exchange ratio
In a stock deal, the number of acquirer shares issued per target share. A fixed exchange ratio fixes the number of shares and lets the value float with the acquirer's price; a floating ratio fixes the value and lets the share count float.

Formula: Fixed ratio: ER = P_offer / P_A. Floating ratio: ER_at_close = P_offer / P_A,close

Under a fixed exchange ratio the target's shareholders bear the acquirer's price risk between signing and closing, which can be many months in a regulated deal. Under a floating ratio the acquirer bears the dilution risk instead. That single choice reallocates more economic risk than most of the rest of the agreement.,A collar is the middle case: fixed ratio inside a price band, floating outside it, or the reverse. Collars are where fixed and floating disputes are usually settled, and they introduce a discontinuity in the payoff that both sides' models frequently smooth over.,In a stock-for-stock merger the ownership split is the real deal term. Quoting a premium to the target's unaffected price and quoting a pro forma ownership percentage are two views of the same number, and they can be made to sound very different.

### Breakeven P/E rule, stock consideration
In an all-stock deal with no synergies and no other adjustments, the transaction is accretive if and only if the P/E paid for the target is below the acquirer's own P/E. The breakeven is exact and requires no model.

Formula: Accretive if P/E_offer < P/E_A. Maximum EPS-neutral price per share = P/E_A * EPS_T

The rule is a statement about relative multiples, not about quality. A high-multiple acquirer can buy almost anything accretively in stock, which is why multiple-driven roll-ups are structurally stock-funded and why the strategy stops working the moment the acquirer's own multiple compresses.,The rule inverts cleanly: a low-multiple acquirer buying a high-multiple target in stock is mathematically guaranteed to be dilutive before synergies. If such a deal is being pitched as accretive, the accretion is in the synergy line and should be interrogated there.,Because the acquirer's P/E is measured at a market price and the target's at an offer price, the comparison silently includes the premium. The relevant test is the offer P/E, not the target's unaffected trading P/E.

### Breakeven rule, cash and debt consideration
A debt-funded cash deal is accretive if the target's after-tax earnings yield on the purchase price exceeds the after-tax cost of the debt raised to pay it. Expressed as a multiple, the breakeven P/E is the reciprocal of the after-tax funding cost.

Formula: Accretive if NI_T / Price > r_d*(1-tau); equivalently if P/E_offer < 1 / (r_d*(1-tau))

Funding with surplus balance-sheet cash rather than debt replaces the cost of debt with the after-tax yield foregone. At a 3.0 percent pre-tax yield that is 2.25 percent, a breakeven P/E of 44.44x, and the same 24.0x offer flips from dilutive to accretive - the pro forma EPS becomes 546.0/250.0 = 2.184, or +9.20 percent.,That flip is the single most misleading fact in accretion analysis. When the funding cost is near zero, almost any acquisition is accretive, and accretion stops carrying any information about whether the deal is good.,The rule also explains why cash deals look better than stock deals in low-rate conditions and why the ranking reverses when rates rise, with no change in the underlying businesses.,Deductibility matters: if the incremental interest is disallowed under IRC section 163(j), the after-tax cost is the full 6.0 percent, the breakeven P/E falls to 16.67x, and the deal is materially more dilutive.

### Synergies net of cost to achieve
Run-rate synergies are the recurring annual benefit; cost to achieve is the one-time spend required to realise them. Both belong in the analysis, but they belong in different places, and conflating them is the most common way a synergy case is overstated.

Formula: Run-rate EPS effect = Syn*(1-tau) / S_pf. Value effect = Syn*(1-tau)/r - CTA*(1-tau), for a perpetual synergy

Cost to achieve is a one-time item and therefore does not appear in run-rate pro forma EPS, but it is real cash and it appears in full in the value calculation. A deal justified on run-rate accretion alone has been justified with the cost removed.,Cost synergies and revenue synergies do not deserve the same discount rate treatment in practice. Cost actions are largely under the acquirer's control; revenue synergies require customers to behave in a new way. Presenting both at the same probability is the standard optimism.,The share of synergies paid away in the premium is the honest test. If the premium over the unaffected price is 600.0 and the capitalised net synergy value is 292.08, the acquirer has paid the target for more than all of the value the deal creates.,Dis-synergies exist and are almost never modelled: customer overlap loss, attrition of revenue-generating staff, and the management attention consumed by integration.

### Breakeven synergies
The run-rate synergy amount at which the transaction is exactly EPS-neutral. This is the most testable number in an accretion analysis because it converts a return claim into an operating claim someone can be held to.

Formula: Syn_breakeven = [EPS_A * S_pf - (NI_A + NI_T - Cash*r_d*(1-tau))] / (1 - tau)

Expressing the breakeven as a percentage of the target's cost base or EBITDA is what makes it falsifiable. A breakeven that requires half of the target's EBITDA in synergies is a different proposition from one requiring 7 percent, and the raw dollar figure hides that.,The all-stock and all-cash breakevens differ by almost 8x in this example on the same purchase price. Consideration mix is therefore a bigger driver of the required synergy case than the price itself.,A breakeven synergy figure larger than the target's total addressable overhead is a proof that the deal cannot be neutral on cost synergies alone, whatever the model shows.

### Intangible amortisation drag and cash EPS
Purchase accounting steps acquired identifiable intangibles up to fair value, and the resulting amortisation is a non-cash charge that reduces reported pro forma EPS without reducing cash. Acquirers therefore report both GAAP EPS and a cash EPS excluding the charge.

Formula: Annual pre-tax amortisation = intangible step-up / useful life. EPS drag = amort*(1-tau) / S_pf

Goodwill is not amortised under ASC 350; only identifiable intangibles with finite lives are. The allocation between goodwill and finite-lived intangibles therefore determines the size of the drag, and that allocation is a valuation exercise completed after signing, often after the accretion analysis was presented.,Cash EPS is a legitimate adjustment for a charge that has no cash effect and an illegitimate one when it is used to make an expensive deal look cheap. The test is whether the intangible represents an asset that will need to be re-bought - customer relationships that must be re-won with real spend are an economic cost, not a bookkeeping one.,Deals structured as asset purchases or IRC section 338(h)(10) elections generate tax-deductible amortisation of the step-up, which is a real cash benefit and is worth modelling separately from the book charge. In a stock purchase without an election there is usually no such deduction, so the book charge is a drag with no offsetting cash benefit.,Inventory and fixed asset step-ups also produce charges, but they run through cost of sales and depreciation over shorter periods and are frequently missed entirely.

### Mixed consideration and where the answer lands
A mixed cash-and-stock deal has an EPS effect that is a weighted blend of its components, weighted by the value of each component rather than by share count.

Formula: EPS_pf = (NI_A + NI_T + Syn*(1-tau) - c*Price*r_d*(1-tau)) / (S_A + (1-c)*Price/P_A), where c is the cash fraction

Consideration mix is usually driven by the target's tax position and the acquirer's rating headroom, not by the accretion answer. A target shareholder base seeking tax-deferred treatment needs a stock component large enough to qualify under IRC section 368(a); a rating-constrained acquirer needs the debt component small enough to hold its ratios.,Those two constraints pull in opposite directions and the accretion number falls out of wherever they meet. Presenting the mix as chosen to optimise EPS inverts the actual causality in most deals.,Election mechanics matter: where target holders may elect cash or stock subject to proration, the final mix is not known at signing and the accretion figure in the proxy is an estimate.

#### Pro forma EPS by consideration mix
Offer equity value 2,400.0 in every row. Stock is issued at the acquirer's 30.00 price, so new shares = stock consideration / 30.00. Cash is funded with debt at 6.0 percent pre-tax, so after-tax interest = cash * 0.06 * 0.75. Synergy rows add 40.0 pre-tax, or 30.0 after tax. Standalone acquirer EPS is 2.00.

| Consideration | New shares | Pro forma shares | After-tax interest | After-tax synergies | Pro forma net income | Pro forma EPS | Accretion |
|---|---|---|---|---|---|---|---|
| 100% stock | 80.0 | 330.0 | 0.00 | 0.0 | 600.0 | 1.8182 | -9.09% |
| 100% stock + synergies | 80.0 | 330.0 | 0.00 | 30.0 | 630.0 | 1.9091 | -4.55% |
| 50% cash / 50% stock | 40.0 | 290.0 | 54.00 | 0.0 | 546.0 | 1.8828 | -5.86% |
| 50/50 + synergies | 40.0 | 290.0 | 54.00 | 30.0 | 576.0 | 1.9862 | -0.69% |
| 100% cash (debt funded) | 0.0 | 250.0 | 108.00 | 0.0 | 492.0 | 1.9680 | -1.60% |
| 100% cash + synergies | 0.0 | 250.0 | 108.00 | 30.0 | 522.0 | 2.0880 | +4.40% |

#### Breakeven conditions by funding source
Each row states the condition under which a deal is exactly EPS-neutral before synergies, the equivalent breakeven P/E, and the result for the worked example at an offer P/E of 24.0x. Acquirer P/E 15.0x, tax rate 25 percent, incremental debt 6.0 percent pre-tax, assumed after-tax yield on surplus cash 3.0 percent pre-tax.

| Funding | Neutral when | Breakeven P/E paid | At offer P/E 24.0x |
|---|---|---|---|
| All stock | Offer P/E = acquirer P/E | 15.00x | Dilutive |
| All debt | Target earnings yield on price = after-tax cost of debt (4.50%) | 22.22x | Dilutive |
| All balance-sheet cash | Target earnings yield = after-tax yield foregone (2.25%) | 44.44x | Accretive |
| Mixed | Weighted average of the component conditions | Between the above | Depends on mix |

#### Sensitivity to the offer price, all-stock
Acquirer EPS 2.00, acquirer price 30.00, target net income 100.0 and 100.0 shares, no synergies. New shares = offer price * 100.0 / 30.00.

| Offer per share | Offer P/E | New shares | Pro forma shares | Pro forma EPS | Accretion |
|---|---|---|---|---|---|
| 12.00 | 12.0x | 40.0 | 290.0 | 2.0690 | +3.45% |
| 15.00 | 15.0x | 50.0 | 300.0 | 2.0000 | 0.00% |
| 18.00 | 18.0x | 60.0 | 310.0 | 1.9355 | -3.23% |
| 24.00 | 24.0x | 80.0 | 330.0 | 1.8182 | -9.09% |
| 30.00 | 30.0x | 100.0 | 350.0 | 1.7143 | -14.29% |

## Purchase price and consideration
Reviewed: 2026-08-27
Canonical: https://m-a.wiki/purchase-price/ (JSON: https://m-a.wiki/purchase-price.json)

The headline number in a press release is one of at least four different prices, and they differ by amounts large enough to change whether a deal is good. Enterprise value is what the business costs; equity value is what the shareholders receive; the amount actually paid at closing is adjusted for working capital, cash and debt as measured on the closing date; and the amount ultimately paid includes or excludes earnouts, escrow releases, and ticking fees that resolve months or years later. This section states each bridge explicitly. The worked target throughout: 96.0 basic shares, options on 8.0 shares struck at 12.00, offer price 24.00 per share, total debt 600.0, cash and equivalents 150.0, preferred stock with a 50.0 redemption value, and non-controlling interests carried at 25.0.

### Enterprise value to equity value bridge
The identity connecting the value of the operating business to the value of its common equity. Every claim on the enterprise that ranks ahead of common stock is added, and every non-operating asset is deducted.

Formula: EV = E + D + preferred + NCI - C; equivalently E = EV - ND - preferred - NCI

The bridge is only as reliable as the completeness of the claims list. Items routinely missing: unfunded pension obligations, asset retirement obligations, deferred and contingent consideration owed on the target's own prior acquisitions, tax indemnity liabilities, off-balance-sheet factoring, and management incentive plan payouts triggered by the sale.,Operating leases capitalised under ASC 842 sit on the balance sheet as liabilities but are excluded from net debt by most practitioners because the corresponding right-of-use asset is an operating asset and lease expense is already in EBITDA. Including them without moving to an EBITDAR basis double-counts. State which convention is being used.,Non-controlling interests should be added at fair value, not book value, if the multiple being applied is derived from consolidated EBITDA that includes the subsidiary in full. Adding NCI at book while valuing 100 percent of consolidated earnings is internally inconsistent.,Cash is not automatically deductible in full. Cash trapped in a jurisdiction with a repatriation cost, cash required as a regulatory minimum, and cash that is really customer float are not available to the buyer and should be excluded from the deduction.

### Net debt
Total interest-bearing debt less cash and cash equivalents. A defined term in the purchase agreement whose scope is negotiated line by line, not an accounting quantity that can be read off the balance sheet.

Formula: ND = D - C, where the contents of D and C are as defined in the agreement

Every item argued into net debt reduces the equity price one for one. On a deal with a fixed enterprise value, the net debt definition is a direct transfer of price, and it is negotiated after the headline number has been agreed and announced.,The debt-like items list is where most post-LOI price erosion happens. A seller who agrees an enterprise value without simultaneously agreeing the net debt and working capital definitions has agreed to a number, not a price.,Net debt is measured at closing, not at signing or at the last audited balance sheet date. A seller that draws its revolver to fund operations between signing and closing has reduced its own proceeds.

### Treasury stock method
The standard convention for converting basic shares into a fully diluted count for valuation purposes. In-the-money options and warrants are assumed exercised, and the strike proceeds are assumed used to buy back shares at the offer price.

Formula: Net new shares = N_options * (1 - K / P_offer), for K < P_offer; zero otherwise

Dilution from options is a function of the offer price, so the fully diluted count rises with the price. Solving for an offer price from a fixed enterprise value is therefore circular; the closed-form solution is P = (EV - ND - pref - NCI + sum of K_i*N_i) / (S_basic + sum of N_i) over the tranches that end up in the money.,The method understates dilution where options are settled in cash at the spread rather than exercised for shares, because the cash outflow reduces equity value directly and no repurchase offsets it. In a change-of-control cash settlement, treat the payout as a use of funds instead.,Restricted stock units carry no strike and are fully dilutive - add them at face count, not through the treasury method. Performance share units accelerating on a change of control frequently vest at maximum, not target, which is a real and commonly missed increase in the count.,ASC 260 governs diluted EPS reporting and uses the same mechanic with the average market price rather than an offer price. The two produce different counts and are not substitutes.

### Cash-free debt-free
A pricing convention, standard in private M&A, in which the agreed price is the enterprise value: the seller keeps the cash and settles the debt, and the buyer acquires the operating business with a normalised balance sheet.

Formula: Seller proceeds = EV_agreed - D_at_close + C_at_close +/- NWC adjustment - transaction expenses

The convention exists because the buyer is pricing an operating business, not a cash pile. It also means the seller has no incentive to hoard cash and every incentive to argue about what counts as debt, which is why the debt-like items list is longer in a cash-free debt-free deal than anywhere else.,Cash-free debt-free removes the cash and debt distortion but not the working capital distortion, which is exactly what the peg exists to address. Without a peg, a seller can convert working capital to cash before closing and keep both.,In a locked box structure the balance sheet is fixed at an earlier reference date and the buyer takes the economic risk and benefit from that date forward, usually with an interest-style ticking payment to the seller. Locked box and cash-free debt-free with a completion true-up are alternatives, not complements - a deal should use one.

### Working capital peg
The normalised level of net working capital the business is expected to be delivered with, agreed in advance. Delivering above the peg increases the price; delivering below it reduces the price.

Formula: Adjustment = NWC_close - Peg, subject to any collar. Adjusted price = base price + adjustment

The peg is normally set as an average of monthly net working capital over a trailing period, most commonly twelve months to neutralise seasonality. A peg set on a single month's balance sheet in a seasonal business is a coin flip on which side of the seasonal swing closing falls.,Two collar conventions exist and they are not equivalent. Under the version shown here the full difference is payable once the collar is breached; under the alternative only the excess beyond the collar is payable, so a closing NWC of 68.0 against a 60.0 peg with a 2.5 collar would produce an adjustment of 5.5 rather than 8.0. The agreement must say which.,The definition of net working capital in the agreement almost never matches the definition in the target's management accounts. Every included and excluded line - deferred revenue, accrued bonuses, income tax payable, current portion of debt - is a price term.,The most valuable protection for either side is an agreed sample calculation appended to the agreement, applying the definition to a historical month and showing the resulting number. Without it, the true-up is a dispute over accounting policy conducted after the money has moved.

### Closing statement and true-up mechanics
The process by which the estimated closing adjustment paid at completion is replaced by the actual amount once closing accounts are prepared, with the difference settled in cash.

Formula: True-up payment = (actual adjustment - estimated adjustment); positive is payable by buyer to seller

Whoever prepares the closing statement has a structural advantage, because the other side must object within a fixed window on specified grounds. Sellers who concede preparation rights and accept a short objection window have given away more than they usually realise.,The independent accountant's mandate matters as much as their identity. An expert determination limited to the disputed items, deciding within the range the parties have each proposed, produces a very different distribution of outcomes from an unconstrained arbitration.,A true-up escrow sized to the plausible downside is the standard way to make a negative true-up collectible. Without it, a buyer owed money by a seller who has already distributed the proceeds has a claim, not a recovery.,The accounting hierarchy clause - agreement definitions first, then the specified sample calculation, then the target's historical policies, then GAAP - decides most true-up disputes before they start. Its ordering is a negotiated term and is frequently reversed by mistake.

### Earnout
Contingent consideration payable after closing if the acquired business meets specified performance conditions. Economically a bridge across a valuation disagreement and a written option on the metric chosen.

Formula: Payout = min(Cap, max(0, Rate * (Actual - Threshold))), summed over any tiers

An earnout is a written option, so its value depends on the volatility of the metric as well as its expected level. A cliff structure with a single threshold is a digital option and creates an enormous incentive to move revenue across the measurement date; a linear structure with a floor and a cap is a call spread and creates a smoother, weaker incentive.,Choose the metric for its manipulability, not its relevance. Revenue is the easiest to verify and the easiest to buy with margin. EBITDA is closer to value and fully exposed to allocation of shared costs. Non-financial milestones - a regulatory approval, a named contract signed - are the least gameable and the least connected to value.,The covenant package around an earnout is more important than the formula. Without an obligation to operate the business consistently, maintain the sales force, and refrain from reallocating customers or loading costs into the earnout entity, the buyer controls the outcome of the payment it owes.,Earnouts convert a price dispute into a post-closing litigation risk. Delaware courts read earnout provisions narrowly and generally do not imply an obligation to maximise the earnout absent express language, so what is not written is usually not owed.

### Escrow and holdback
A portion of the purchase price withheld at closing to secure the seller's post-closing obligations - most often indemnification and the working capital true-up. Escrow is held by a third party; a holdback is retained by the buyer.

Formula: Cash at close = purchase price - escrow - holdback; released per the release schedule less claims

An escrow that is the exclusive remedy caps the buyer's recovery at the escrow amount regardless of the size of the loss. An escrow that is merely the first source of recovery leaves the seller exposed above it. Those are radically different deals with nearly identical documents.,A buyer holdback is cheaper to administer and much worse for the seller than a third-party escrow, because collection depends on the buyer's willingness to release rather than on an instruction to an agent.,Escrow size and indemnity cap are separate terms that are often confused. A 10 percent cap with a 5 percent escrow means half the cap is unsecured; a 10 percent escrow with a 5 percent cap means half the escrow must be released.,Representations and warranties insurance has largely displaced the large indemnity escrow in mid-market and larger deals, reducing escrow to a true-up mechanism only. Where insurance is used, the escrow question becomes whether it also covers the retention under the policy.

### Contingent value right
A transferable or non-transferable instrument issued to target shareholders entitling them to a payment if a specified future event occurs. The public-company analogue of an earnout, used where a discrete binary outcome dominates value.

Formula: CVR value = probability-weighted payout, discounted: sum of p_i * Payout_i / (1+r)^t_i

The gap between the headline sum and the present value is the point of a CVR: it lets an acquirer announce a larger number and pay a smaller one in expectation. Both sides know this, and target boards use it to bridge a gap they cannot bridge in cash.,Milestone definition is where the value actually sits. A payment on regulatory approval by a fixed date is a clean condition. A payment on cumulative net sales exceeding a threshold hands the acquirer control of the trigger through pricing, launch sequencing, and revenue recognition.,Tradeable CVRs are securities and require registration or an exemption; non-tradeable CVRs avoid that but leave holders with no way to monetise, which reduces the value they will ascribe to the instrument at the vote.,CVRs are most common where a single asset dominates value and the parties disagree about one probability rather than about the whole business. Outside that fact pattern they add complexity without resolving anything.

### Ticking fee
An increase in the purchase price accruing at a stated rate for each day closing is delayed beyond a specified date, compensating the seller for the time value of proceeds held up in a long regulatory or financing process.

Formula: Price_t = Price_0 * (1 + rate * days / 365); per share: P_t = P_0 + P_0*rate*days/365

A ticking fee reprices delay but does not allocate blame for it. Whether it accrues during a delay caused by the seller's own failure to satisfy a condition depends entirely on the drafting, and the default reading is usually that it accrues regardless.,The rate is a negotiated number and functions as the seller's compensation for holding an unhedged position, not as an interest rate. Comparing it to a cost of funds misses that the seller also bears the deal-break risk during the same period.,Ticking fees and outside dates interact. A generous ticking fee with a distant outside date is a very different risk profile from no fee with a near outside date, and the combination is what determines the seller's real exposure to a long antitrust review.,In a locked box structure the equivalent mechanism is interest on the locked box price from the reference date to closing, which serves the same economic purpose through a different route.

#### Enterprise value to equity value bridge
Read downward to build enterprise value from an offer per share; read upward to solve the offer price from an enterprise value. Both directions use the same signs, reversed.

| Line | Amount | Running total |
|---|---|---|
| Offer price per share 24.00 x fully diluted shares 100.0 | 2,400.0 | 2,400.0 = equity value |
| Plus total debt (all interest-bearing, including finance leases) | +600.0 | 3,000.0 |
| Plus preferred stock at redemption value | +50.0 | 3,050.0 |
| Plus non-controlling interests | +25.0 | 3,075.0 |
| Less cash and cash equivalents | -150.0 | 2,925.0 = enterprise value |
| Memo: net debt = 600.0 - 150.0 | 450.0 | - |
| Reverse check: 2,925.0 - 450.0 - 50.0 - 25.0 | - | 2,400.0 |

#### Treasury stock method, diluted share count
Options in the money at the offer price are treated as exercised, with the strike proceeds used to repurchase shares at the offer price. Offer price 24.00.

| Step | Calculation | Shares |
|---|---|---|
| Basic shares outstanding | given | 96.0 |
| Options exercised (strike 12.00, in the money) | given | +8.0 |
| Option proceeds | 8.0 x 12.00 = 96.0 | - |
| Shares repurchased with proceeds | 96.0 / 24.00 | -4.0 |
| Fully diluted shares | 96.0 + 8.0 - 4.0 | 100.0 |
| Net dilution from options | 8.0 x (1 - 12.00/24.00) | 4.0 |

#### Working capital true-up scenarios
Base purchase price 500.0 on a cash-free debt-free basis. Peg (target normalised net working capital) 60.0. Collar of plus or minus 2.5 around the peg, with the full difference payable once the collar is breached.

| Closing NWC | Raw difference | Inside collar? | Adjustment applied | Adjusted price |
|---|---|---|---|---|
| 68.0 | +8.0 | No | +8.0 | 508.0 |
| 62.0 | +2.0 | Yes | 0.0 | 500.0 |
| 61.5 | +1.5 | Yes | 0.0 | 500.0 |
| 57.0 | -3.0 | No | -3.0 | 497.0 |
| 52.0 | -8.0 | No | -8.0 | 492.0 |

#### Earnout payout schedule
Base consideration 500.0. Earnout of up to 100.0 on year-one EBITDA, zero below 60.0, straight-line between 60.0 and 70.0, capped at 100.0. Payout = 100.0 x (Actual - 60.0)/10.0, floored at 0 and capped at 100.0.

| Year-1 EBITDA | Earnout payout | Total consideration | Marginal payout per unit of EBITDA |
|---|---|---|---|
| 58.0 | 0.0 | 500.0 | 0.0 |
| 60.0 | 0.0 | 500.0 | 10.0 |
| 63.0 | 30.0 | 530.0 | 10.0 |
| 66.0 | 60.0 | 560.0 | 10.0 |
| 70.0 | 100.0 | 600.0 | 0.0 |
| 75.0 | 100.0 | 600.0 | 0.0 |

## Deal process and agreement mechanics
Reviewed: 2026-08-27
Canonical: https://m-a.wiki/process/ (JSON: https://m-a.wiki/process.json)

The acquisition agreement allocates three things: risk of the unknown between signing and closing, risk that the deal does not close at all, and risk that what was bought is not what was described. Almost every negotiated provision is an instrument for one of those three. Where a provision has arithmetic - indemnity caps and baskets, break fees, insurance retentions - the arithmetic is stated below with a consistent worked deal: purchase price 500.0 in the private-deal examples, target equity value 2,400.0 in the public-deal examples.

### Letter of intent
A pre-agreement document setting out the principal commercial terms, almost entirely non-binding as to the transaction itself, with a small number of provisions that do bind.

The binding provisions are the ones a seller should negotiate hardest, because they are the only ones that will be enforced. The price in an LOI is an opening position; the exclusivity period is a commitment.,An LOI that fixes an enterprise value without simultaneously fixing the net debt definition, the working capital peg methodology, and the indemnity architecture has fixed almost nothing. Those three terms move price by more than most subsequent price negotiations.,Drafting matters for enforceability: a document expressed as an agreement to negotiate in good faith can create real obligations in some jurisdictions even where the transaction terms are non-binding. Say explicitly which clauses bind.,Sellers in a competitive process should resist granting exclusivity at all until confirmatory diligence is scoped and timetabled, because exclusivity is the moment competitive tension ends.

### Exclusivity
A binding undertaking by the seller not to solicit, negotiate with, or provide information to any other potential buyer for a defined period. The single most valuable thing a buyer obtains before signing.

Exclusivity converts an auction into a bilateral negotiation. Every subsequent price movement is therefore downward on average, because the buyer's alternative has improved and the seller's has vanished.,The negotiable dimensions are duration, automatic extension triggers, and whether the period terminates early if the buyer revises its indicative price. A price-revision termination right is the seller's most effective single protection.,Pairing exclusivity with a defined diligence workplan and a signing deadline is the standard counterweight: the buyer gets the period it needs, and the seller gets a date.,In a public-company process the equivalent pre-signing constraint is usually a standstill in the NDA rather than exclusivity, because a target board's fiduciary duties limit what it can promise before signing.

### Representations and warranties
Statements of fact about the target, made as of signing and usually repeated as of closing, allocating the risk that the described state of affairs is untrue. They perform three separate functions and are negotiated as though they perform one.

Qualifiers do the work, not the representations. Knowledge qualifiers, materiality qualifiers, material adverse effect qualifiers, and the definition of the knowledge group each narrow the statement substantially, and a representation with all four is close to unenforceable.,Fundamental representations - title to shares, capitalisation, authority, and often tax - are typically carved out of the general cap and the general survival period. That carve-out list is where the real risk allocation happens.,Disclosure schedules are part of the negotiation, not an administrative appendix. A general disclosure of everything in the data room, if accepted, defeats most of the representation package.,The bring-down standard at closing is a separate negotiation from the representations themselves. Bringing representations down only to the extent inaccuracy would constitute a material adverse effect is a far weaker closing condition than a bring-down in all material respects.

### Indemnity cap, basket, and de minimis
The three quantitative limits on a seller's post-closing liability: a floor below which no claim can be made at all, a threshold below which aggregate losses are not recoverable, and a ceiling on total recovery.

Formula: Deductible basket: Recovery = min(max(L - B, 0), Cap). Tipping basket: Recovery = 0 if L <= B, else min(L, Cap)

The deductible versus tipping choice is worth exactly the basket amount in every outcome between the basket and the cap, and nothing outside that band. It is therefore a small, precisely quantifiable concession that is frequently traded as though it were a large one.,De minimis exclusions matter more than their size suggests, because they prevent aggregation of many small claims into a basket breach. A low basket with a high de minimis can be more protective of the seller than the reverse.,Separate caps by representation category are standard: a general cap for operational representations, a higher or uncapped level for fundamental representations, and often the full purchase price for fraud. A single cap across everything is unusual and heavily seller-favourable.,Survival periods interact with the caps. A 10 percent cap surviving 18 months and a 5 percent cap surviving 3 years are not comparable, and the tax representation survival usually tracks the statute of limitations rather than the negotiated period.

### Material adverse effect
A defined term whose occurrence permits a buyer not to close. Constructed as a broad general standard followed by a long list of carve-outs, so that the operative question is almost always whether an event falls into a carve-out rather than whether it is material.

The Delaware standard is durational and demanding: the adverse change must be consequential to the company's long-term earnings power over a commercially reasonable period, measured in years rather than quarters. Akorn v. Fresenius (Del. Ch. 2018) is the only Delaware decision to have found a valid MAE termination, and its facts involved a sustained collapse in earnings alongside regulatory data integrity failures.,The carve-out list, not the general standard, decides most disputes. An event that is plainly material but sits squarely inside a carve-out is not an MAE, and industry-wide and general-economic carve-outs remove the entire class of events buyers most fear.,The disproportionate effect proviso is where the carve-outs are given back, and it is drafted narrowly or broadly depending on who wins that point. It converts the question from what happened to how the target fared relative to peers, which requires comparator data neither side has at the moment of decision.,Practically, an MAE claim is a negotiating position rather than an exit. Its usual outcome is a price reduction, because both parties know that litigating it is slow, public, and unlikely to succeed.

### Closing conditions
The list of matters that must be satisfied or waived before each party is obliged to close. Every condition is an option to walk away, and the value of that option sits with whoever holds the condition.

Conditions are asymmetric in practice. Buyer conditions are numerous and factual; seller conditions are few and mechanical. That asymmetry is why a signed deal is far more certain for the buyer than for the seller.,A financing condition is the strongest buyer condition and is largely absent from competitive processes. It has been replaced by a reverse termination fee, which converts an option to walk away into a priced right to walk away.,Efforts standards on the regulatory condition do most of the work in a difficult antitrust deal. Commercially reasonable efforts, best efforts, and a hell-or-high-water covenant requiring divestitures without limit allocate the entire regulatory risk differently, and the drafted standard is a bigger determinant of outcome than the fee.,Third-party consent conditions are the quiet killer in carve-out transactions, where hundreds of contracts may contain change-of-control provisions. A condition requiring all material consents hands the buyer a walk-away right that depends on counterparties neither party controls.

### No-shop and go-shop
Post-signing deal protection. A no-shop prohibits the target from soliciting competing proposals. A go-shop expressly permits and often requires active solicitation for a defined window after signing, usually at a reduced break fee.

The two structures answer the same question - was the price tested - at different points in time. A no-shop after a broad pre-signing auction and a go-shop after a bilateral negotiation are both defensible; a no-shop after a bilateral negotiation with no market check is the fact pattern that draws scrutiny.,A go-shop with a break fee that steps up after the window, an information-sharing obligation, and matching rights for the initial bidder is a genuine market check. A go-shop whose window is short and whose fee barely differs is a market check in name.,Where a target board is subject to enhanced scrutiny of its sale process under Revlon, the market check is not merely an economic term but part of the record of how the board discharged its duty to seek the best transaction reasonably available.,Matching rights are the most consequential and least discussed element. A three-business-day match right on every revision of a competing bid materially discourages a second bidder from spending money to compete.

### Fiduciary out
An exception to the no-shop permitting the target board to engage with an unsolicited proposal that is or may reasonably be expected to lead to a superior proposal, and ultimately to change its recommendation or terminate the agreement on payment of the break fee.

The definition of superior proposal is the real term. Requiring a proposal to be fully financed, not subject to a diligence condition, and reasonably capable of completion narrows the gate considerably, and each of those qualifiers is negotiated separately.,A merger agreement with no effective fiduciary out, combined with locked-up shareholder votes sufficient to guarantee approval, was held in Omnicare v. NCS Healthcare to be invalid as a matter of Delaware law because it made the outcome a fait accompli. That case marks the outer boundary of deal protection.,The fee is the price of the out, and the two terms must be read together. A low fee with a narrow out and a high fee with a wide out can be equally protective; quoting either in isolation says little.,An intervening event fiduciary out - permitting a recommendation change for reasons unrelated to a competing bid - is a separate and more contested provision than the superior proposal out.

### Break fee
A payment by the target to the buyer on termination in specified circumstances, principally where the target board accepts a competing proposal. Compensation for the buyer's sunk costs and lost opportunity, and simultaneously a deterrent to competing bidders.

Formula: Fee = rate * reference value; the reference base is a negotiated term

Always check the reference base before comparing two fee percentages. On the worked target, 3.0 percent of equity value is 72.0 and 3.0 percent of enterprise value is 87.75 - a 22 percent difference in the actual deterrent from an identical-sounding term.,The economic function is a threshold, not a payment. A competing bidder must exceed the existing price by the fee before its bid is worth more to shareholders, so the fee sets the minimum increment of any topping bid.,Tail provisions extend the fee to a competing transaction signed within a period after termination, which prevents the target from terminating for another stated reason and then doing the competing deal fee-free.,Expense reimbursement is a separate and smaller item payable in circumstances where the full fee is not, most commonly a failed shareholder vote with no competing proposal on the table.

### Reverse termination fee
A payment by the buyer to the target where the buyer fails to close for a specified reason - most often failure of debt financing or failure to obtain regulatory clearance. The mirror image of the break fee and usually larger.

Formula: RTF = rate * reference value, frequently at two levels for financing failure and regulatory failure

A financing RTF combined with an exclusive-remedy clause is functionally a financing condition with a price attached. Whether the target has any remedy beyond the fee - specific performance against the buyer, or a claim against the equity backstop - is the term that determines whether the deal is really committed.,Regulatory RTFs are typically larger than financing RTFs because the risk is longer-dated, outside both parties' control, and more damaging to the target, which must operate under a no-shop and interim covenants for the duration.,The fee and the efforts covenant are substitutes at the margin. A buyer that accepts a hell-or-high-water divestiture covenant will resist a large regulatory fee, and vice versa. Negotiating them independently produces either double protection or none.,Limited guarantees from sponsor funds are what make an RTF collectible against an acquisition vehicle with no assets. An RTF against a shell with no guarantee is a number in a document.

### Representations and warranties insurance
A policy, usually buyer-side, covering losses from breach of the seller's representations, replacing or supplementing the seller's indemnity obligation. It converts a seller credit exposure into an insurance recovery.

Formula: Cost = rate on line * limit. Buyer recovers above the retention, up to the limit, for covered breaches

The policy does not underwrite what was not diligenced. Underwriters review the diligence reports and exclude areas where diligence was thin, which means insurance rewards a thorough process and provides little cover for a fast one.,Standard exclusions are consistent and consequential: known issues, purchase price adjustments, forward-looking statements and projections, and often specific categories such as wage-and-hour claims, transfer pricing, or environmental matters depending on the target. The exclusion list is the actual scope of cover.,Insurance changes who bears risk but also who bears the cost of pursuing it. A buyer with a claim against a policy faces an insurer's claims process rather than a counterparty with a continuing commercial relationship, which is slower and more adversarial than sellers assume when they price the concession.,Because the premium is small relative to price while the escrow released is large, the seller is usually the economic beneficiary even where the buyer nominally pays. That is why premium allocation is a negotiated term and why it is often split.

#### Indemnity recovery arithmetic
Purchase price 500.0. Cap 10 percent = 50.0. Basket 1 percent = 5.0. Per-claim de minimis 0.05. Recovery is shown for a deductible basket, where only losses above the basket are recoverable, and a tipping basket, where the full amount becomes recoverable once the basket is exceeded.

| Aggregate losses | Above de minimis? | Deductible basket recovery | Tipping basket recovery | Difference |
|---|---|---|---|---|
| 0.03 | No | 0.00 | 0.00 | 0.00 |
| 4.00 | Yes | 0.00 | 0.00 | 0.00 |
| 5.00 | Yes | 0.00 | 0.00 | 0.00 |
| 12.00 | Yes | 7.00 | 12.00 | 5.00 |
| 55.00 | Yes | 50.00 | 50.00 | 0.00 |
| 80.00 | Yes | 50.00 | 50.00 | 0.00 |

#### Termination fee taxonomy
Target equity value 2,400.0. Percentages are illustrative points on a scale, not measured market levels; the purpose of the table is the direction each fee runs and what it prices.

| Fee | Payable by | Trigger | Illustrative rate | Amount |
|---|---|---|---|---|
| Break fee | Target | Target board terminates to accept a superior proposal, or a competing deal within a tail period | 3.0% of equity value | 72.0 |
| Go-shop period fee | Target | Same, but the superior proposal emerges from a solicited go-shop within the window | 1.5% | 36.0 |
| Expense reimbursement | Target | Shareholder vote fails absent a competing proposal | 0.5% | 12.0 |
| Reverse termination fee, financing | Buyer | Buyer's debt financing fails and buyer cannot close | 4.0% | 96.0 |
| Reverse termination fee, regulatory | Buyer | Antitrust or foreign investment clearance not obtained by the outside date | 6.0% | 144.0 |

#### Process sequence and what binds at each stage
Which provisions are legally binding at each stage is the practical question, because most of a letter of intent is not.

| Stage | Document | Binding elements | Principal risk transferred |
|---|---|---|---|
| Approach | NDA | Confidentiality, non-solicit of employees, standstill in a public process | Information leakage |
| Indicative bid | Letter of intent or term sheet | Exclusivity, confidentiality, expenses, governing law only | Timing leverage |
| Confirmatory diligence | Diligence request lists, data room | NDA terms continue | Discovery of undisclosed liabilities |
| Signing | Merger or purchase agreement | Entire agreement, including conditions and covenants | Interim operating and deal-break risk |
| Interim period | Same agreement | Interim covenants, efforts covenants, no-shop | Regulatory and MAE risk |
| Closing | Closing deliverables, escrow agreement | Conditions satisfied or waived | Payment mechanics |
| Post-closing | Same agreement, escrow agreement, R&amp;W policy | Survival, indemnity, true-up, earnout | Breach of representation |

#### R&W insurance economics
Purchase price 500.0. Policy limit set at 10 percent of enterprise value. Retention is the insured's self-insured layer before the policy responds. Rate on line is premium divided by limit. Figures are arithmetic on the stated inputs.

| Item | Basis | Amount |
|---|---|---|
| Policy limit | 10% of 500.0 | 50.0 |
| Retention | 0.75% of 500.0 | 3.75 |
| Premium at a 3.0% rate on line | 0.030 x 50.0 | 1.50 |
| Premium as a share of price | 1.50 / 500.0 | 0.30% |
| Seller indemnity retained (typical no-seller-indemnity structure) | fraud and specified excluded matters only | - |
| Escrow replaced | 50.0 indemnity escrow no longer required | 50.0 released to seller at close |

## Valuation cross-checks
Reviewed: 2026-08-27
Canonical: https://m-a.wiki/valuation/ (JSON: https://m-a.wiki/valuation.json)

No single valuation method is reliable enough to defend a price, so the practice is triangulation: run several methods with genuinely different inputs and interrogate the disagreements. This section states the arithmetic of each method and, more usefully, the cross-check that reveals when two methods are secretly making the same assumption. The worked case: equity market value 2,400.0, debt 600.0, cost of equity 10.0 percent, pre-tax cost of debt 6.0 percent, tax rate 25 percent, year-5 EBITDA 150.0, year-6 free cash flow to the firm 120.0.

### WACC
The weighted average cost of capital: the blended after-tax required return on the capital funding the enterprise, and the correct discount rate for unlevered free cash flow.

Formula: WACC = (E/V)*r_e + (D/V)*r_d*(1 - tau), where V = E + D

Weights must be market values, and they must be the target capital structure rather than the current one if the current one is temporary. Using book equity weights in a company trading well above book systematically overweights debt and understates WACC.,The tax shield belongs in exactly one place. Putting it in the discount rate through the (1 - tau) term and also in the cash flows by forecasting levered free cash flow double-counts it. Unlevered cash flow with WACC, or levered cash flow with cost of equity - never a mixture.,WACC is not constant when leverage changes over the forecast, which is precisely the case in any LBO. A constant WACC applied to a deleveraging capital structure is internally inconsistent; the adjusted present value approach, valuing the unlevered business and the tax shield separately, is the consistent alternative.,In practice the discount rate is where a valuation is quietly tuned to its answer, because a 100 basis point move in WACC moves a terminal-value-heavy DCF by more than most operating assumptions. Sensitivity to r should be shown, not buried.

### Terminal value, Gordon growth
The value at the end of the forecast horizon of a perpetually growing cash flow stream. The largest single number in most DCF valuations and the one supported by the least analysis.

Formula: TV_n = FCF_(n+1) / (r - g) = FCF_n * (1 + g) / (r - g); PV = TV_n / (1 + r)^n

The denominator r - g is small, so the terminal value is hypersensitive to both inputs. At r = 8.9 percent, moving g by 100 basis points moves the terminal value by roughly 17 percent. Any DCF where terminal value is most of the total is primarily a statement about two numbers.,The perpetuity growth rate cannot exceed the long-run nominal growth rate of the economy for any sustained period, because a company growing faster forever eventually becomes the economy. That is a hard ceiling, not a convention.,The terminal cash flow must be a steady state. If terminal capital expenditure is below terminal depreciation, the model has a company growing forever while shrinking its asset base. Set terminal reinvestment consistent with g: reinvestment rate = g / return on invested capital.,The formula requires the cash flow of the period after the forecast, not the last forecast period. Using FCF_n rather than FCF_n*(1+g) understates terminal value by a factor of (1+g) and is a common error.

### Terminal value, exit multiple
Terminal value estimated by applying a market multiple to the final forecast year's earnings measure. Intuitive, easy to communicate, and circular in a way the Gordon method is not.

Formula: TV_n = x_exit * EBITDA_n; PV = TV_n / (1 + r)^n

The exit multiple method imports today's market multiple as a forecast of the multiple five years from now. That is an assumption about market conditions, presented as an observation. The Gordon method at least states its assumption as a growth rate about the company.,It is also circular when the multiple comes from comparables that are themselves being valued in the same exercise. A DCF whose terminal value is set by a trading multiple is a partially relative valuation wearing an absolute valuation's clothes.,The two methods are only genuinely independent cross-checks if their implied assumptions are compared. Compute the implied perpetuity growth of the exit multiple and the implied exit multiple of the Gordon growth rate, and reconcile them.,Using an EBITDA multiple to value a cash flow stream skips over the reinvestment question entirely: two companies with identical terminal EBITDA and different capital intensity are not worth the same multiple, and the method cannot see the difference.

### Implied growth cross-check
The perpetuity growth rate that a chosen exit multiple is equivalent to, given the discount rate and the terminal cash flow. The single most efficient sanity check available on a DCF.

Formula: g_implied = r - FCF_(n+1) / TV_n = r - FCF_(n+1) / (x_exit * EBITDA_n)

In the worked case a 9.0x exit multiple implies essentially zero perpetuity growth, while the Gordon method with a 2.5 percent growth rate implies a 12.50x exit multiple. Those are not two views of the same company - they are two incompatible views presented as a range.,That gap is the normal outcome of running both methods without reconciling them, and it is why a football field chart with a DCF bar and a comparables bar can look like agreement while hiding a disagreement of 40 percent.,The direction of the gap is diagnostic. An exit multiple implying negative growth means the multiple is low relative to the cash flow the model forecasts, which usually means the forecast cash conversion is too optimistic rather than that the multiple is wrong.,Run the check both ways and state both numbers. It costs one line of arithmetic and it is the fastest way to find an inconsistent model.

### Trading comparables
Valuation by applying multiples observed in the current trading prices of similar public companies. Measures what the market pays for a minority position in the business type today.

Formula: EV_target = median(EV/EBITDA of peers) * EBITDA_target; then bridge to equity value

The numerator and denominator must belong to the same claimants. EV/net income and price/EBITDA are both meaningless, and both appear in practice.,Calendarisation and adjustment do more work than peer selection. Peers with different fiscal year ends, different treatment of stock compensation, and different lease accounting produce a spurious dispersion that is then reported as a valuation range.,Trading multiples exclude a control premium by construction, so a trading comps range is a floor for a controlling acquisition, not an estimate of one. Adding an assumed control premium to a trading range re-derives transaction comps by a less reliable route.,A small peer set is usually worse than a wider one with explicit adjustments, because the median of four companies is dominated by idiosyncratic facts about those four.

### Transaction comparables and precedent premiums
Valuation by reference to multiples and premiums paid in completed acquisitions of similar businesses. Measures what control of the business type has cost, including whatever synergies those acquirers believed in.

Formula: EV_target = median(EV/EBITDA at announcement of precedents) * EBITDA_target; premium = P_offer / P_unaffected - 1

The reference price is the whole argument. On identical facts the same offer is a 50 percent premium, a 33 percent premium, a 20 percent premium, or a discount, depending on whether the reference is the pre-leak price, the last close, a volume-weighted average, or the 52-week high. Every proxy statement chooses, and the choice is advocacy.,Where a leak or rumour has already moved the price, the last unaffected trading day is the only economically meaningful reference, and identifying it is a judgement rather than a lookup.,Transaction multiples embed the acquirer's synergy assumptions. Paying a precedent multiple without the same synergy opportunity means paying for someone else's synergies.,Precedent samples are small and selected: completed deals at announced prices, with abandoned processes and lower bids invisible. The distribution is truncated from below, which biases the apparent range upward.,Where a board relies on a financial advisor's analysis, the underlying reports and opinions are disclosure items under Item 1015 of Regulation M-A, which is why the premium reference and comparable set used in an opinion are visible in the filed documents.

### LBO as a valuation floor
The highest price a financial buyer requiring a target return can pay, computed by inverting the LBO. Because a financial buyer without synergies is the least aggressive credible bidder, that price behaves as a floor under a competitive process.

Formula: EV_max = [E_required + D_0] / (1 + fee%), where E_required = (x_exit*EBITDA_t - D_t) / (1 + IRR_target)^t

The floor is a floor on the sponsor's willingness to pay, and it is driven entirely by the debt markets. A one-turn change in available leverage moves the affordable entry multiple by roughly the same amount times the equity discount factor - which is why sponsor bids are more sensitive to credit conditions than to the target's operating outlook.,This is also the practical explanation for why financial buyers win auctions in loose credit conditions and lose them to strategics in tight ones. The floor rises with leverage availability; the strategic ceiling, driven by synergies, does not.,The floor is not a valuation. It states what a buyer with a required return can afford, not what the business is worth, and a sponsor's required return is a fund-level constraint rather than a market discount rate.,Running the calculation with the exit multiple set equal to the entry multiple removes the multiple-expansion assumption and produces the honest version of the number - the price at which the deal works on operations and deleveraging alone.

### Triangulating the methods
The discipline of running several valuation approaches with genuinely independent inputs and treating the disagreements as information rather than noise to be averaged away.

Averaging methods destroys the information. The useful output of a valuation exercise is not a midpoint but a statement of which assumption each method is most sensitive to and which of those assumptions the deal actually depends on.,Methods are only independent if their inputs are. A DCF with a terminal exit multiple taken from trading comps and a trading comps analysis on the same peer set are one method presented twice, and their agreement means nothing.,The single most informative comparison is the strategic ceiling against the financial floor. The gap between them is the value of control plus synergies, and if the offer exceeds that gap the acquirer is paying the target for value it has not identified.,The offer price ultimately reflects process and alternatives, not method. A method is a way of testing whether a price is defensible, not of generating one, and treating it as the latter is how a fairness analysis becomes a rationalisation.

#### WACC build
Market value weights, not book. E = 2,400.0, D = 600.0, V = 3,000.0. Tax rate 25 percent.

| Component | Market value | Weight | Pre-tax cost | After-tax cost | Contribution |
|---|---|---|---|---|---|
| Equity | 2,400.0 | 80.00% | 10.00% | 10.00% | 8.000% |
| Debt | 600.0 | 20.00% | 6.00% | 4.50% | 0.900% |
| Total capital | 3,000.0 | 100.00% | - | - | 8.900% = WACC |

#### Terminal value - Gordon growth versus exit multiple
r = 8.900%. FCF_6 = 120.0. EBITDA_5 = 150.0. Discount factor to today is 1.089^5 = 1.531579. The implied growth column is the perpetuity growth rate that the stated exit multiple is equivalent to, computed as g = r - FCF_6/TV_5.

| Method | Input | TV at year 5 | PV of TV today | Implied perpetuity g |
|---|---|---|---|---|
| Gordon growth | g = 1.50% | 1,621.6 | 1,058.8 | 1.50% |
| Gordon growth | g = 2.00% | 1,739.1 | 1,135.5 | 2.00% |
| Gordon growth | g = 2.50% | 1,875.0 | 1,224.2 | 2.50% |
| Gordon growth | g = 3.00% | 2,033.9 | 1,328.0 | 3.00% |
| Exit multiple | 8.0x EBITDA_5 | 1,200.0 | 783.5 | -1.10% |
| Exit multiple | 9.0x EBITDA_5 | 1,350.0 | 881.4 | 0.01% |
| Exit multiple | 10.0x EBITDA_5 | 1,500.0 | 979.4 | 0.90% |

#### Premium arithmetic
Offer 24.00 per share. Premium is measured against a reference price, and the choice of reference is a presentation decision that can change the headline by 30 percentage points on identical facts.

| Reference price | Basis | Premium | Aggregate premium on 100.0 shares |
|---|---|---|---|
| 16.00 | Unaffected price 30 days before leak | 50.00% | 800.0 |
| 18.00 | Closing price one day before announcement | 33.33% | 600.0 |
| 20.00 | 30-day volume weighted average | 20.00% | 400.0 |
| 26.00 | 52-week high | -7.69% | -200.0 |

#### Trading versus transaction comparables
The two comparable-company methods answer different questions and are not interchangeable inputs to the same range.

| Dimension | Trading comparables | Transaction comparables |
|---|---|---|
| Question answered | What does the market pay for a minority stake in this kind of business today | What have buyers paid for control of this kind of business |
| Includes control premium | No | Yes |
| Includes synergies | No | Yes, the acquirer's, which may not be yours |
| Timeliness | Current market prices | Historical, at the market conditions then prevailing |
| Financial data quality | Current filings, consistent | Often stale or incomplete for private targets |
| Sample size | Usually adequate | Usually small, and small samples in M&amp;A are not random |
| Standard use | Floor for a controlling acquisition | Reference for what control has cost |

#### LBO floor - maximum affordable entry multiple
Solving the LBO backwards for the highest price a financial buyer can pay and still reach a 20 percent IRR. Inputs: EBITDA_0 = 250.0, growth 4.0 percent, unlevered FCF 55 percent of EBITDA, debt 5.0x EBITDA_0 = 1,250.0 at 6.5 percent, fees 2.0 percent of EV, exit 9.0x in year 5, 100 percent cash sweep.

| Step | Calculation | Result |
|---|---|---|
| EBITDA at exit | 250.0 x 1.04^5 | 304.1632 |
| Exit enterprise value | 9.0 x 304.1632 | 2,737.47 |
| Debt at exit after sweep | 1,250.0 less cumulative paydown of 415.03 | 834.97 |
| Equity at exit | 2,737.47 - 834.97 | 1,902.50 |
| Required equity at entry | 1,902.50 / 1.20^5 | 764.57 |
| Total sources | 1,250.0 + 764.57 | 2,014.57 |
| Enterprise value affordable | 2,014.57 / 1.02 (fees are 2% of EV) | 1,975.07 |
| Maximum entry multiple | 1,975.07 / 250.0 | 7.90x |

Reference information only. Not legal, tax, or investment advice. Acquisition agreements, credit documents, and tax structures vary materially between transactions and jurisdictions; the mechanics described here are common patterns, not the terms of any particular deal. Worked examples use assumed inputs chosen to make the arithmetic verifiable, not to represent market levels. Consult counsel.