Why do potential buyers in an M&A process care so much about the treatment of factoring in the EV to equity bridge? My understanding is that the buyer pays EV in an M&A transaction (which may be wrong), so why does it even matter for them?
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I'm not sure specifically what "care so much" means (there can be a few valid concerns), but firstly I should clarify that buyers pay the equity value, not the enterprise value.
As a main point though, the buyer will want to know whether factoring arrangements are a debt-like item or liability that they're taking on by acquiring the business. It may or may not be considered a debt-like item (usually it is considered as debt in my experience, but commercially, in reality, the buyer and seller will trade off the amount / existence of this on the bridge as a bargaining chip for "wins" elsewhere in the bridge or SPA or something else).
What?? Buyers definitely pay the enterprise value.
Enterprise value = what buyers pay
Equity value = what sellers keep
I'm not sure it's as simple as "Buyers pay Enterprise Value" - if I as a seller have transaction perimeter which is a box with $10 in it (and the box is worthless, with an EV of zero), then the buyer pays $0 + $10 for the cash. (And I take the counter-argument that this nets out to zero, but I'm thinking in terms of funds flows).
In addition, there are adjustments in the bridge which are foggy and don't easily translate into "Buyer pays the Enterprise Value". For example, the bridge might include items such as potential legal claims, bonuses of key management, and capex underspend.
The factoring question is quite nuanced, and often debated. It's a very good question.
The amount paid to the Seller is adjusted on a dollar-for-dollar basis for cash and debt. A Buyer will not want to hand over cash to the Seller and be left with a factoring liability it may need to service. So the Buyer may require that a corresponding adjustment is made to Debt.
It can get more nuanced - use of factoring might reduce the level of net working capital. So, was this a one-off event, or does the business always use factoring? The answer to that will impact the calculation of normalised net working capital.
The broader point being that the Buyer can and should care a lot about the Equity Value. The Buyer does not simply pay the Enterprise Value in real world transactions, I'm afraid.
Why think about it in terms of fund flows? Conceptually, if I pay you $10 for a box containing $10, I'm getting the box for free.
Enterprise value = value of the target's operating assets. this is what the buyer pays, whether via (a) cash equity, (b) assumption of existing debt, or (c) new debt. Otherwise, the purchase price would vary based on the target's capital structure (which doesn't make sense).
I take your point, and that's what I meant by "counter-argument". But then this counter-argument doesn't address the original post's question.
Why should a financial sponsor (just picking an example of a potential buyer) care about what is in the EV-Equity bridge at all if the sponsor only pays the EV?
One way of looking at this (and agreeing to agree!) is that the arguments over what is contained in the bridge is to properly agree what the EV is, so that the Buyer doesn't, for example, fail to address a liability and end up paying for it twice (once in the form of Equity to the Seller, and the second time to the liability-holder).
So what I mean is that the Buyer does pay the Equity Value to the Seller, and pays the EV overall. But if we stop there, then we don't address the original question.
Agree with this. I agree to agree to agree.
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