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I have the feeling nobody, except lawyers and seniors fully fully understand EV/Equity bridge. Hopefully I understood it now.

Most finance articles will give you a formula for the EV/Equity bridge and call it a day. You’ll see something like:

Equity Value = Enterprise Value – Net Debt ± Adjustments

That’s the skeleton. By the end of this piece, every term in that formula will mean something specific — and you’ll understand why experienced deal teams can start with the exact same Enterprise Value and land on completely different equity checks. It’s not math errors. It’s judgment calls about risk.

So let’s start from scratch.

What are you actually buying?

When you acquire a company, the first question is deceptively simple: what exactly changes hands and how do we calculate it? The answer depends on the deal type.

In a public deal, you buy shares in the open market. The equity value is set by the market every day: share price multiplied by fully diluted shares outstanding. You’re acquiring the whole entity — operating business, cash, debt, and everything else sitting on the balance sheet. This is called Total Enterprise Value.

In a private share deal, there is no market to tell you what equity is worth. You have to calculate it. The convention here is different: you typically negotiate the deal on a cash-free, debt-free basis — meaning liquid cash stays with the seller, and financial debt is settled at close rather than inherited by the buyer. But cash-free/debt-free doesn’t mean the buyer gets only the operating business. Any non-operating assets that exist — investments in affiliates, surplus real estate, marketable securities — transfer with the company unless explicitly carved out in the purchase agreement. The bridge has to account for them.

So the real difference between a public and a private deal is not only what’s included. It’s how the price is determined and settled. In a public deal, the share price does the work implicitly. In a private deal, the bridge does it explicitly — item by item, negotiated line by line.

This single distinction is the root of most confusion. The rest of this article focuses on private deals — where the bridge is most contested, and where the negotiation actually happens.

The bridge as a logic problem

Think of Enterprise Value (EV) as a box. Inside the box is the operating business — the thing that generates EBITDA, has customers, and employs people. That is what EV tries to capture.

The equity bridge is really asking: what sits outside the box, and who does every item belong to?

Keep that image in mind. Everything that follows is just working through the items — one by one — deciding which side of the box they sit on, and who bears the risk if the answer is contested.

• Items outside the box that belong to equity holders increase the equity value relative to EV. In a public deal or where cash is included in the transaction, cash is the clearest example. In a cash-free/debt-free private deal — which is what the rest of this article covers — non-operating assets like surplus property or affiliate investments play that role instead. Cash is settled separately.
• Items that belong to lenders or represent liabilities reduce it (like debt).

Why it gets complicated

1. The “Clean” EV Problem (Minority Interests)

Minority interests are earnings inside the box that don’t fully belong to you. When a company owns 70% of a subsidiary, accounting rules make it consolidate 100% of that subsidiary’s earnings. So, the EV you calculate — based on reported EBITDA — implicitly includes 100% of the subsidiary’s value. But 30% of that value belongs to outside shareholders, not to you. You subtract minority interest from EV when bridging to equity value, because that slice isn’t yours.

The reverse applies to non-consolidated stakes — say, a 30% holding in an affiliate. Those earnings never appear in EBITDA, so EV doesn’t capture them. But they are real assets on the balance sheet. You add them back when bridging, because they do belong to the equity holders.

2. “Net debt” is a negotiation

In theory, it is simple: debt minus cash. In practice, the question of what counts as debt is one of the most contested points in any deal. Do finance leases count? What about earn-outs payable to the seller? Off-balance-sheet items? Unfunded pension liabilities? These are all items that, in a liquidation scenario, would reduce what equity holders receive. Whether they end up in the bridge — and at what value — is heavily negotiated.

On the cash side: not all cash is equal. Freely transferable cash is straightforward — in a public deal it flows to the buyer, in a cash-free private deal the seller keeps it. But restricted cash (held in regulatory reserves, client escrow accounts, or pledged as collateral) belongs to neither party cleanly. Seasonal cash — a business that collects heavily in December will look cash-rich at year end but cash-poor in July — creates timing games. And in a cash-free/debt-free deal, the question of exactly which cash balance is measured, and at what moment, is itself a negotiation.

3. Contingencies are hard to price

Environmental liabilities, ongoing litigation, product warranties — these are real potential obligations, but nobody knows exactly what they will cost. Someone has to put a number on them, and that number directly affects the final equity payout.

However, in practice, contingencies often don’t appear in the bridge at all. They are handled via escrow (a portion of the equity price held back pending resolution) or seller indemnities (the seller contractually takes on the risk post-close).

4. The Working Capital Peg

Working capital is the fuel inside the box — and manipulating it is the most common way sellers quietly drain value before closing.

Working capital has a “normal” historical level. If a seller drains inventory or collects receivables aggressively just before closing, they extract cash that was really part of the business engine. The working capital peg sets a target for what the normal level should be at closing. If it’s below target, the buyer gets a price adjustment. If it’s above, the seller gets more. This prevents one side from quietly shifting costs to the other in the window between signing and closing.

The Real Insight: Risk Allocation and Negotiation

Here is what most explanations completely miss: the EV/Equity bridge is not an accounting exercise. It is a risk allocation tool – and a negotiation.

Every item in the bridge represents a potential gap between what you think you’re buying and what you’re actually getting. The bridge is the mechanism through which buyer and seller negotiate who bears that uncertainty, and at what price. The formula is simple. The negotiation is not.

Let’s run through a real deal structure and see exactly what happens:

• EBITDA: €12m
• EV Multiple: 8.5x
• Operating EV: €102m
• Financial debt: €25m
• Cash – freely transferable: €5m
• Cash – restricted: €3m (negotiated)
• Pension deficit: €4m (debt-like)
• Surplus property: €9m (Non-operating assets transfer with deal unless carved out)
• Affiliate investment (30% stake): €5m (Non-operating assets, transfer with deal unless carved out)
• Working capital shortfall vs. peg: €2m (seller drained receivables before closing)

The Equity Bridge

• Operating EV: €102.0m
• + Surplus property non-op: +€9.0m
• + Affiliate investment non-op: +€5.0m
• = Total Enterprise Value: €116.0m
• − Financial debt repaid at close: −€25.0m
• − Pension deficit: −€4.0m (debt-like — buyer inherits obligation)
• − Working capital shortfall vs. Peg: −€2.0m
• − Restricted cash excluded: −€3.0m (neither side gets it freely)
• = Equity value — paid to seller at close: €82.0m

Freely transferable cash (€5m) does not appear. The deal is struck on a cash-free basis — the seller keeps it. It is not an asset the buyer acquires through the bridge.

This highlights another point of confusion. Where the seller’s proceeds are actually higher than the equity check we have written. So, the seller’s bridge looks different — the seller retains the cash outside the equity cheque entirely.

Seller’s proceeds

• Equity value received at close: €82.0m
• + Freely transferable cash retained (seller keeps): +€5.0m
• = Total seller proceeds: €87.0m

The restricted cash (€3m) is deducted here because it cannot be freely used by either party — it sits locked in a regulatory reserve. In practice this is negotiated: some deals treat it as partial debt (reducing what the seller receives), others escrow it pending regulatory release. Here we exclude it fully from the buyer’s benefit.

The final sources and uses is:

• Uses: €82m to seller + €25m debt repayment + €3m transaction costs = €110m total.
• Sources (illustrative): €60m buyer equity + €50m acquisition debt = €110m.

The bridge determined the €82m. The financing structure determined how the €110m was funded. They’re related but separate questions.

The naive formula gives:

€116m (total EV) − €25m (debt) + €5m (cash) = €96m

The actual equity value:

€116m − €25m (debt) − €4m (pension deficit, inherited by buyer) − €2m (working capital shortfall) − €3m (restricted cash, stranded) = €82m

That €14m gap isn’t a rounding error. This can be split into €9m and €5m gap. The pension deficit stays in the business — the buyer inherits it, so the seller gets paid less to reflect that. The working capital shortfall means the seller drained the business before closing. The restricted cash benefits nobody. Every euro of that gap came out of the seller's cheque. Where it went — to the buyer, into the business, or nowhere at all — depended entirely on what was negotiated.

The remaining €5m gap. Most formulas would add €5m cash here, giving €96m. That number isn’t wrong — it just answers a different question. It reflects the seller’s total economic proceeds (equity cheque plus retained cash). It doesn’t reflect what the buyer pays through the bridge.

The formula Equity Value = EV − Debt + Cash is not universally wrong. It depends entirely on who is looking at it and what deal type you’re in.

• For the seller in a cash-free/debt-free deal: their total proceeds are equity cheque + cash they retain. So from their perspective, cash absolutely factors into their economic outcome — just not through the bridge. It sits beside it.
• For the buyer in a cash-free/debt-free deal: cash doesn’t appear in the bridge at all. The buyer pays the equity value and gets the business plus non-operating assets. The seller keeps the cash separately.

The buyer’s total cash out on day one: €110m. The seller’s total proceeds: €87m. Neither number is the €116m TEV. Neither is the €82m equity value. The bridge is what sits between all of them.

That’s what the bridge actually does.

A quick summary

Enterprise Value: The value of the operating business, before capital structure.

Total Enterprise Value: Operating EV plus non-operating assets that transfer with the deal. In public deals this includes cash; in cash-free private deals, cash sits outside the bridge entirely - from a buyers perspective.

Net Debt: Debt minus cash — but the definition of “debt” is contested. Cash depends on the deal.

Minority interests / affiliates: Adjustments for ownership stakes that distort reported EV.

Working Capital Peg: Protection against gaming the balance sheet before close

Contingent liabilities: Uncertain obligations, usually handled via escrow or indemnity.

Equity Value: What’s left for equity holders after all of the above.

The next time you see a deal announcement and wonder why the equity check was so different from the headline EV, now you know. It’s not rounding. It’s the bridge.

TheOperatingPartner is a newsletter about how businesses actually work — not how textbooks say they do.