So I've a friend of mine, with whom I am in conflict about the treatment of cash in a purchase. He's someone who has been part of company sales a few times from a strategic perspective (as an entrepreneur), but typically in the smaller case stuff, say, under 20M (I believe).
He is absolutely convinced that the total amount paid for a company is [EV+seller cash]; his reason being that "enterprise value is derived from EBTIDA, but that's separate from the cash they have in the books". He backs this up by volunteering that idea that a company with an EBITDA of 20, a multiple of 5x, and cash of 500 cannot possibly be worth the same as a company with EBITDA 20, a multiple of 5x, and cash of 50; that any company worth it's salt would simply have it's owners take that 500 for themselves vs a buyout valuation of 100 (for sake of argument we were discussing sole ownership). Cash, in his argument, has to be treated separately from the EBITDA flow, and purchase of a company does not include purchase of it's cash. He claims to have seen this happen following a purchase for some of his companies, that there is further negotiation to buy the cash holdings after the company was bought.
I said this makes no sense; that EV, by itself, was going to be basically within a few % of the actual money paid out to a company. I mentioned that cash is taken out of a non-multiple calculation of EV exactly because it's totally now owned by the buyer, and thus makes their purchase "less expensive"; that cash on the balance sheet is in no way the same as the personal holdings of the owners even if they've complete control of the company; that balance sheet assets aren't actually part of the total money paid out valuation at all; that the enterprise value already intrinsically includes the cash holdings of the company as a non-operational means to generate the EBITDA which forms the basis for the multiple; that a company with massive cash holdings isn't worth that much more just because they've cash but in fact raises eyebrows because they've not been utilizing their cash as efficiently as they could.
I've never once seen a secondary negotiation to buy cash holdings from a seller following a purchase of that seller.
He remains supremely unswayed, and asks again: why would a company with 20 EBITDA/5x/500 cash be bought for the same amount of money as a company with 20 EBITDA/5x/50 cash. A house worth 1M and a basement full of gold isn't going to get bought for the same price as a house worth 1M and no gold.
Has anyone seen such a thing? Who is right in this scenario? What would be a convincing, easy analogy to explain that the company with 500 cash is in fact going to be bought for the same price as the company with 50 cash (assuming I'm right)?
EDIT: I am in the wrong on this one, and as such have changed the title.