Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
Evolution Capital · 25 Years · 250+ Deals
Getting Your Sheet In Order
Enterprise value gets the headlines. But what you actually receive at completion is determined by the balance sheet. Most IT services founders don’t realise this until it’s too late, and by then the adjustments are coming off your proceeds.
Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
25+
Years in technology M&A
250+
Transactions
$1bn+
In completed transactions
“Enterprise Value gets the headlines. Your balance sheet determines what you actually receive.”
Evolution Capital · From the trenches
- At a Glance
What You'll Learn.
Discover how buyers evaluate your balance sheet, why common balance sheet issues reduce deal value, and what you can do before a sale to maximize your proceeds.
01
Why the Balance Sheet Matters
02
How Enterprise Value Becomes Equity Value
03
The Net Cash & Debt Schedule
04
Working Capital Explained
05
Completion Accounts vs Locked Box
06
EBITDA vs Free Cash Flow
07
Common Balance Sheet Risks
08
How Buyers Review Your Balance Sheet
09
Getting Your Sheet in Order
10
How Evolution Capital Can Help
11
Frequently Asked Questions
Let’s be honest about the balance sheet’s reputation. For most founders, it is the least intuitive part of running a business. The P&L makes sense: revenue comes in, costs go out, the difference is profit. The cash flow statement has an obvious logic. The balance sheet, with its assets and liabilities balancing against each other, its deferred revenue and accruals and intercompany balances and DLA entries, can feel like an impenetrable technical exercise that the accountant produces once a year and files away.
I actually had “What a Load of BS!” as a working title for this article on the Balance Sheet. You can see why.
But here is what I learned in my first FDD training sessions at a Big 4 firm, and what every serious M&A adviser knows: the balance sheet is not just a statutory formality. It is where the real money moves in a deal. And the first thing you notice when you start doing financial due diligence is that buyers don’t present the balance sheet the way management accounts or statutory accounts do. They reorder it into what is called a “bucketed balance sheet”: groupings based on how each category of balance is treated in the deal, what impact it has on what you receive, and how much work is required to diligence it.
The buckets are roughly: net cash and debt items, working capital, fixed assets and intangibles, and other items including deferred tax and related party balances. The order is not arbitrary. It reflects exactly what buyers care about, in roughly the order they care about it.
So when I say “getting your sheet in order,” I mean it literally. Knowing the order in which a buyer will look at your balance sheet, understanding what questions each bucket will generate, and having clean, defensible numbers in each one, is the difference between a smooth process and an expensive, prolonged one.
At the lower end of the market, we regularly see businesses that only prepare balance sheets annually, at the statutory year-end, with no monthly true-ups of key balances. Debtors don’t get reconciled. Deferred revenue isn’t recalculated. Accruals aren’t updated. When a buyer needs to understand the financial position at an arbitrary completion date, the numbers simply don’t exist in the form they need them. This adds weeks to the diligence process, increases adviser costs on both sides, and gives buyers legitimate grounds to question everything else they have been told. A bad balance sheet makes everything take longer and cost more.
Then the deal story happened.
The deal was on track to close in four weeks. Enterprise value agreed at £14.5 million for an IT managed services business with £1.75 million EBITDA. The founder had spent months in negotiation and due diligence. Completion felt certain.
Then the buyer’s accountants completed their working capital analysis.
The business had £680,000 in trade debtors on the balance sheet. Of that, £240,000 was more than 90 days overdue. Another £150,000 was in active dispute, with customers claiming they had been invoiced for services they didn’t authorise or didn’t receive.
The buyer’s position was straightforward: “We’re not paying £14.5 million and inheriting £400,000 in uncollectable receivables. Either you collect these before close, or we’re reducing the purchase price.”
The founder protested that the aged debtors were normal and would eventually be collected. The buyer had seen this pattern before and wasn’t moved. After two weeks of tense negotiation, the deal closed at £13.8 million. A £700,000 reduction driven entirely by balance sheet issues the founder had never thought mattered.
This is a fundamental misunderstanding of how M&A transactions actually work.
The Balance Sheet Issues That Derail IT Services Deals
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How Your Balance Sheet Determines What Goes in Your Pocket
Understanding why the balance sheet matters requires understanding one of the most important mechanics in any deal: how Enterprise Value becomes the money you actually receive.
When a buyer agrees to pay £15 million for your business, that £15 million is the Enterprise Value: the value of the business as a whole, before accounting for its financial position. Enterprise Value is what an earnings multiple applied to EBITDA produces. It is the headline number in every offer letter and letter of intent.
What you actually receive at completion is the Equity Value, which is the Enterprise Value adjusted for the items in the net cash and debt schedule and the working capital adjustment.
- Process Section
Preparing Your Business for Financial Due Diligence
01
Prepare Monthly Balance Sheets
Maintain accurate monthly reconciliations instead of relying solely on annual statutory accounts.
02
Clean Up Working Capital
Resolve aged debtors, calculate deferred revenue correctly, and reconcile accruals.
03
Model the EV to Equity Bridge
Understand how cash, debt, working capital, and debt-like items affect your final proceeds before going to market.
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The Net Cash and Debt Schedule
In the bucketed balance sheet, net cash and debt is where FDD teams spend the most time. The reason is straightforward: every pound identified here adjusts the purchase price pound for pound. A £100,000 debt-like item missed during negotiation is £100,000 off your proceeds. A £100,000 cash balance confirmed is £100,000 added. The stakes are high enough that buyers and their advisers go through this bucket line by line, and sellers who have done the same work in advance move through it far faster.
The net cash and debt schedule brings together all of the items that adjust EV on a pound-for-pound basis:
Cash and cash-like items
Cash on the balance sheet at completion is added to your proceeds. Cash-like items, such as short-term deposits and certain receivable amounts that are immediately realisable, may also be included.
Debt
All financial debt, including bank loans, revolving credit facilities, and finance leases, is deducted in full. The buyer is either taking on the debt or requiring you to clear it at completion.
Debt-like items
Certain balance sheet positions that aren’t technically bank debt but represent real cash obligations are treated as debt and deducted from proceeds. Common examples include unpaid PAYE or VAT, pension deficits, deferred tax liabilities, s.455 charges on director’s loan accounts, and certain contingent liabilities. These are often the items sellers haven’t anticipated.
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The Working Capital Adjustment
Separately from the net debt schedule, there is a working capital adjustment. This compares working capital at completion to an agreed normalised peg. If completion working capital is above the peg, you receive more. If below, you receive less.
A worked example: agree £15 million EV. The business has £200,000 net cash after debt. Working capital is £150,000 below the peg. There is £80,000 in debt-like items from unpaid PAYE. You receive £14,870,000. None of this is unusual. But founders who have not modelled this bridge before going to market are regularly surprised, and the surprise almost always arrives under time pressure at the worst moment.
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What the SPA Actually Is and Why It Matters
efore going further, it is worth explaining what an SPA is, because the term gets used constantly and is not always explained.
The Sale and Purchase Agreement is the binding legal contract governing the entire transaction. It covers the purchase price and how it is calculated, the conditions that must be satisfied before completion can occur, covenants on how the seller must operate the business between signing and completion, the warranties and indemnities the seller gives to the buyer, and the specific mechanics of how the balance sheet feeds into the final price.
In the UK mid-market IT services space, the overwhelming majority of transactions use completion accounts within the SPA. Under this structure, the purchase price is initially estimated at signing based on management’s best estimate of the completion balance sheet. After completion, both sides’ accountants prepare and review the actual completion accounts, determining the final balance sheet position. Adjustments are made to the purchase price based on the difference between estimated and actual working capital, cash, and debt. This process typically takes 30 to 90 days post-completion and is frequently contentious. We have seen completion accounts processes run for six months, consuming £60,000 to £100,000 in accounting fees, before being resolved.
The alternative is called a locked box structure, more common in US transactions and in larger UK deals, but rarely seen at the lower to mid end of the UK market. Under locked box, the purchase price is fixed based on a historical balance sheet from an agreed date. No post-completion adjustment is made. Any cash generated after that date belongs to the buyer; any leakage from the business to the seller between the locked box date and completion is tightly defined and controlled. It is a cleaner structure for sellers because it provides price certainty, but it requires a very high-quality historical balance sheet to work from.
Understanding which structure your deal will use, and what your balance sheet needs to look like to navigate it cleanly, is something to work through with advisers well before you go to market.
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From EBITDA to Free Cash Flow: What Buyers Actually Model
Before getting into the mechanics of working capital, it is worth understanding why buyers care about it so much. The answer comes down to the difference between EBITDA and free cash flow, and why the two numbers can be very different in the same business.
EBITDA is an earnings measure. It tells you how much profit the business generates before interest, tax, depreciation, and amortisation. It is the starting point for valuation multiples and the figure most prominently discussed in any IT services M&A process.
Free cash flow is what the business actually generates in cash after funding its own operations. It is the number buyers use to sanity-check valuation and to model debt serviceability and returns. The bridge from EBITDA to free cash flow goes through several adjustments, each of which the balance sheet determines:
Working capital movement. If the business is growing and customers pay in arrears, working capital will consume cash even as EBITDA grows. A business growing 20% annually may generate £2 million EBITDA but consume £300,000 in working capital, leaving £1.7 million before other items. Conversely, a business with strong upfront billing and tight collection may generate cash significantly above EBITDA.
Maintenance capital expenditure. The cash spent replacing and maintaining assets necessary to keep the business operating. This is not an EBITDA charge but it is a real cash outflow. A business depreciating £200,000 annually but spending £80,000 on capex is generating more cash than EBITDA implies in the short term, but consuming its asset base faster than it is replacing it.
Tax paid. Corporation tax is paid on a different timing to when it is recognised in the P&L. Businesses that have grown rapidly may have deferred tax liabilities; businesses with R&D credits may have timing benefits. The actual cash tax paid in any year can differ materially from the P&L charge.
Debt service. If the business carries bank debt, interest payments and scheduled repayments reduce cash available to shareholders.
A business generating £2 million EBITDA with £300,000 working capital consumption, £200,000 maintenance capex, and £350,000 in tax paid is generating approximately £1.15 million in free cash flow: 57% of its EBITDA. A business with the same EBITDA but strong upfront billing, minimal capex requirements, and a lower effective tax rate might generate £1.6 million: 80% of EBITDA. Both businesses have identical earnings multiples applied to them in the headline valuation, but they are fundamentally different cash-generating machines.
Buyers model this bridge explicitly. When they apply a 8x multiple to £2 million EBITDA and arrive at £16 million enterprise value, they are implicitly assuming a certain quality of cash conversion. If that conversion is materially worse than assumed, the effective multiple they are paying on free cash flow is much higher than the headline EBITDA multiple suggests. That realisation either reduces the price they are willing to pay or increases the protections they seek.
Understanding your own EBITDA to free cash flow bridge, and being able to present it clearly, is one of the more sophisticated things a seller can do in preparation for a sale process. Most founders have never built this analysis. EC Analytics can help construct it, which gives you a much clearer picture of what buyers will find and allows you to present it on your terms rather than waiting for their model to do it for you.
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Working Capital: Where Most of the Money Moves
Working capital is the net of current assets and current liabilities used in day-to-day operations. In an IT services business, the key components are trade debtors, prepayments, trade creditors, accrued expenses, and deferred revenue.
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The Working Capital Peg
Working capital sits in its own bucket in the FDD balance sheet, and while it is a slightly less binary area than net debt, the pound-for-pound impact on cash is still very real, as the section below makes clear. Most IT services transactions are structured around a working capital peg: a normalised level that the seller is expected to deliver at completion, typically based on average working capital over the trailing twelve months.
If working capital at completion is above the peg, you receive more. If it is below, you receive less.
The problem is that working capital at an arbitrary completion date can differ materially from the normalised level. Annual insurance premiums just paid. Software renewals falling in the completion month. Customers slow-paying. Supplier payments stretched. Each moves working capital away from the peg. We have seen completion working capital adjustments ranging from £500,000 in the seller’s favour to £800,000 against. That is a £1.3 million swing based purely on timing.
Beyond the completion adjustment itself, it is worth understanding that working capital swings have a direct effect on the cash position of the business throughout the year. A business that invoices strongly in one quarter but collects slowly will show healthy revenue and EBITDA while actually consuming cash. Debtors build up. Creditors get stretched to compensate. The cash balance tells a very different story from the P&L. In the months before a deal closes, founders are sometimes surprised to find that a profitable business has less cash on the balance sheet than they expected, precisely because working capital has moved against them. That cash shortfall flows directly into the net debt calculation and reduces what you receive at completion. Tracking working capital monthly, and understanding what drives it, is not just good financial management. It is how you avoid being caught out at the worst possible moment.
“A clean balance sheet doesn’t just speed up due diligence it protects value, builds buyer confidence, and helps prevent last-minute price adjustments.”
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Debtors and Creditors: Two Sides of the Same Story
Trade debtors and trade creditors sit together in the working capital bucket and need to be understood as a pair. Debtors represent cash the business is owed. Creditors represent cash it owes. The gap between the two, and how quickly each moves, directly affects how much cash is sitting in the business at any point in time.
I have seen the lessons that really stick come from unexpected places. Working in a consultancy role in Germany, I had to quickly get to grips with Rechnungsdatum versus Rechnungsmonat: the invoice date versus the invoice (end of) month. The difference matters: 30 days from the invoice date and 30 days from the end of the invoice month are not the same thing, and whether your customers are actually paying on your stated terms is exactly what FDD teams look for. We will come back to this shortly.
On the debtor side, what buyers examine: average debtor days versus stated payment terms; the proportion that is current, 30 to 60, 60 to 90, and over 90 days; whether significant amounts are in dispute; whether there is a consistent pattern of collection aligned with terms; and whether bad debt provisions are realistic. Disputed invoices are treated by buyers as liabilities, not assets. Debts over 90 days attract immediate scrutiny. Debts over 120 days are often treated as provisionally uncollectable unless specifically evidenced otherwise.
On the creditor side, buyers are equally watchful. If your normal payment terms with suppliers are 30 days but your creditor aging shows a spike to 60 to 90 days at completion, buyers will question whether this is a deliberate pre-close manoeuvre to retain cash in the business. Stretching creditors to inflate the cash balance before a deal is one of the most commonly spotted working capital manipulations, and it damages trust at exactly the moment you can least afford to. Equally, if you are paying suppliers significantly faster than your terms require, that is cash leaving the business unnecessarily and will affect your working capital position at completion. The creditor position, like the debtor position, should reflect genuine commercial reality rather than pre-sale window dressing.
Deferred Revenue: The Balance Sheet Item Most Often Missing
Deferred revenue is the liability representing cash received from customers for services not yet delivered. If a customer pays £24,000 upfront for an annual managed services contract, the correct treatment under accrual accounting is to recognise £2,000 per month and carry the unearned balance as deferred revenue on the balance sheet.
For IT services businesses on proper accrual accounting, this is standard. But a significant number of smaller businesses, particularly those preparing only annual accounts, are not doing this correctly, and the consequences can be very significant.
With annual or multi-year contracts, the deferred revenue balance can be a hugely material number. A business with £4 million ARR where customers predominantly sign twelve-month contracts billed upfront could be carrying £350,000 or more in deferred revenue at any given point. This number becomes even more significant in certain customer verticals. Public sector customers often align IT spend to government financial year-ends. Large enterprise clients may time significant IT investment around their own year-ends. Seasonal businesses may bunch renewals into specific months. All of this creates deferred revenue concentrations that can be much larger than an even monthly recognition would suggest.
Businesses not applying accrual accounting will be missing this entirely. The balance sheet overstates the net asset position. Working capital looks higher than it should be. When a buyer’s FDD team restates the financials on an accrual basis, deferred revenue appears as a liability that wasn’t there before, reducing working capital and triggering a completion adjustment that comes straight off your proceeds.
We have reviewed managed services businesses with £3 to £5 million ARR where the correctly calculated deferred revenue balance was £200,000 to £400,000, none of it on the balance sheet. Getting monthly balance sheets prepared on a proper accrual basis, with deferred revenue correctly calculated every month, is one of the most important things you can do before going to market.
Fixed Assets: It Depends What Kind of Business You Are
The relevance and complexity of fixed assets varies significantly depending on the business model.
At one extreme, a pure cloud MSP with no on-premise infrastructure and no hardware in the field carries almost no fixed assets. The balance sheet is dominated by debtors, prepayments, and cash. Fixed asset analysis in diligence is brief.
At the other extreme, a telecommunications infrastructure business or an MSP with significant on-premise customer deployments may carry millions in fixed assets: network equipment, servers, customer-site hardware, vehicles, test equipment. For these businesses, the age, condition, and remaining useful life of fixed assets matter enormously. Network infrastructure approaching end of life represents near-term capital expenditure that the buyer is inheriting.
Fixed assets don’t generate the same intensity of FDD work as net debt or working capital in most IT services deals. Buyers are acquiring a going concern, and a functional asset base is assumed to be part of that. The EBITDA multiple already reflects the value of well-maintained assets.
What does attract attention is capex that is materially overdue or, in the opposite direction, recently accelerated. Overdue capex, where infrastructure or equipment is past its expected replacement date, is effectively a deferred liability the buyer is inheriting and will seek to treat as a debt-like adjustment. Conversely, significant recent investment that benefits the business post-completion can sometimes be argued as a cash-like item, though this is harder to achieve. The broader distinction between maintenance capex, the spend required simply to stand still, and expansionary capex, investment in new capability, matters for how buyers model sustainable free cash flow. Buyers compare depreciation to actual capex: if the business is depreciating £200,000 per year but spending £80,000, it is consuming its asset base faster than it is replacing it, which flows into the valuation conversation.
One additional point: the revised FRS 102 standard, effective from 1 January 2026, aligns the UK treatment of leases with IFRS 16 (ASC 842 under US GAAP), bringing operating leases onto the balance sheet as right-of-use assets with corresponding lease liabilities. For IT services businesses with significant office, equipment, or vehicle leases, this changes the balance sheet and affects the net debt calculation. If your deal completes after this takes effect, model the impact with your advisers in advance.
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Director's Loan Accounts: A Surprisingly Complicated Area
The Director’s Loan Account sits firmly in the net cash and debt bucket: every pound on it adjusts your proceeds pound for pound, which is why it receives the same level of scrutiny as any other debt item. In owner-managed IT services businesses, DLA balances are frequently substantial and poorly documented.
If you owe the company money on your DLA, that is an asset the buyer is acquiring. They will expect it to be settled before completion or netted from your proceeds. If the company owes you money, that is a liability they are inheriting: you will want it repaid at completion, which comes out of the deal proceeds.
What makes DLAs particularly complicated is the tax position. If a director owes the company money through a DLA and it is not repaid within nine months of the company’s year-end, the company faces a Section 455 tax charge: currently 33.75% of the outstanding balance, held by HMRC until the loan is repaid. This is a real cash cost at the point of a deal and is itself treated as a debt-like item, deducted from proceeds on top of the loan balance. On a £100,000 DLA, the s.455 charge is £33,750 before you have even addressed the loan itself.
Get your DLA to zero, or as close to zero as possible, well before going to market. Understand the s.455 position. Document the full movement history clearly, because FDD teams will trace every entry.
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Many IT services businesses of diligenceable scale operate through multiple legal entities: a trading company, a holding company, perhaps a property-owning entity, possibly a separate company for a different service line or geography.
What we frequently see, particularly where holding entities have been created for tax planning purposes, is that the holding company balance sheet is months, sometimes years, out of date. Intercompany balances haven’t been reconciled. Dividends have been declared but not formally documented. Related party loans sit between entities without clear terms or interest calculations.
When a buyer needs to understand the consolidated balance sheet, which they always do, this becomes a significant piece of work. Intercompany balances need to be eliminated on consolidation. Related party loans need appropriate treatment as debt or debt-like items. Holding company costs need to be allocated or excluded correctly.
The consolidation exercise regularly surfaces material items that weren’t visible at the trading company level: a dividend declared at the holding company that reduces net assets; an intercompany loan where the terms imply market-rate interest that hasn’t been charged or accrued; a property company charging below-market rent to the trading company, creating a related party transaction with tax implications.
If your business operates through multiple entities, the balance sheet preparation work should cover the consolidated position across all entities, not just the trading company. Any entity that will or won’t form part of the transaction perimeter should be clearly identified and discussed with advisers early.
Group Structures and Consolidation: The Hidden Complexity
Experienced FDD teams don’t simply review the balance sheet as a document. They build it from the ground up, working through each bucket in turn, and the depth of that work is significant.
Net cash and debt. Every item in the net debt schedule is tested independently. Bank balances are confirmed against statements. Loan agreements are reviewed to verify outstanding balances, interest accruals, and any prepayment penalties. Finance leases are analysed in full. Debt-like items are identified proactively: we look for unpaid PAYE and NI, VAT liabilities, pension obligations, outstanding s.455 charges on DLAs, and any other cash obligations that don’t sit in the headline debt figure but reduce what the seller walks away with. Directors’ loan accounts are traced through the full movement history, not just the closing balance.
Working capital. Trade debtors are tested against the aging schedule, customer by customer for material amounts, and cross-referenced against cash receipts in the period to verify that collection is genuinely happening at the rate the balance sheet implies. Remember the Rechnungsdatum point: the stated terms on a contract and the actual timing of cash receipts are not always the same thing. If a business says its debtor days are 35 but cash is consistently arriving 55 days after invoicing, that is a gap that needs explaining, and it affects the working capital normalisation. Trade creditors receive the same treatment in reverse: payment timing is tested against stated terms to identify whether the creditor position reflects normal commercial behaviour or pre-close manipulation. Deferred revenue is reconstructed from underlying contract data rather than taken from the balance sheet at face value. Every prepayment is reviewed for validity and whether it is genuinely recoverable or transferable post-completion. Accruals are tested for completeness: are all known costs captured, or are there liabilities that should be on the balance sheet and aren’t?
Fixed assets. Capex schedules are reviewed against the depreciation charge to identify whether maintenance capex is keeping pace with asset consumption or has been deferred. Asset registers are tested for accuracy: are assets still in use, still at the location shown, and still in serviceable condition? For businesses with significant on-premise customer infrastructure, the age profile of that infrastructure matters: a network built on equipment approaching end of life is a near-term liability that the buyer is inheriting.
Other items. Deferred tax positions are reviewed for reasonableness. Intercompany balances are reconciled across all entities in the group and any that cannot be explained are treated as red flags. Related party balances are scrutinised for arm’s-length treatment and appropriate documentation.
For businesses that only prepare annual balance sheets, this reconstruction is enormously time-consuming and frequently reveals discrepancies between what the balance sheet says and what the underlying position actually is. The cost is borne in extended timelines, in fees on both sides, and in buyer confidence. We have seen FDD workstreams that should have taken two weeks extend to six because the underlying records simply weren’t there. The businesses that have done this work in advance move through diligence at a different pace entirely.
How FDD Teams Examine the Balance Sheet
The name of this article is straightforward advice. The time to act on it is 12 to 18 months before you go to market.
Prepare monthly balance sheets, properly. If you are currently preparing balance sheets only at year-end, change that now. Every month: reconcile debtors, calculate deferred revenue correctly, update accruals, reconcile DLAs, eliminate intercompany balances.
Move to accrual accounting if you haven’t already. Buyers will restate to accrual accounting regardless. It is better to do this yourself, in a controlled way, with time to understand the adjustments and build the track record.
Clean up your debtor book. Identify debts that won’t be collected and write them off or provision against them. Resolve disputed invoices. Understand your average debtor days and whether they genuinely reflect your stated payment terms, not just what the contract says.
Resolve your DLA and understand the s.455 position. Get the balance to zero if you can. If you can’t before the sale, understand exactly what the outstanding balance is and what the tax charge will be.
Map the full group structure. Identify which entities are in and out of the transaction perimeter. Prepare a consolidated balance sheet across all relevant entities. Document all intercompany balances and resolve any that are unclear.
Model the EV to equity bridge. Work with your advisers to understand what you will actually receive at completion. Build a realistic picture of your net debt position, expected working capital, debt-like items, and how these move the headline number to your actual proceeds.
Getting Your Sheet in Order: What to Do
“The balance sheet isn’t just an accounting document it’s the financial settlement mechanism of every successful transaction.”
Evolution Capital
EC Analytics (Virtual CFO / CFO Assist) builds the balance sheet infrastructure that makes this process clean: monthly management accounts on proper accrual accounting; deferred revenue correctly calculated and reconciled every month; DLA balances tracked and managed; group consolidations prepared and maintained; and working capital tracked historically so that the normalised peg is based on real data rather than estimates negotiated under pressure. Clients also work directly with our experienced, qualified advisers to understand what each balance sheet item means, how buyers look at it, and how it feeds into the EV to equity bridge. By the time you go to market, you understand your own balance sheet well enough to present it with confidence and defend every number in it.
Corporate Finance. We model the EV to equity bridge from the earliest stages of the sale process, so you know what you are actually going to receive before you accept any offer. We negotiate completion accounts mechanics and working capital peg definitions with balance sheet quality in mind, and manage the post-completion accounts process through to final settlement.
On the FDD side, balance sheet and working capital analysis is one of the most detailed workstreams in any IT services diligence review. The businesses where it is clean and well-documented move through it quickly. The businesses where monthly balance sheets don’t exist, where deferred revenue hasn’t been properly calculated, or where DLAs and intercompany balances haven’t been resolved generate weeks of additional work, legitimate grounds for price adjustment, and the kind of trust erosion that is very difficult to recover from late in a deal process.
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Related Articles
What is the EV to equity value bridge in an IT services acquisition?
Enterprise Value is the agreed value of the business before accounting for its financial position. Equity value, what you actually receive at completion, is derived by adjusting EV through the net cash and debt schedule, which adds cash and deducts financial debt and debt-like items, and the working capital adjustment, which is positive if completion working capital is above the agreed peg and negative if below. Understanding this bridge before going to market is essential: the adjustments frequently move the headline number by £500,000 to £2 million or more.
What is an SPA and why does it matter for balance sheet purposes?
The Sale and Purchase Agreement is the binding legal contract governing the transaction. It defines the purchase price mechanics, including how the balance sheet feeds into the final price through either completion accounts or a locked box structure, what items are treated as cash, debt, or debt-like, and the working capital peg. The SPA is where the balance sheet stops being an accounting document and becomes a financial settlement mechanism. Understanding its terms before signing is essential.
What is the difference between completion accounts and locked box?
Completion accounts is the standard structure in the UK mid-market IT services space: the price is estimated at signing and adjusted post-completion based on the actual balance sheet, with a reconciliation process typically taking 30 to 90 days after the deal closes. Locked box fixes the price based on a historical balance sheet, with no post-completion adjustment. Locked box provides price certainty but requires a very clean historical balance sheet and is rarely seen at the lower to mid end of the UK market.
Why is deferred revenue so important in IT services M&A?
Deferred revenue represents cash received for services not yet delivered and is a liability on the balance sheet. For IT services businesses with annual or multi-year contracts billed upfront, and particularly those serving customers who time spend around financial year-ends or seasonal cycles, it can be a very material number. Businesses not on accrual accounting often carry no deferred revenue on their balance sheet at all, meaning it overstates the net asset position. Buyers always restate, and the adjustment comes off your proceeds.
What is a Section 455 charge and how does it arise from a director's loan account?
If a director owes the company money through a DLA and it is not repaid within nine months of the company’s accounting year-end, the company faces a Section 455 tax charge of 33.75% of the outstanding balance. This is repayable by HMRC once the loan is repaid, but it represents a real cash cost at the point of a deal, treated as a debt-like item deducted from proceeds. A £150,000 outstanding DLA creates a £50,625 s.455 charge on top of the loan balance itself.
Do I need a consolidated balance sheet if I operate through multiple legal entities?
Yes. Buyers always look at the consolidated position across all entities in the group. Holding company balance sheets that haven’t been updated for months or years are one of the most common sources of unwelcome surprises in IT services diligence. Get the consolidated position clear and current well before going to market, and identify which entities are in and out of the transaction perimeter early in the process.
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