Valuing a company is not simply a matter of applying a multiple to EBITDA. It is an analytical process that demands a clear distinction between what generates business value and what occupies space on the balance sheet without contributing to the core activity. This distinction \u2014 between operating and non-operating assets and liabilities \u2014 is one of the most consequential concepts in any M&A transaction, and at the same time one of the most frequently misunderstood.<\/strong><\/p>\n An error in this classification can mean millions of euros of difference in the final price: non-operating assets that the seller fails to identify and leaves on the table, or hidden liabilities that the buyer uncovers during due diligence and uses to renegotiate downward. This article explains the concept, how the valuation bridge is correctly constructed, and what the most common mistakes are.<\/p>\n Any M&A transaction involves two distinct figures: the Enterprise Value (EV), which represents the value of the operating business for all capital providers, and the Equity Value (EqV), which is the value attributable to shareholders after all other obligations have been met.<\/p>\n The transition between these two figures is made through what is professionally known as the valuation bridge, whose fundamental formula is:<\/p>\n EqV\u00a0 =\u00a0 EV\u00a0 \u2212\u00a0 Gross financial debt\u00a0 +\u00a0 Surplus cash\u00a0 \u00b1\u00a0 Adjustments for non-operating assets and liabilities<\/strong><\/p>\n This bridge is not a straightforward accounting exercise. It requires analysing the economic substance of each balance sheet item. The table below shows the full structure:<\/p>\n <\/p>\n The valuation bridge is not a financial model \u2014 it is a negotiation. The definitions of what constitutes debt, operating cash and non-operating assets must be precisely and technically defined in the Share Purchase Agreement (SPA). Anything left technically ambiguous will become a dispute at closing accounts.<\/em><\/p>\n When a buyer applies an EBITDA multiple to a business, that multiple only captures the value generated by the operating assets. Non-operating assets fall outside that calculation and must be added at their fair market value. For the seller who correctly identifies and presents them, they represent additional value that would otherwise go uncompensated.<\/strong><\/p>\n The cash adjustment is the most common and the most disputed. The general principle is that all available cash adds to enterprise value, but in practice M&A professionals distinguish between minimum operating cash \u2014 the liquidity required to fund the working capital cycle without interruption \u2014 and surplus cash, which is the balance above that threshold and which is treated as a non-operating asset.<\/strong><\/p>\n If the seller withdraws all cash prior to closing, the buyer will need to inject capital from day one to fund operations, reducing the effective return on investment. For this reason, negotiations focus on defining a minimum cash level that remains on the balance sheet, with only the surplus added to the price.<\/p>\n A specific case is trapped cash: balances held in jurisdictions with repatriation restrictions or with a prohibitive tax cost for dividend distribution. In these situations, the buyer will apply a discount reflecting the fiscal and time cost of bringing that cash to the parent \u2014 the full nominal value is not accepted.<\/p>\n It is common, particularly in family-owned businesses or long-established companies, to find real estate on the balance sheet that is not required for the core activity: industrial warehouses leased to third parties, rural land, unused offices. These assets must be valued using independent methods \u2014 market appraisal or income capitalisation \u2014 and not by the same multiple applied to the business.<\/strong><\/p>\n The most frequent risk: if the property were kept within the EBITDA multiple valuation perimeter, its value would be diluted if the rental yield is below the operating return of the core business, or entirely overlooked if the property is vacant and generates no income.<\/p>\n Minority stakes in other companies or portfolios of listed securities do not consolidate linearly into the parent’s EBITDA, and therefore are not captured in a standard multiple-based valuation. They must be valued specifically:<\/strong> at market value if the investee is listed, or by DCF or comparable multiples if it is a private company.<\/p>\n In technology or SaaS companies, the most relevant non-operating asset is often the accumulated net operating losses (NOLs) built up during years of growth and cash burn. They represent a real future cash saving:<\/strong> the company will pay less corporation tax once it generates taxable profits. They are valued by discounting projected annual tax savings at the cost of debt, reflecting the lower risk of this cash flow relative to operating cash flows.<\/p>\n One of the most frequent errors in the valuation of non-operating assets is adding their gross market value to the bridge without accounting for the tax liability attached to them. When an asset has a market value significantly above its historical book cost, there is a latent capital gain that will be taxed when that asset is eventually sold.<\/strong><\/p>\n A buyer acquiring the company is inheriting that future tax obligation. Accordingly, the value added to the bridge should be the market value net of the tax on the capital gain that would arise in a hypothetical disposal \u2014 not the gross value.<\/p>\n A practical example for Spain: a company holds a building with a book value of \u20ac1,000,000 and a market value of \u20ac5,000,000. The embedded gain is \u20ac4,000,000. At the Spanish corporation tax rate of 25%, the associated deferred tax liability is \u20ac1,000,000. The net positive adjustment in the valuation bridge is therefore \u20ac4,000,000 (\u20ac5M less \u20ac1M of embedded tax), not \u20ac5,000,000. Ignoring this fiscal liability would result in paying \u20ac1,000,000 of unjustified overprice.<\/em><\/p>\n For Spanish real estate, there is an additional charge: the Municipal Capital Gains Tax (IIVTNU), which may represent between 15% and 30% of the increase in the cadastral land value, and potentially Stamp Duty (ITP) depending on how the transaction is structured \u2014 both of which further reduce the net value to the seller’s equity.<\/p>\n The valuation bridge does not only add non-operating assets \u2014 it also deducts liabilities that do not appear explicitly as financial debt on the balance sheet but that drain real value from the shareholder. Identifying them is one of the primary objectives of financial and legal due diligence.<\/strong><\/p>\n Contingent liabilities are obligations whose existence depends on uncertain future events: pending employment claims, open tax audits, environmental remediation requirements. Although they are not recognised on the balance sheet under IFRS if their probability of occurrence is below 50%, a prudent buyer will require protection against these risks.<\/strong><\/p>\n In M&A transactions they are typically managed in three ways: direct price deduction, if the risk is probable and quantifiable; escrow retention, where a portion of the price is held in a blocked account for 18\u201336 months until the risk crystallises or the limitation period expires; or a Warranty and Indemnity (W&I) insurance policy, which transfers the risk to an insurer \u2014 a mechanism that is particularly common in private equity transactions.<\/p>\n Since the introduction of IFRS 16, operating lease contracts are capitalised on the balance sheet as financial debt. This has a direct impact on the valuation bridge: if the EBITDA used for the multiple excludes the rent expense (pre-IFRS 16 EBITDA), the present value of all future lease obligations must be deducted from the EV<\/strong>. Failing to do so means paying twice for the same cost.<\/p>\n Minority interests<\/strong> \u2014 the portion of consolidated subsidiaries not 100% owned by the parent \u2014 must also be deducted from the total EV. The EV captures the value of the full consolidated business, but the selling shareholder can only transfer their proportional entitlement.<\/p>\n Valuing non-operating assets in private companies requires applying additional discounts that reflect the real limitations of ownership. Two concepts are central:<\/strong><\/p>\n The Discount for Lack of Marketability (DLOM)<\/strong> quantifies the loss of value arising from the difficulty of selling an asset quickly<\/strong>. While a listed investment fund can be liquidated in minutes, a 10% stake in a mid-sized family industrial company may take months to find a buyer. Studies based on restricted stock transactions and pre-IPO data suggest that investors typically require discounts of between 20% and 40% to compensate for illiquidity.<\/p>\n The Discount for Lack of Control (DLOC)<\/strong> reflects the fact that a minority shareholder cannot decide when dividends are distributed, whether the company is sold, or how cash flow is deployed. The typical range is 10% to 30%.<\/p>\n <\/p>\n The combined application of DLOM and DLOC can reduce the value of a minority stake in a private company by up to 50% relative to its pro-rata value. This adjustment is a frequent source of disputes in divorce proceedings, shareholder litigation and estate distributions.<\/em><\/p>\n A distribution company presents the following data at the time of sale:<\/em><\/p>\n <\/p>\n Had the industrial warehouse not been identified as a non-operating asset, the sale price would have been \u20ac21,800,000 instead of \u20ac24,300,000. The \u20ac2,500,000 difference is the direct cost of failing to classify the balance sheet correctly. Had the gross warehouse value (\u20ac3,000,000) been added to the bridge without deducting the deferred tax liability, the price would have been \u20ac500,000 above what was justified \u2014 creating a dispute at closing accounts.<\/em><\/p>\n The value of a company for its shareholders is the sum of its future cash generation potential plus the net value of everything it owns but does not need to operate. Managing this duality correctly \u2014 identifying non-operating assets that add value and hidden liabilities that reduce it, applying the embedded tax that each carries, and negotiating the valuation bridge with precision \u2014 is what determines whether the seller achieves the right price or leaves value on the table.<\/p>\n At Maraz Corporate Finance, we specialise in company valuation<\/a> and M&A advisory<\/a>. If you are considering selling your company or wish to understand the true value of all your assets, contact our team for a first confidential consultation.<\/strong><\/p>\n <\/p>\nFrom Enterprise Value to Equity Value: the Valuation Bridge<\/strong><\/h2>\n
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\n Bridge component<\/strong><\/td>\n Nature<\/strong><\/td>\n Impact on Equity Value<\/strong><\/td>\n<\/tr>\n<\/thead>\n\n \n Enterprise Value (EV)<\/strong><\/td>\n Operating business value (EBITDA \u00d7 multiple or DCF)<\/td>\n Valuation base<\/td>\n<\/tr>\n \n + Surplus cash<\/strong><\/td>\n Cash above the minimum operating balance<\/td>\n Positive adjustment<\/td>\n<\/tr>\n \n + Non-operating assets<\/strong><\/td>\n Non-core real estate, financial investments, stakes<\/td>\n Positive adjustment<\/td>\n<\/tr>\n \n \u2212 Gross financial debt<\/strong><\/td>\n Bank loans, bonds, finance leases<\/td>\n Negative adjustment<\/td>\n<\/tr>\n \n \u2212 Non-operating liabilities<\/strong><\/td>\n Pensions, contingencies, deferred tax liabilities<\/td>\n Negative adjustment<\/td>\n<\/tr>\n \n \u2212 Minority interests<\/strong><\/td>\n Portion of consolidated subsidiaries not 100% owned<\/td>\n Negative adjustment<\/td>\n<\/tr>\n \n = Equity Value<\/strong><\/td>\n Value of 100% of the shares for the seller<\/td>\n Final result<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Non-Operating Assets: Sources of value the market often overlooks<\/strong><\/h2>\n
Cash: the most contested adjustment<\/strong><\/h3>\n
Non-core real estate and tangible assets<\/strong><\/h3>\n
Financial investments and tax loss carryforwards (NOLs)<\/strong><\/h2>\n
Embedded Tax Liability: The adjustment many forget<\/strong><\/h2>\n
Non-Operating Liabilities: Obligations that reduce the value<\/strong><\/h2>\n
Legal, tax and environmental contingencies<\/strong><\/h3>\n
Capitalised leases (IFRS 16) and minority interests<\/strong><\/h3>\n
Discounts for Lack of Liquidity and Control<\/strong><\/h2>\n
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\n Type of interest<\/strong><\/td>\n Control<\/strong><\/td>\n Liquidity<\/strong><\/td>\n Typical combined discount<\/strong><\/td>\n<\/tr>\n<\/thead>\n\n \n Full control \u2014 listed company<\/strong><\/td>\n Controlling<\/td>\n High<\/td>\n 0% (reference)<\/td>\n<\/tr>\n \n Full control \u2014 private company<\/strong><\/td>\n Controlling<\/td>\n Low (DLOM)<\/td>\n 15% \u2013 25%<\/td>\n<\/tr>\n \n Minority \u2014 listed company<\/strong><\/td>\n Non-controlling<\/td>\n High<\/td>\n 5% \u2013 15% (DLOC)<\/td>\n<\/tr>\n \n Minority \u2014 private company<\/strong><\/td>\n Non-controlling<\/td>\n Low (DLOM + DLOC)<\/td>\n 35% \u2013 50%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Example: Valuation Bridge with Non-Operating Assets and Liabilities<\/strong><\/h2>\n
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\n Item<\/strong><\/em><\/td>\n Amount<\/strong><\/em><\/td>\n<\/tr>\n<\/thead>\n\n \n Enterprise Value (\u20ac4,000,000 \u00d7 6x)<\/em><\/td>\n \u20ac24,000,000<\/em><\/td>\n<\/tr>\n \n + Surplus cash<\/em><\/td>\n \u20ac1,600,000<\/em><\/td>\n<\/tr>\n \n + Industrial warehouse (net of deferred tax)<\/em><\/td>\n \u20ac2,500,000<\/em><\/td>\n<\/tr>\n \n \u2212 Gross financial debt<\/em><\/td>\n (\u20ac3,500,000)<\/em><\/td>\n<\/tr>\n \n \u2212 Escrow retention for employment claim (18 mths)<\/em><\/td>\n (\u20ac300,000)<\/em><\/td>\n<\/tr>\n \n = Equity Value<\/em><\/td>\n \u20ac24,300,000<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Conclusion <\/strong>on Non-Operating Assets and Liabilities<\/strong><\/h2>\n