Enterprise Value Is Not Your Cheque: What Founders Get Wrong About Selling a Business

A founder once told me he had sold his business for 100 crore. He had not. He had agreed an enterprise value of 100 crore, and after the debt bridge, a working capital shortfall, an escrow and a two-year earn-out, he took roughly 52 crore off the table on closing day, with the rest depending on a business he no longer controlled. Nothing had gone wrong. The deal was fair, the buyer was reasonable, the lawyers were competent. He simply had not understood, until very late, what he had actually agreed to. That gap between the headline and the outcome is where most of the value in a sale process is won or lost, and it is almost never where founders spend their attention.

The headline number is not the cheque

Enterprise value is a valuation of the business. What you receive is equity value, net of a series of adjustments that are negotiated quietly and rarely revisited once agreed. Start with net debt. Most founders count term loans and forget the rest. Buyers count everything that behaves like debt: unpaid statutory dues, accrued but undeclared dividends, director loans, lease obligations, gratuity and leave encashment provisions, deferred capex commitments, disputed tax demands. Every item you did not think of is a rupee subtracted from your proceeds.

Then comes the working capital peg. The buyer is entitled to receive the business with a normal level of working capital, usually a trailing twelve-month average. If you have been running lean to show cash, or if you collected aggressively in the quarter before signing, you will fund the gap at closing. This is not a trick. It is standard. But it is settled by reference to a definition drafted months earlier, and the definition is where the money sits. Whether slow-moving inventory is included at book or written down, whether receivables past 180 days count, whether customer advances are working capital or debt, these choices routinely move several percent of deal value.

Finally, structure. An escrow of 10 to 15 percent held for 18 to 24 months against indemnity claims is normal. An earn-out of 20 to 30 percent tied to forward performance is common where the buyer and seller disagree on growth. Both are legitimate risk-sharing tools. Both mean that a meaningful part of your price is a claim, not cash. Judge every offer on upfront certain consideration first, and treat the rest as an option you may or may not exercise.

One buyer is not a process

The single most expensive decision founders make is engaging exclusively with the first credible approach. It feels efficient. It is flattering. It is also the moment you surrender your only real source of leverage.

Price in an M&A transaction is not discovered by analysis. It is discovered by competition. A buyer who knows there are three other parties in the room behaves differently from a buyer who knows there are none, and that difference shows up not only in valuation but in everything that follows: the size of the escrow, the length of the indemnity period, whether a personal indemnity cap is 10 percent or 50 percent of consideration, how hard the working capital definition is fought. When a buyer grants exclusivity early and then spends three months in diligence, every discovery becomes a reason to reprice, and you have no alternative to walk to. Retrading after exclusivity is not bad faith. It is the predictable consequence of a structure you agreed to.

Running a process does not mean auctioning your company to the market. For most founder-led businesses, a controlled approach to six to ten genuinely relevant buyers, strategic and financial, is enough to create real tension. What matters is that the buyer believes the alternative is real, and that you have not signed away optionality before the price is set.

You are selling a business, not your role in it

A buyer is not paying for last year's profit. They are paying for cash flows that continue after you stop answering the phone. Anything that makes those cash flows dependent on you personally reduces what they are worth.

The usual suspects are familiar and fixable. Customer concentration above 25 to 30 percent invites a discount or a deferred structure tied to retention. Supplier or distributor relationships held in the promoter's name rather than the company's raise assignability questions. A second line of management that has never made a pricing or hiring decision independently tells a buyer that the operating risk transfers to them on day one. Related-party transactions, informal family employment and personal expenses run through the company all get identified in a quality of earnings review, and each one converts from a lifestyle convenience into a valuation adjustment.

The commercial point is that these are priced, not forgiven. A business earning 20 crore of EBITDA with three customers at 60 percent of revenue and a founder who approves every invoice does not trade at the same multiple as one earning 20 crore across forty customers with a functioning management team. The difference is frequently two to three turns of EBITDA, which is larger than almost any negotiating win available at the table.

Preparation happens well before the term sheet

By the time a letter of intent arrives, most of the value-determining facts about your business are already fixed. Preparation is what you do in the 12 to 24 months before that.

That means audited financials that a buyer can reconcile without explanation, and a clean separation between business and personal. It means statutory hygiene: GST reconciliations, TDS, PF and ESI, closed or provisioned tax litigation. It means a cap table with no verbal understandings, ESOPs properly documented, and no legacy investor with a consent right nobody remembered. It means reviewing your top contracts for change-of-control and assignment clauses, because a customer with a termination right on change of control holds a veto over your deal. It means being able to answer, in writing, why your margin moved in any quarter over the last three years.

None of this improves your business. All of it protects your price. Diligence does not find problems and forgive them. It finds problems and converts them into indemnities, holdbacks and reductions.

Selling a business is not a valuation exercise with a negotiation attached. It is a sequence of decisions about structure, tension and readiness, most of them taken before price is ever discussed, and each one determining how much of the headline number survives to your bank account. Decide early what your real objective is, whether that is maximum cash certainty, continuity for your team, or partial liquidity with a second bite. Then build the process backwards from that. Founders who do this rarely get a surprise on closing day, and the ones who do not almost always do.

Disclaimer

This article is for general information only and does not constitute financial, investment, tax, legal, or professional advice. The views expressed are for general informational purposes and should not be relied upon as a substitute for advice specific to your business or circumstances. Please seek appropriate professional advice before making any business, financial, investment, or transaction-related decision.