Structuring the Purchase Price in Dutch M&A: Value, Price and Exit

From valuation multiples to deferred consideration, earn-outs and venture exit waterfalls

As a Dutch Corporate/M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam, Dirk de Waard regularly advises on transactions where valuation, purchase price mechanics and shareholder economics need to be translated into a workable deal structure.

In many M&A processes, the valuation discussion starts with a multiple. Six times EBITDA, eight times EBITDA, a revenue multiple or, in a software business, perhaps a multiple of recurring revenue.

That gives buyer and seller a useful common reference point. It does not yet tell them what the purchase price will be, when that price will be paid or how much each selling shareholder will ultimately receive.

Those distinctions matter.

The economic value of the business, the price agreed with the buyer and the proceeds ultimately received by each shareholder are different concepts. A fourth issue arises where part of the consideration is deferred, contingent on future performance or linked to a later transaction.

For VC-backed companies, another layer sits on top of this. The buyer may offer an attractive price for all shares, but the cap table, preferred share rights and liquidation preference waterfall can produce a very different allocation of those proceeds between investors, founders and other shareholders.

This article follows my earlier analysis on Valuation Gaps in Dutch M&A. That article focused on using transaction structure to allocate uncertainty. Here the focus is narrower: how the purchase price itself is built, paid and ultimately distributed in a Dutch transaction.

A valuation multiple is the start of the discussion

A multiple can make a valuation look deceptively simple. If the parties agree on 6x EBITDA and the relevant EBITDA is EUR 2 million, an enterprise value of EUR 12 million appears straightforward. In practice, that is where the real negotiation starts.

The first issue is the EBITDA to which the multiple applies. Owner remuneration may need to be normalised. One-off advisory costs may be added back. A new management layer may already increase costs without yet contributing fully to revenue. Recent acquisitions, restructuring costs or unusually strong trading periods may affect the result.

The next step is the bridge from enterprise value to equity value. Cash, debt, debt-like items and the agreed level of normal working capital can materially change the amount ultimately payable for the shares.

For international buyers, this is an important point in Dutch mid-market transactions. A headline multiple in an LOI is not enough if the definitions underneath it remain open.

The LOI should give the parties sufficient clarity on the underlying economics to avoid discovering during SPA negotiations that they attached different meanings to the same valuation.

For more on this stage of a Dutch transaction, see The Dutch M&A Process Explained: From LOI to Closing.

Paying the purchase price in full at closing

The cleanest structure remains a purchase price that is paid in full at closing. Even then, the pricing mechanism still needs to be selected.

A locked box fixes the price by reference to a historical balance sheet date. The buyer accepts the financial position at that date and is protected against leakage between the locked-box date and closing.

With completion accounts, the price is adjusted after closing by reference to the actual cash, debt and working capital position at completion.

The distinction is more than drafting technique.

A locked box puts greater emphasis on price certainty before closing. Completion accounts place greater emphasis on achieving the agreed financial position at closing and correcting the price afterwards.

Which mechanism works best depends on the quality of the financial information, working capital volatility, transaction timetable and bargaining position of the parties.

See Locked Box vs Completion Accounts in Dutch M&A for a more detailed comparison.

Deferred consideration and vendor loans

The agreed purchase price does not always have to be paid entirely at closing. Part of the consideration can remain outstanding as deferred consideration. Alternatively, the seller may effectively finance part of the acquisition through a vendor loan.

Those structures can look economically similar, but their legal character may be different.

Under a vendor loan, the seller becomes a creditor after closing. The loan documentation therefore needs to address interest, maturity, repayment, subordination, security, acceleration and information rights.

Deferred consideration may remain part of the SPA purchase price mechanism rather than becoming a separate financing instrument.

For the seller, the fundamental change is the same: part of the exit proceeds remains exposed after control of the business has passed to the buyer.

That exposure should be considered consciously.

Set-off is a good example. A buyer may want to set off a post-closing warranty claim against amounts still owed to the seller. From the buyer’s perspective, that provides an obvious source of recovery. From the seller’s perspective, it can turn part of the unpaid purchase price into de facto security for a later claims dispute.

The SPA and financing documentation should say clearly whether that is intended. More on this structure: Vendor Loans and Deferred Consideration in Dutch Acquisitions.

Earn-outs: making future performance part of the price

An earn-out addresses a different issue. The outstanding amount is not merely paid later. It remains uncertain whether, and to what extent, it will become payable at all.

An earn-out can work where the seller attributes value to future growth that the buyer is not yet prepared to pay for at closing. Rather than compromising entirely on the headline price, part of the consideration is tied to actual post-closing performance.

This does not make the business worth more in economic terms. It changes the allocation of uncertainty. The drafting therefore matters more than the label.

EBITDA, revenue, recurring revenue, gross margin and operational milestones all create different incentives. An EBITDA-based earn-out can be affected by integration costs, additional management, group charges and investment decisions. A revenue-based metric may reward growth without addressing the profitability of that growth.

The seller’s information position also needs attention. After closing, the seller may no longer control the business, while part of the sale proceeds still depends on how that business is operated.

In Dutch deals, a well-structured earn-out therefore combines purchase price mechanics with reporting, accounting rules, conduct provisions and a workable dispute mechanism.

More on this topic: Earn-outs in Dutch M&A.

Selling part of the equity at a later stage

Another possibility is not to sell all shares at the same time. The seller retains an equity interest for a period and the parties agree how that interest can or must be sold later. This is legally different from an earn-out. The seller remains a shareholder rather than merely holding a contractual claim for additional consideration.

That creates a different set of issues. The future price may be based on the same multiple used for the first transaction, a future EBITDA figure, fair market value or another agreed formula. Call and put options can be used to create a mechanism for the later transfer.

A formula such as “6x EBITDA in three years” may sound precise. Over three years, however, the business may change materially. Acquisitions may have been made. A new management structure may have been introduced. Financing may have changed. Activities may have been added or sold.

The longer the period between the first and second transaction, the more important the definitions underneath the formula become.

There is also a governance issue. The party that acquires control in the first transaction may take entirely legitimate business decisions that affect the metric used to calculate the price of the remaining shares.

The solution is not to give the minority seller a veto over ordinary business decisions and thereby recreate the control that was sold. It is to align the pricing formula with appropriate accounting rules, related-party protections, information rights and objective dispute resolution.

For a Dutch BV, the later share transfer must also be implemented under Dutch corporate law. Transfers of registered BV shares generally require a notarial deed, and the articles, shareholders’ agreement and any applicable transfer restrictions or approvals need to be checked when the structure is designed, not only when the second transfer is due.

Due diligence should feed into the pricing structure

Due diligence has limited value if its findings remain confined to a report. A concentration risk in the customer base may affect the way future consideration is structured. Uncertain working capital may justify completion accounts or a specific normalisation adjustment. Management dependency may require retention arrangements. Financing risk may affect the amount payable at closing and the amount left outstanding.

The point is not to find a contractual mechanism for every diligence finding. The point is to identify which findings genuinely affect value, price, payment certainty or recovery and then reflect them in the transaction documents.

That is where legal transaction work becomes part of the economics of the deal.

In a VC-backed company, the purchase price is not the final calculation

The analysis becomes more complicated where the target has completed several venture capital rounds.

The buyer may offer a clear price for all outstanding shares. That still does not tell the founders or individual investors what they will receive.

Different share classes may carry different economic rights. Liquidation preferences may entitle one investor class to receive proceeds before ordinary shareholders participate. Depending on the terms, an investor may be economically better off relying on its preference or converting into ordinary shares and participating on an as-converted basis.

The precise outcome depends on the rights attached to the relevant shares and how those rights are implemented in the Dutch documentation.

For foreign investors, the commercial concepts will often be familiar from US or UK venture transactions. The Dutch implementation still matters. The articles of association, shareholders’ agreement, investment agreement and exit provisions must work together.

A headline valuation therefore tells only part of the story. For more detail on these economics, see Liquidation Preferences in Dutch Venture Capital Deals.

Cap table, preference stack and exit waterfall should be reviewed together

Before an exit process starts, the cap table should be more than mathematically correct. Options, depositary receipts, convertible instruments, warrants, earlier share issuances and different preferred classes can all affect the fully diluted ownership and, ultimately, the distribution of exit proceeds.

That matters particularly where the company has raised several rounds on different terms. At a relatively low exit value, the preference stack may absorb a substantial part of the proceeds before ordinary shareholders participate. At a higher exit value, conversion into ordinary shares may become more attractive for investors. Different series may also rank pari passu, senior or junior, depending on the investment history.

The exit waterfall should therefore be modelled at several sale prices before the company goes to market.

For founders, that can reveal that their economic exposure differs materially from their percentage ownership. For investors, it shows whether the protection negotiated in an earlier financing round remains economically relevant at the expected exit range.

The cap table and the legal documents need to support the same result. A spreadsheet cannot cure inconsistencies between the articles, shareholders’ agreement and actual share issuances.

See also Cap Table Adjustments in Dutch Startups and Scale-Ups. For the broader translation of US-style venture economics into Dutch documentation, see Implementing US-Style VC Terms in Dutch Venture Financings.

Contingent consideration makes the exit waterfall more complex

The waterfall becomes more difficult when part of the purchase price is received after closing.

If there is an earn-out, the transaction documents need to determine how that later payment is allocated between the selling shareholders. The same issue arises with deferred consideration and, potentially, where different shareholders dispose of their interests at different times.

The existing preference structure cannot simply be ignored once the initial closing has taken place.

An investor may have negotiated priority economics in the financing documents, but those documents may not have been drafted with a multi-year purchase price structure in mind. A founder who has sold all shares may also have a different economic position from a shareholder who remains invested.

This is where SPA mechanics and the existing VC documents need to be read together.

In a VC-backed exit, it is not enough for the buyer and the seller group to agree on the headline price. The sellers also need clarity on how each component of that price is allocated internally.

The LOI should capture the economic architecture

Not all of this belongs in full detail in the LOI. The economic architecture does.

A letter of intent that records only an enterprise value and a multiple may leave too much unresolved if the contemplated consideration consists of a combination of cash at closing, deferred consideration, an earn-out or a later equity transfer.

The LOI should make clear how the parties expect to move from valuation to purchase price and which components remain conditional on future events.

For a VC-backed company, the seller side should also understand how the proposed consideration runs through the existing exit waterfall before taking binding decisions. That waterfall is not necessarily something that needs to be negotiated with the buyer, but it should be understood internally before shareholders evaluate an offer.

Practical conclusion

In Dutch M&A, the purchase price is rarely just the number shown at the top of the SPA. Economic value, agreed purchase price, timing of payment and the proceeds ultimately received by individual shareholders should be analysed separately.

A valuation multiple may provide the starting point. The transaction then requires actual pricing mechanics: locked box or completion accounts, cash at closing, vendor financing, deferred consideration, an earn-out or, in some cases, a later transfer of part of the equity.

For a VC-backed company, another calculation follows. The cap table, share classes, liquidation preferences and exit waterfall determine how the proceeds are ultimately allocated between founders and investors.

Good transaction documentation does not increase or decrease the economic value of the business by itself. It ensures that valuation, price, risk allocation and payment mechanics produce the commercial outcome the parties actually agreed.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises international investors, founders, management teams, buyers, sellers and deal counsel on Dutch acquisitions, venture financings, purchase price structures, shareholder arrangements and transaction documentation.

On ViottaLaw, Dirk writes about Dutch M&A and venture capital from a transaction-practice perspective: how international deal concepts are implemented in Dutch structures, how transaction risk is allocated and how commercial terms are translated into executable Dutch documentation.

More insights for international deal professionals are available through M&A Insights: Dutch Deal Practice for Buyers, Sellers and Investors and Venture Capital Insights: Dutch BV Financing, Investor Rights and Growth Company Governance.

Structuring the purchase price or exit waterfall in a Dutch transaction?

Dirk de Waard advises international buyers, investors, founders and deal counsel on Dutch purchase price mechanisms, earn-outs, vendor financing, staged transactions and the interaction between an M&A exit and existing Dutch VC investment documentation.

Contact Dirk at dirk.dewaard@viottalaw.com to discuss the Dutch implementation of an acquisition, exit or venture-backed sale process.