10 Key Factors affecting the Enterprise Value to Equity Value bridge in European HealthTech and MedTech 2026

Nelson Advisors
4 minutes ago
25 min read

Executive Summary

The enterprise value (EV) to equity value bridge represents the critical calculation that determines what shareholders actually receive in a transaction, the difference between a buyer's headline offer and the cash distributed to founders and investors. In the European HealthTech and MedTech sectors entering 2026, this bridge calculation has become increasingly complex, driven by structural market shifts including the end of the zero interest rate policy (ZIRP) era, heightened regulatory compliance burdens under MDR/IVDR, refinancing pressures from 2019-2021 vintage debt, and the maturation of the sector from "growth at all costs" to "industrial efficiency."

This report examines the ten most significant factors affecting the EV to equity value bridge, ranked by their typical financial impact and prevalence in 2026 European HealthTech and MedTech transactions. Each factor is analysed through the lens of current market conditions, including the €2.5 Trillion private equity dry powder deployment cycle, distressed M&A driven by regulatory Darwinism, and the flight to quality favouring profitable, compliant platforms over high-burn ventures.

Understanding these bridge factors is essential for founders, investors and acquirers navigating an environment where enterprise values for AI-enabled, MDR-compliant assets command 6x-8x revenue multiples and 12x-15x EBITDA multiples, while non-compliant or sub-scale assets face distressed exits at 3x-4x revenue.

1. Net Debt Adjustment

Impact Magnitude: Dollar-for-dollar reduction to equity value

Prevalence: Universal across all transactions

2026 Amplification: Refinancing pressure from maturing 2019-2021 debt tranches

Mechanism and Calculation

Net debt represents the most fundamental and mechanically straightforward adjustment in the EV to equity value bridge. The calculation subtracts a company's gross debt from its cash and cash equivalents, with the net figure then deducted from enterprise value to arrive at equity value.

Net Debt = Total Debt – Cash and Cash Equivalents

Total debt encompasses all interest-bearing liabilities including short-term borrowings, long-term debt, capital leases, vendor financing, and convertible instruments. Cash and cash equivalents include physical cash, demand deposits, marketable securities with maturities under 90 days, and money market instruments.

European HealthTech Debt Landscape in 2026

The debt composition in European HealthTech and MedTech has evolved significantly, with three primary debt categories dominating balance sheets:

Venture Debt: Growth-stage companies increasingly rely on venture debt to extend runway between equity rounds without excessive dilution. These structures typically include 10-12% annual interest rates, warrant coverage of 5-15%, and covenants tied to revenue milestones or regulatory approvals. Venture debt is particularly prevalent among companies that raised Series B or Series C rounds in 2021-2023 and now face the Series B+ Gap—the widening chasm for growth capital rounds exceeding €50 million.

Equipment Financing and Capital Leases: MedTech companies with hardware components (surgical robotics, imaging equipment, diagnostic devices) commonly utilize equipment financing and capital leases. These arrangements allow manufacturers to place capital-intensive equipment in hospitals and clinics while preserving cash flow. Under IFRS 16, most leases are capitalised on the balance sheet and treated as debt-like obligations in M&A transactions.

Convertible Notes and Loan Notes: European life sciences and digital health companies have embraced convertible loan notes (CLNs) as bridge financing. CLNs typically carry 10-30% discounts to the next equity round valuation and 1-3 year maturity periods. These instruments convert to equity upon triggering events (usually a qualified financing round), but if unconverted at acquisition, they are treated as debt and subtracted from enterprise value.

2026-Specific Debt Servicing Pressure

A critical dynamic intensifying net debt's impact in 2026 is the maturity of debt tranches originated during the 2019-2021 fundraising boom. As these debt facilities reach their refinancing windows, HealthTech platforms, particularly those in "buy-and-build" strategies in dental, veterinary, and ophthalmology services, face refinancing risk. Companies that aggressively leveraged during the low-cost capital era now confront higher interest rates and stricter lending standards, forcing some into distressed M&A scenarios where net debt significantly erodes equity value.

The net debt to EBITDA ratio has emerged as a key valuation screen, with lenders and acquirers viewing ratios above 3.0x as elevated risk in the current environment. For companies carrying excessive net debt relative to cash generation, the EV to equity bridge can produce minimal or even negative equity value for common shareholders after senior creditors and preferred equity holders are satisfied.

Treatment of Restricted Cash and Off-Balance Sheet Obligations

A nuanced consideration in calculating net debt is the treatment of restricted cash. While general cash balances offset debt dollar-for-dollar, cash pledged as collateral, held in escrow for regulatory compliance, or restricted under debt covenants may be excluded from the offset calculation, thereby increasing net debt. This is particularly relevant for MedTech companies maintaining cash reserves to satisfy notified body requirements under MDR/IVDR.

Additionally, the definition of "debt-like items" extends beyond traditional borrowings to include accrued bonuses tied to transaction completion, deferred consideration from prior acquisitions, unfunded pension liabilities (more common in legacy European MedTech manufacturers), and contingent liabilities from litigation. The negotiation of what constitutes debt versus working capital can shift millions in equity value, making this a heavily contested area during due diligence.

2. Preferred Stock Liquidation Preferences

Impact Magnitude: Can eliminate 40-100% of common equity value in moderate exits

Prevalence: Universal in venture-backed companies

2026 Amplification: Down rounds and flat rounds increasing preference overhang

Structure and Mechanics

Liquidation preferences represent contractual rights granted to preferred shareholders, typically venture capital and growth equity investors, that entitle them to receive a defined return of capital before common shareholders (founders, employees, angel investors) receive any proceeds in a liquidity event.

The standard structure includes two key parameters:

Preference Multiple: The most common structure is a 1x liquidation preference, meaning investors receive their original investment amount before any distribution to common shareholders. In more challenging financing environments or down rounds, investors may negotiate 2x or 3x multiples, effectively doubling or tripling their priority claim on exit proceeds.

Participation Rights: Preferences can be non-participating (investors choose between their preference amount OR their pro-rata share of proceeds) or participating (investors receive their preference amount AND participate pro-rata in remaining proceeds with common shareholders). Participating preferences create "double dipping" that dramatically reduces common shareholder returns, particularly in moderate-value exits.

Impact on Equity Value Distribution

To illustrate the material impact, consider a European digital health company that raised €15 Million across seed, Series A, and Series B rounds, with Series B investors holding a 1x participating preferred preference:

Enterprise Value at Exit: €40 million
Net Debt: €5 million
Equity Value: €35 million
Series B Preference: €10 million (1x of €10M investment)
Series B Post-Preference Participation: 25% of remaining €25M = €6.25M
Total to Series B: €16.25 million
Remaining for Series A, Seed, Common: €18.75 million

Before any additional preferences from earlier rounds, the Series B investors have captured 46% of equity value despite holding 25% ownership on a fully diluted basis. This scenario is increasingly common in 2026 as companies that raised at peak 2021 valuations face flat or down exits.

2026 Market Conditions Amplifying Preference Impact

The shift from "growth at all costs" to "profitable efficiency" has compressed valuation multiples for unprofitable HealthTech companies from 8x-10x revenue in 2021 to 3x-4x revenue in 2026. For companies that raised multiple rounds at escalating valuations during 2020-2021, the cumulative liquidation preference stack can exceed current enterprise values, resulting in zero equity value for common shareholders.

A specific risk in the European market is the prevalence of participating preferences in growth-stage financings. While U.S. venture markets have largely standardised on non-participating preferences for Series A and beyond, European investors more frequently negotiate participating structures, particularly in competitive rounds or when providing rescue financing.

The Series B+ Gap—where companies struggle to raise €50M+ growth rounds, has forced many HealthTech platforms to accept "inside rounds" (led by existing investors at flat or reduced valuations) with enhanced liquidation preferences, creating compounding preference overhang that severely impacts founder and employee equity value at exit.

Calculating Waterfall Distributions

The practical calculation of preference distributions follows a "waterfall" methodology where proceeds flow sequentially through priority tiers:

Senior Debt and Transaction Costs are satisfied first (covered in Factors 1, 4)
Most Recent Preferred Round receives its preference (typically "last in, first out")
Earlier Preferred Rounds receive preferences in reverse chronological order
Participating Preferred Shareholders participate pro-rata in remaining proceeds
Common Shareholders receive residual proceeds

This waterfall structure means that in transactions below the total capitalisation table preference stack, common shareholders—the primary recipients of equity compensation and founders' holdings—may receive nothing despite a nominally successful acquisition.

3. Working Capital Adjustments

Impact Magnitude: Typically ±5-15% of purchase price, dollar-for-dollar adjustment

Prevalence: Standard in 85%+ of transactions

2026 Amplification: Deferred revenue complexity in SaaS models, A/R quality deterioration

Purpose and Calculation Methodology

Working capital adjustments ensure the buyer receives a business with sufficient operating liquidity to maintain normal operations without immediate capital injection. The mechanism compares actual working capital at closing against a negotiated "target" or "peg" level, with any surplus or shortfall resulting in a dollar-for-dollar purchase price adjustment.

Working Capital Adjustment = Actual Working Capital at Closing – Target Working Capital

Target working capital is typically calculated as the normalized average of the trailing 12 months, adjusted for seasonality, one-off transactions, and growth trends. Most European HealthTech transactions utilize a "cash-free, debt-free" structure where working capital is defined as current assets (excluding cash) minus current liabilities (excluding debt)

Components and HealthTech-Specific Considerations

Accounts Receivable: For healthcare services businesses (telehealth platforms, home health, specialty pharmacy), accounts receivable quality is paramount. The 2026 environment has seen deteriorating collection cycles, with 60% of healthcare providers facing cash flow issues due to delayed reimbursements from payers. Buyers increasingly demand aging analysis showing receivables over 90 days, with adjustments for uncollectable balances.

Reimbursement delays from governmental payers (NHS in the UK, statutory health insurers in Germany) and private insurers have extended from historical 30-45 day cycles to 60-90+ days in 2026, straining working capital positions. Companies with reimbursement-dependent revenue streams must demonstrate sustainable collection patterns to avoid punitive working capital adjustments.

Inventory and Work-in-Progress: MedTech manufacturers holding physical inventory face scrutiny regarding obsolescence, particularly for products approaching the end of MDR/IVDR certificate validity periods. Slow-moving inventory over 180 days is typically written down or excluded from working capital calculations.

Accounts Payable and Accrued Expenses: Buyers examine payment cycles to identify aggressive payable management—a tactic where sellers delay payments to suppliers to inflate cash balances pre-closing. Such manipulation is detected through payables aging analysis and results in working capital shortfalls post-closing.

Accrued expenses, particularly accrued bonuses, vacation liabilities, and regulatory compliance costs, are negotiated items. In HealthTech, year-end accruals for clinical trial costs, regulatory filing fees, and quality management system audits can significantly impact working capital levels.

Deferred Revenue: The SaaS Trap

The treatment of deferred revenue has emerged as the most contentious working capital negotiation point in European HealthTech, particularly for SaaS-based digital health platforms. Deferred revenue represents customer prepayments for future service obligations—a liability on the balance sheet that creates a structural disconnect between sellers (who have received cash) and buyers (who must fulfil the service obligation).

Three primary treatment approaches exist:

Option 1 – Treat as Debt (Most Buyer-Favorable): Deferred revenue is excluded from working capital and treated as a debt-like item, resulting in a dollar-for-dollar reduction to equity value. This approach compensates the buyer for assuming service obligations without receiving the associated cash. While theoretically sound, it is rarely accepted by sellers and represents only 15-20% of European HealthTech transactions.

Option 2 – Include in Working Capital (Most Seller-Favorable): Deferred revenue is included in both the target working capital peg and the closing working capital calculation. This "no special treatment" approach is simple but fails to compensate buyers for the cost of fulfilling prepaid obligations. It appears in approximately 25-30% of transactions, typically where deferred revenue is immaterial or where sellers have significant negotiating leverage.

Option 3 – Exclude but Leave "Cost to Serve" Cash (Balanced, Most Common in 2026): Deferred revenue is excluded from working capital entirely, but sellers leave sufficient cash to fund the cost of fulfilling prepaid obligations. The "cost to serve" is calculated as the inverse of gross margin, for a SaaS platform with 80% gross margins, 20% of deferred revenue remains as cash.

This third approach has become the market standard in 2026, representing 50-60% of European HealthTech transactions. It balances the economic reality that sellers received customer cash while buyers inherit service obligations.

Purchase Accounting Haircut

An additional complexity in deferred revenue treatment is the ASC 805 (U.S. GAAP) and IFRS 3 purchase accounting requirement to remeasure deferred revenue at fair value post-acquisition. Fair value reflects the cost plus reasonable margin to fulfil remaining obligations, typically resulting in a 30-60% "haircut" to the deferred revenue liability on the buyer's opening balance sheet.

This haircut reduces post-acquisition revenue recognition, creating a temporary revenue dip in the first 12-24 months post-deal, a dynamic that sophisticated buyers price into their valuation models but can surprise sellers expecting trailing revenue run rates to continue uninterrupted.

Working Capital True-Up Process

The working capital adjustment follows a two-step process:

Estimated Adjustment at Closing: Based on the most recent pre-closing balance sheet (typically month-end within 30 days of closing), an estimated working capital figure is calculated and applied at closing.
Final True-Up (60-90 Days Post-Closing): After closing, the buyer prepares audited closing balance sheet figures, and both parties reconcile to determine the final working capital position. Any delta between estimated and actual results in a cash payment (if actual exceeds target) to the seller or a clawback (if actual falls short) from escrow or directly from the seller.

Disputes over working capital true-ups are common, appearing in 35-40% of transactions according to escrow claim data, with financial statement definitions (GAAP vs. management accounts), one-off item treatment, and allocation of transaction-related expenses as primary friction points.

4. Transaction Costs and Advisory Fees

Impact Magnitude: 1-4% of transaction value, typically 2-3% in middle-market deals

Prevalence: Universal across all transactions

2026 Amplification: Regulatory complexity increasing legal/advisory costs

Composition of Transaction Costs

Transaction costs represent the cumulative fees and expenses incurred to complete an M&A transaction, typically paid from transaction proceeds and thus reducing equity value distributed to shareholders. The major cost categories include:

M&A Advisory and Investment Banking Fees: The largest component, representing 1-5% of transaction value on a sliding scale:

Deals under €10M: 5-8% success fees plus €10-20k monthly retainers
Deals €10-50M: 3-6% success fees plus €15-30k monthly retainers
Deals €50-100M: 2-4% success fees plus €25-40k monthly retainers
Deals €100M+: 1-3% success fees plus €40-50k+ monthly retainers

In the European HealthTech market, boutique advisors specializing in the sector (such as sector-focused M&A firms) typically command premium fees due to deep buyer networks and regulatory expertise. The Lehman Formula (5% on first €1M, 4% on second €1M, 3% on third €1M, 2% on fourth €1M, 1% thereafter) remains a common baseline negotiating framework.

Legal Fees: Legal counsel for both buyer and seller represents €100,000-€500,000+ depending on deal complexity:

Transaction lawyers (buy-side and sell-side): €100-500k each
Regulatory specialists (MDR/IVDR, GDPR, AI Act compliance): €50-150k
Employment law (TUPE transfers, works council consultations): €20-75k
Intellectual property counsel: €15-50k

Cross-border transactions involving U.S. buyers acquiring European targets, or pan-European consolidations, incur dual legal fees in multiple jurisdictions, easily pushing total legal costs to €750,000-€1.5M for transactions in the €50-150M range.

Accounting and Financial Due Diligence: Quality of Earnings (QoE) reports, financial due diligence, tax structuring, and transaction accounting represent €30,000-€200,000:

Financial due diligence and QoE: €50-150k
Tax advisors: €20-100k
Transaction auditors: €30-75k
Valuation specialists: €10-50k

Regulatory and Compliance Consultants: In HealthTech and MedTech, regulatory diligence is critical and costly:

MDR/IVDR compliance assessment: €25-75k
GDPR and data protection audits: €15-40k
Clinical evidence review: €30-100k
Notified body liaison: €10-30k

Other Costs: Escrow agent fees (€5-25k), financing arrangement fees (0.5-2% of debt), employee retention consultants (€10-50k), and miscellaneous costs (travel, data room, communication) add €50-150k.

Total Transaction Cost Impact

For a typical €75 million European HealthTech transaction in 2026, representative transaction costs might include:

M&A advisory: €2.25M (3% success fee)
Legal fees: €350k
Accounting/tax: €125k
Regulatory consultants: €75k
Other costs: €100k
Total: €2.9M (3.9% of transaction value)

This €2.9 million is deducted from equity value before distribution to shareholders, a material reduction that founders must account for when evaluating headline offers.

2026 Cost Escalation Factors

Several dynamics are increasing transaction costs in 2026 European HealthTech deals:

Regulatory Complexity: MDR/IVDR compliance verification, AI Act high-risk classification assessments (for AI-driven diagnostics and treatment planning software), and GDPR data transfer mechanism reviews (particularly for cross-border deals) are adding €100-250k in incremental regulatory diligence costs.

Distressed M&A Dynamics: The wave of distressed transactions driven by regulatory non-compliance and cash scarcity requires extensive restructuring advice, insolvency specialists, and work-out negotiations, increasing professional fees by 30-50% compared to friendly transactions.

Cross-Border Structuring: U.S. corporate venture arms and strategic buyers entering Europe to acquire AI and robotics platforms require dual-jurisdiction structuring (U.S. and European legal counsel, tax optimization across jurisdictions, transfer pricing analysis), meaningfully increasing costs.

5. Earn outs and Deferred Consideration

Impact Magnitude: 10-30% of headline purchase price, risk-adjusted value 50-70% of face value

Prevalence: 35-45% of European HealthTech transactions in 2026

2026 Amplification: Valuation uncertainty driving increased earn out usage

Structure and Economic Purpose

Earnouts represent contingent, deferred payments to sellers based on the achievement of post-closing performance milestones—effectively bridging valuation gaps between buyer and seller expectations. They enable transactions to proceed when parties disagree on future performance trajectory, risk profile, or achievable synergies.

In European HealthTech and MedTech, earn outs typically represent 15-35% of total consideration, with milestone payments triggered by:

Financial Metrics: Revenue targets, EBITDA thresholds, gross margin maintenance, customer retention rates (particularly in SaaS models with annual recurring revenue)

Regulatory Milestones: CE Mark approval under MDR, FDA clearance, ISO 13485 certification, reimbursement code assignment (DiGA approval in Germany, PECAN listing in France)

Commercial Milestones: Product launch dates, key account wins (NHS framework agreements, hospital system contracts), integration completion (for platform consolidations)

Clinical and Scientific Milestones: Clinical trial endpoints, peer-reviewed publication, real-world evidence generation

Earn out Duration and Payment Structures

Typical earnout periods in European HealthTech range from 12 months (short-term revenue earnouts) to 36+ months (regulatory approval-based earnouts for early-stage medical devices). Payment structures vary:

Binary Milestones: All-or-nothing payments upon regulatory approval, product launch, or other discrete events
Graduated Financial Earn outs: Sliding scale payments based on achieved revenue/EBITDA levels (e.g., 100% payout if €15M revenue achieved, 50% if €12.5M, 0% if under €10M)
Tiered Structures: Multiple tranches with different triggers (Year 1 revenue earn out + Year 2 regulatory milestone)

Valuation and Risk Adjustment

From a seller's perspective, earnouts represent contingent value that must be risk-adjusted. A €10 million earnout conditional on achieving regulatory approval carries far less certain value than €10 million in cash at closing. Industry practice applies probability-weighted valuations:

Low-Risk Financial Earn outs (revenue/EBITDA targets, 12-24 month periods): 70-85% probability-weighted value
Moderate-Risk Milestones (reimbursement approval, product launch): 50-70% probability-weighted value
High-Risk Milestones (regulatory approvals for novel devices, clinical trial outcomes): 30-50% probability-weighted value

Common Friction Points and Seller Protections

Earnouts are fertile ground for post-closing disputes, with key areas of friction including:

Buyer's Post-Acquisition Conduct: If the buyer deprioritizes the acquired product line, reallocates resources, or makes decisions that undermine earnout achievement, sellers may claim breach of implied good faith obligations. Sale and purchase agreements increasingly include affirmative covenants requiring buyers to maintain specified investment levels, personnel, and sales support.

Accounting and Measurement Disputes: Financial earn outs require precise definitions of revenue (gross vs. net, treatment of discounts/returns), EBITDA calculation methodologies (alignment with historical accounting policies vs. buyer's group policies), and treatment of inter company transactions.

Change of Control Scenarios: If the buyer sells the acquired business during the earn out period, sellers negotiate provisions requiring immediate payout of earn outs (sometimes at assumed 100% achievement) or rights to receive a proportional share of the subsequent sale proceeds.

2026 Market Dynamics Increasing Earnout Prevalence

The valuation uncertainty characterizing the 2026 European HealthTech market has driven increased earnout adoption. With buyers skeptical of revenue projections made during the ZIRP era and sellers resistant to accepting 2024-2025 compressed multiples, earn outs bridge the gap.

Specific scenarios driving earn out structures in 2026:

MDR/IVDR Transition Uncertainty: Medical device companies in the MDR transition process (particularly those with certificates expiring in Q2-Q3 2026) face binary outcomes, successful recertification maintaining full market access versus compliance failure forcing product withdrawal. Earnouts tied to successful recertification by specified deadlines have become standard.

Reimbursement Pathway Risk: Digital health platforms pursuing DiGA approval in Germany or PECAN assessment in France face 9-18 month timelines with uncertain outcomes. Buyers structure earnouts paying 60-70% of consideration upfront, with the balance contingent on reimbursement approval within 18-24 months.

AI Act Compliance Unknown: AI-driven diagnostic platforms and clinical decision support tools facing high-risk classification under the EU AI Act carry regulatory uncertainty. Earnouts defer 20-30% of consideration until AI Act compliance is demonstrated and product can maintain unrestricted EU market access.

6. Escrow and Holdback Provisions

Impact Magnitude: 7-15% of purchase price, held for 12-18 months

Prevalence: 60-70% of European middle-market transactions

2026 Amplification: Increased usage due to warranty/compliance concerns

Purpose and Mechanics

Escrow and holdback mechanisms provide buyers with security for post-closing indemnification claims arising from breaches of representations and warranties, undisclosed liabilities, or other seller obligations. Rather than requiring sellers to pay out-of-pocket for indemnification claims, buyers withhold a portion of purchase price in a segregated account (escrow) or on their own balance sheet (holdback) for a defined period.

Escrow: A third-party financial institution holds funds in a segregated account, releasing them to the seller if no valid claims arise by the expiration date, or to the buyer to satisfy verified claims. Escrow provides neutral administration and is the preferred structure for institutional investors and cross-border deals. Escrow agent fees typically range from €5,000-€25,000.

Holdback: The buyer retains funds on its own balance sheet, creating a payable to the seller. Holdbacks are administratively simpler and eliminate escrow fees, but provide less security for sellers (funds are commingled with buyer's general assets and at risk if buyer becomes insolvent). Holdbacks have gained market share in 2026, representing 20% of security arrangements versus 33% for escrows.

Bank Guarantee: The seller's bank provides a guarantee securing the buyer's potential claims. Bank guarantees preserve seller liquidity (funds are not tied up) but incur guarantee fees (typically 1-3% annually of guaranteed amount) and require seller creditworthiness. Usage has declined from 31% in 2023 to 19% in 2024.

Typical Terms

Amount: Escrow amounts in European HealthTech transactions typically range from 7-15% of purchase price, with several determinants:

Deal Size: Smaller transactions (<€25M) average 10-12% escrow; mid-market deals (€25-100M) average 7-9%; larger deals (€100M+) average 5-7%
Business Complexity: Multi-subsidiary structures, international operations, and regulated products drive higher escrows (10-15%)
Due Diligence Quality: Limited diligence or seller resistance to providing access increases escrow requirement
Cap on Indemnification: Escrows often represent the maximum liability exposure (the "cap") for general indemnification claims

Duration: Standard escrow periods align with statute of limitations for contractual claims and survival periods for representations and warranties:

12 months: 52% of European transactions, covering fundamental warranties and general representations
18 months: 17% of transactions, extending protection through a full fiscal year-end and audit cycle
24+ months: Used for tax indemnity escrows (aligned with tax assessment windows) and specific regulatory/reimbursement risks

Release Mechanisms: Escrows typically release in tranches—50% at 12 months if no claims are pending, remainder at 18 months—providing partial liquidity to sellers while maintaining claim security.

Claim Dynamics and Recovery Rates

Market data from European escrow transactions reveals:

22% of transactions result in at least one claim against the escrow
Average claim amount: 34% of total escrow value
Claim timing: 35% of claims are presented in the first 6 months (often financial statement or tax-related), 39% in the final 30 days before escrow expiration (strategic timing to preserve claim rights)
Dispute rate: 78% of first-half claims are disputed by sellers versus buyer assertions
Payment timing: 52% of valid claims are paid within 30 days of claim presentation

Common claim categories in HealthTech/MedTech transactions include tax liabilities (32% of claims), financial statement inaccuracies (28%), undisclosed litigation (22%), intellectual property issues (7%), regulatory compliance gaps (5%), un collectable accounts receivable (3%), and undisclosed accounts payable (2%).

2026-Specific Escrow Considerations

MDR/IVDR Compliance Escrows: Buyers acquiring medical device companies in MDR/IVDR transition are negotiating specific "regulatory escrows" of 10-20% of purchase price, held for 18-36 months and released upon confirmation of continued compliance and no regulatory enforcement actions.

Reimbursement Escrows: For digital health platforms claiming (but not yet having secured) reimbursement eligibility, buyers are escrowing 15-25% of purchase price, released contingently on reimbursement approval and sustained payer coverage for 12+ months.

Cybersecurity and Data Breach Escrows: Following NIS2 implementation, buyers are establishing specific escrows (5-10% of purchase price) to cover potential cybersecurity incident costs, GDPR fines, and remediation expenses for 12-18 months post-closing.

7. Minority Interest and Non-Controlling Interest Adjustments

Impact Magnitude: Varies by subsidiary ownership structure, typically 5-25% of subsidiary value

Prevalence: 15-20% of European HealthTech platform transactions

2026 Amplification: PE buy-and-build strategies creating complex minority structures

Conceptual Framework

Minority interest (also termed non-controlling interest or NCI) represents the portion of a subsidiary's equity not owned by the parent company, typically less than 50% ownership held by other investors, founders, or financial partners. When calculating enterprise value and equity value, minority interest adjustments ensure that consolidated financial metrics (which include 100% of subsidiary results) are reconciled with actual ownership economics.

Inclusion in EV Calculation

Minority interest is added to enterprise value (not subtracted) when bridging from equity value to enterprise value, or equivalently, subtracted when moving from enterprise value to equity value available to controlling shareholders.

The logic: Consolidated financial statements include 100% of a partly-owned subsidiary's revenue, EBITDA, and assets, even though the parent owns only 51-80%. When valuation multiples are applied to these consolidated figures (e.g., EV/EBITDA), the resulting enterprise value represents the entire consolidated entity. To isolate the value attributable to the parent's shareholders, the minority shareholders' claim must be deducted.

Equity Value (Parent Shareholders) = Enterprise Value – Net Debt – Minority Interest

Valuation Methodology

Minority interest is valued at market value, not book value (the figure appearing on the consolidated balance sheet). In private company contexts where market values are not observable, minority interest is typically valued using the same multiple applied to the overall business, proportional to the minority ownership stake.

For example, if a European HealthTech platform holds 70% of a German telehealth subsidiary valued at €20 million (using comparable company multiples), the minority interest represents €6 million (30% x €20M) and is deducted from the parent's equity value.

European HealthTech Applications in 2026

Minority interest structures are increasingly prevalent in European HealthTech due to several 2026 market dynamics:

PE Buy-and-Build Platforms: Private equity sponsors executing buy-and-build strategies in fragmented services (dental, veterinary, ophthalmology, fertility) often acquire 51-80% controlling stakes in individual clinics or service providers, leaving founder-operators with 20-49% minority stakes. These minority stakes incentivize continued operational engagement while limiting PE capital deployment. When the platform itself is sold, each subsidiary's minority interest must be valued and deducted.

JV Structures with Strategic Partners: MedTech companies entering new markets (particularly CEE and Southern Europe) via joint ventures with local distributors or hospital systems create minority interest positions. A U.K.-based surgical robotics company owning 60% of an Italian distribution JV must account for the 40% minority interest when calculating equity value.

Founder Rollover and Earnout Equity: In management buyout (MBO) structures, founders may retain 10-30% equity stakes post-transaction, creating minority interests. While these are typically structured as common equity participations (not minorities in subsidiaries), they function similarly in reducing equity value available to the financial sponsor and other investors.

Complications in Multi-Subsidiary Structures

Complex platform businesses with 5-15 subsidiary entities, each with different minority ownership percentages, require detailed subsidiary-by-subsidiary valuation. This introduces negotiation friction over:

Valuation Methodology Consistency: Should all subsidiaries use the same EBITDA multiple, or should adjustments reflect subsidiary-specific risk, growth, and scale?
Liquidity and Control Discounts: Do minority positions warrant discounts for lack of control and illiquidity (typically 20-35% discounts in private company valuations)?
Put/Call Rights: Do minority shareholders have put rights requiring the parent to purchase their stakes at defined prices, effectively converting minorities to debt-like obligations?

8. Pension Liabilities and Unfunded Obligations

Impact Magnitude: 10-40% of enterprise value for legacy MedTech manufacturers with DB schemes

Prevalence: 10-15% of European MedTech transactions (concentrated in Germany, UK, legacy manufacturers)

2026 Amplification: Declining discount rates increasing liability valuations

Defined Benefit vs. Defined Contribution Schemes

European pension schemes bifurcate into two categories with radically different M&A implications:

Defined Contribution (DC) Schemes: Employers contribute fixed amounts to employee pension accounts, with no residual liability for investment performance or benefit adequacy. DC schemes create minimal balance sheet impact and no post-transaction obligations for buyers.

Defined Benefit (DB) Schemes: Employers guarantee specific pension benefits based on salary and tenure, bearing investment risk and longevity risk. DB schemes create significant balance sheet liabilities—the present value of future benefit obligations minus pension fund assets—and impose mandatory funding requirements.

Unfunded Pension Liabilities as Debt-Like Obligations

In M&A transactions, unfunded pension liabilities (where benefit obligations exceed pension assets) are treated as debt-like items and deducted from enterprise value dollar-for-dollar. The economic rationale parallels debt: future mandatory cash outflows to discharge obligations.

For a German MedTech manufacturer with €150 million enterprise value and €30 million underfunded DB pension obligations, the equity value calculation includes:

Enterprise Value: €150M
Net Debt: €25M
Unfunded Pension Liability: €30M
Equity Value: €95M

The €30 million pension deficit erodes 20% of enterprise value before common shareholders receive any proceeds.

Mandatory Contribution Requirements

Beyond the static liability, DB schemes impose ongoing mandatory contribution obligations that constrain post-acquisition cash flows and investment capacity. Under the U.K. Pensions Regulator framework and equivalent European regimes, sponsors must amortise funding deficits over 3-7 year recovery periods via annual cash contributions.

These mandatory contributions compete with capital allocation for growth investments, R&D, and debt service, effectively increasing the buyer's cost of capital and reducing financial flexibility. For highly levered PE-backed platforms, pension contribution requirements can violate debt covenants or trigger technical defaults.

2026-Specific Pension Risks

Declining Discount Rates: Pension liability valuations use discount rates typically benchmarked to high-quality corporate bond yields. The 2024-2025 interest rate environment has seen yields decline from 2023 peaks, increasing the present value of pension liabilities by 10-20% for many European DB schemes.

Longevity Risk: Improving life expectancy extends the duration of benefit payments, increasing liability valuations. European DB schemes are particularly exposed to longevity risk given aging participant demographics.

Regulatory Intervention: U.K. and German pension regulators have increased scrutiny of M&A transactions involving DB schemes, requiring comfort letters, contribution acceleration, or security enhancements (charge over assets, parent company guarantees) before approving ownership changes. This regulatory friction adds 3-6 months to transaction timelines and introduces contingency risk.

European Geography Matters

Pension liability prevalence varies dramatically across European geographies:

United Kingdom: DB schemes common in legacy MedTech and pharmaceutical companies; rigorous regulatory oversight by The Pensions Regulator
Germany: Book reserve "Pensionszusage" structures create unfunded, on-balance-sheet liabilities; manufacturing sector exposure high
Nordics: Shift to DC largely complete; minimal DB exposure in growth-stage HealthTech
Southern Europe: Mixed prevalence; state pension systems reduce private DB exposure

Acquirers targeting German or U.K. legacy MedTech assets must budget for comprehensive actuarial diligence, regulatory navigation, and potentially £10-50 Million+ liability assumptions.

9. Options, Warrants and Dilution

Impact Magnitude: 5-15% dilution of equity value in venture-backed companies

Prevalence: 70-80% of venture-backed HealthTech companies

2026 Amplification: Increased warrant coverage in venture debt deals

Mechanism and Valuation

Stock options and warrants represent rights to purchase equity at predetermined strike prices, creating dilution when exercised by increasing the total shares outstanding and reducing existing shareholders' ownership percentages.

Stock Options (Employee Equity): Companies grant employees call options on company stock, typically vesting over 3-4 years. Upon exercise, employees purchase shares at the strike price (often the fair market value at grant date), and the company issues new shares. In M&A transactions, unvested options typically accelerate (vest immediately) upon change of control, and vested options are either cashed out (paid the difference between strike price and per-share deal price) or exchanged for acquirer equity.

Warrants: Common in European venture debt and growth financing, warrants grant lenders or investors the right to purchase equity at specified prices. Warrant coverage typically ranges from 5-15% of the loan amount, with 10-year exercise periods. Unlike employee options, warrant exercise results in cash proceeds to the company (from strike price payment), which increases total equity value, partially offsetting dilution.

Treasury Stock Method

The standard approach to calculating dilutive impact uses the treasury stock method:

Calculate Gross Shares from Exercise: If 1 million options/warrants with €5 strike prices are exercised, 1 million new shares are issued.
Calculate Proceeds: 1 million shares x €5 = €5 million cash to company.
Calculate Shares Repurchased: If the company's share price is €15, the €5 million proceeds could repurchase 333,333 shares at market price.
Net Dilution: 1,000,000 new shares – 333,333 repurchased shares = 666,667 net dilutive shares

This method assumes the company uses exercise proceeds to buy back shares, reducing net dilution.

Fully Diluted Equity Value

When calculating equity value in M&A, buyers determine "fully diluted" equity value, the value inclusive of all exercisable options and warrants. The per-share purchase price is calculated as:

Price per Share = Total Equity Value ÷ Fully Diluted Shares Outstanding

For a company with:

10 million common shares outstanding
2 million employee stock options (weighted average strike €3)
500,000 warrants (strike €5)
Total equity value €100 million
Implied share price €8 (before dilution)

Using treasury stock method with €8 share price:

Options: 2M new shares – (2M x €3 ÷ €8 = 750k repurchased) = 1.25M net dilution
Warrants: 500k new shares – (500k x €5 ÷ €8 = 312.5k repurchased) = 187.5k net dilution
Fully Diluted Shares: 10M + 1.25M + 187.5k = 11.4375M
Price per Fully Diluted Share: €100M ÷ 11.4375M = €8.74

While the headline equity value remains €100 million, the per-share value is diluted from a nominal €10 (if no options/warrants existed) to €8.74, reducing founder and early investor returns by 12.6%.

2026 Venture Debt Warrant Coverage

The proliferation of venture debt in European HealthTech has increased warrant overhang. Venture debt tranches of €5-20 million carry warrant coverage of 8-12%, translating to €400k-€2.4M in warrant value. For companies raising multiple venture debt facilities (initial tranche in 2023, additional funding in 2025), cumulative warrant dilution can reach 15-20% of equity value.

In-the-Money vs. Out-of-the-Money

Critical to dilution analysis is determining which options/warrants are "in the money" (strike price below acquisition price per share) versus "out of the money" (strike price above acquisition price). Only in-the-money instruments are dilutive, out-of-the-money options are worthless and excluded from fully diluted calculations.

In the current compressed valuation environment, companies that granted options at peak 2021 valuations now face scenarios where many employee options are underwater (out of the money), creating employee retention challenges but reducing dilutive impact on exit proceeds.

10. Normalised EBITDA Adjustments and Other Balance Sheet Items

Impact Magnitude: ±10-30% of EBITDA (affects valuation multiple application)

Prevalence: Universal in middle-market transactions

2026 Amplification: One-time regulatory compliance costs creating large adjustments

Purpose of EBITDA Normalisation

While not a direct component of the EV-to-equity bridge calculation (which adjusts from EV to equity value), EBITDA normalization fundamentally affects the enterprise value itself by adjusting the earnings metric upon which valuation multiples are applied.

Buyers and sellers negotiate "normalised" or "adjusted" EBITDA, stripping out one-time, non-recurring, and non-operational items to reveal sustainable, go-forward profitability. The delta between reported EBITDA and normalised EBITDA can shift valuations by 15-40%.

Common HealthTech EBITDA Adjustments

Owner/Director Compensation Normalisation: Private HealthTech companies often pay founders/directors below-market salaries (supplemented with dividends for tax optimisation) or above-market compensation. Normalized EBITDA adjusts to market-rate compensation for equivalent roles. For a €5M revenue digital health platform paying its CEO/founder €150k (when market is €250k), EBITDA increases by €100k upon normalisation.

Non-Recurring Professional Fees: Legal fees for one-off litigation, restructuring costs, previous M&A transaction expenses, and regulatory compliance costs (initial MDR/IVDR certification vs. ongoing surveillance) are added back to EBITDA.

In 2026, MDR/IVDR transition costs are a significant source of adjustment contention. Legacy MedTech companies incurring €500k-€2M in one-time technical file upgrades, clinical evaluation report development, and notified body submission fees argue for full add-backs, while buyers counter that ongoing compliance costs (annual surveillance audits, post-market clinical follow-up) are recurring operational expenses.

Stock-Based Compensation: While a non-cash expense, treatment of stock-based compensation varies. Sellers argue it should be added back (non-cash), while sophisticated buyers argue it represents real economic dilution and recurring talent retention costs, particularly in high-growth SaaS platforms with broad-based equity programs.

Discontinued Operations and Product Line Exits: Costs associated with product lines being sunset, markets exited, or facilities closed are adjusted out of EBITDA to reflect continuing operations.

One-Time Customer/Supplier Events: Loss of a major customer or supplier, one-time revenue from a contract not expected to repeat, or unusual warranty/product liability events are normalised.

Accrued Expenses and Other Balance Sheet Adjustments

Beyond EBITDA normalisation, several other balance sheet items create adjustments in the EV-to-equity bridge:

Accrued Expenses: Year-end bonus accruals, unused vacation liabilities, accrued regulatory fees, and other short-term obligations are negotiated. Sellers argue these are normal course liabilities included in working capital, while buyers may seek to exclude unusual or inflated accruals.

Intercompany Balances: In group structures with multiple subsidiaries, intercompany receivables/payables must be eliminated during consolidation to avoid double-counting. Failure to properly reconcile and eliminate intercompany balances creates phantom assets/liabilities distorting equity value calculations.

Deferred Tax Assets/Liabilities: Created during purchase accounting when assets are stepped up to fair value, deferred tax liabilities reduce equity value while deferred tax assets increase it (though buyers often discount DTA value given uncertainty of utilisation).

Capitalized Software Development Costs: SaaS platforms capitalizing internal software development costs must amortize these over 3-10 year periods. The accounting treatment affects both reported EBITDA (amortisation expense) and balance sheet assets, creating negotiation points around normalisation.

Conclusion and 2026 Outlook

The EV to equity value bridge in European HealthTech and MedTech has grown materially more complex in 2026, driven by the confluence of macroeconomic headwinds (elevated cost of capital, debt refinancing pressure), regulatory Darwinism (MDR/IVDR creating compliance moats and non-compliance crises) and market bifurcation (flight to quality favouring profitable, compliant platforms over high-burn ventures).

The ten factors examined, net debt, liquidation preferences, working capital adjustments, transaction costs, earn outs, escrows, minority interests, pension liabilities, dilution, and EBITDA normalisation, collectively determine the translation of headline enterprise values into actual cash distributed to founders and investors. In an environment where AI-enabled, MDR-compliant assets command 12x-15x EBITDA multiples while non-compliant or sub-scale assets face distressed exits at 3x-4x revenue, understanding these bridge mechanics is essential for maximising shareholder value.

For European HealthTech founders navigating this landscape, several imperatives emerge:

Proactively manage balance sheet health: Minimise net debt, optimise working capital, and address pension/unfunded obligations before entering sale processes
Negotiate protective liquidation preference terms: Resist participating preferences and 2x+ multiples that eliminate common equity value in moderate exits
Structure deferred consideration thoughtfully: Ensure earn outs have objective, measurable triggers and include protective covenants against buyer conduct that undermines milestone achievement
Budget for transaction costs: Reserve 2-4% of expected proceeds for professional fees and regulatory compliance verification
Understand fully diluted capitalisation: Model dilution from employee options and warrant coverage to set realistic per-share exit expectations
Secure regulatory compliance: MDR/IVDR certificates and reimbursement approvals are no longer administrative hurdles, they are primary determinants of asset value and bridge dynamics.

As the European HealthTech sector matures from venture-subsidised experimentation to industrial-scale commercialisation, the EV to equity bridge will remain the critical translation mechanism determining whether founders capture the value created through years of product development, regulatory navigation, and market building. Mastering its components is not optional, it is the difference between financial success and value leakage.

Nelson Advisors > European MedTech and HealthTech Investment Banking

Nelson Advisors specialise in Mergers and Acquisitions, Partnerships and Investments for Digital Health, HealthTech, Health IT, Consumer HealthTech, Healthcare Cybersecurity, Healthcare AI companies. www.nelsonadvisors.co.uk

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