Enterprise value vs equity value, explained simply
The price is usually agreed on an enterprise value basis, and the seller receives equity value. Diligence on net debt, debt-like items and working capital therefore determines how much of the headline price the seller actually receives.
Sellers who focus on the headline figure are often surprised by the gap.
From enterprise value to equity value
IllustrativeAlder Creek Manufacturing, $ millions
The seller receives $28.6 million against a headline price of $36.8 million.
Calculation
FormulaEquity value = enterprise value − debt − debt-like items + cash ± working capital adjustment
Worked example
| Alder Creek, $ millions | Amount |
|---|---|
| Enterprise value (8.0 × $4.6m) | 36.8 |
| Less: term loan, line of credit and finance leases | (7.1) |
| Add: cash | 1.2 |
| Less: debt-like items | (2.1) |
| Less: working capital shortfall against the peg | (0.2) |
| Equity value paid to the seller | 28.6 |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Same value, different proceeds
| $ millions | Company A | Company B |
|---|---|---|
| Enterprise value | 36.8 | 36.8 |
| Net debt | 0 | 10.0 |
| Equity value | 36.8 | 26.8 |
Why it matters in a deal
Sellers often focus on the headline price, while diligence on net debt, debt-like items and working capital decides how much they actually receive.
Red flags
- Sellers expecting the headline price as cash in hand
- Debt-like items not discussed until late in the process
Frequently asked questions
What is the difference between enterprise value and equity value?
Enterprise value is the value of a company’s entire operating business regardless of how it is financed. Equity value is what remains for shareholders after debt and debt-like items are settled and cash is added.
Which value is the multiple applied to?
EBITDA multiples give enterprise value.
Why do buyers price on enterprise value?
It allows businesses to be compared regardless of how each is financed.