Enterprise value

What it means

Enterprise value is the value of the whole business to all investors, owners and lenders alike. It is calculated as equity value plus net debt, meaning loans and bonds less cash. It expresses what it would cost to buy the entire business, including its debts.

EV is independent of how the business is financed, so it allows companies with different levels of debt to be compared. It is used in the EV/EBITDA multiple, the most common quick method of business valuation by comparison with similar deals.

The difference between EV and equity value matters to the seller: a company valued at 10 million euros with 3 million of debt and 1 million of cash has an equity value of 8 million. That amount, after further adjustments, is what the owners receive for their shares.

How it works in practice

In a sale, EV is agreed first, often as an EBITDA multiple or the result of a DCF model. The price for the shares is then derived by deducting debt, adding cash and adjusting for any deviation of working capital from its normal level.

Deals are usually agreed on a cash-free, debt-free basis. The buyer pays for the operating business, and the seller keeps the cash and repays debts from the purchase price. Disputes often arise over what counts as debt, such as unpaid taxes, provisions or leases.

In a share deal, the shares are bought together with all liabilities, so the debt deduction is crucial. In an asset deal, assets are bought and liabilities are assumed only as agreed, so the price calculation differs.

What to watch out for

The definition of net debt in the purchase agreement determines the real price. The seller should push for a narrow definition and the buyer for a broad one, and ambiguity leads to disputes in the post-completion settlement.

EV rests on forecasts and comparable transactions, which change with markets and interest rates. The same company can be worth very different amounts at different times, so it pays to time a sale well and back the figures with high-quality accounts.