Enterprise value

In plain English

When a buyer offers "six times EBITDA", or a headline figure for the business, they are usually describing enterprise value, often shortened to EV. It is the value of the operation itself. It is not what the shareholders receive. To get to that figure, the equity value, the enterprise value is adjusted for cash, debt, items that behave like debt and the difference between actual and normal working capital.

The bridge from enterprise value to equity value

In general terms: start with enterprise value, add cash, subtract debt and debt-like items, and adjust for working capital against an agreed normal level. The result is equity value. In practice, every element of that bridge is defined in the sale agreement and negotiated. What counts as debt (for example, deferred tax, accrued bonuses, unpaid dividends or lease liabilities), what counts as cash and what normal working capital is can each move the number materially. The bridge depends on the agreed transaction mechanics, whether a locked box or completion accounts.

Why it matters

Founders sometimes hear a headline enterprise value and assume it is the cash they will receive. It is never automatically so. A business with debt or a working capital shortfall at completion will deliver less to shareholders than the headline; one with surplus cash may deliver more. Understanding the bridge early avoids disappointment late.

What to watch for

• Ask every buyer how they intend to move from enterprise value to equity value, and what they will treat as debt.
• Agree the normal working capital level with care; it is one of the most contested elements.
• Enterprise value is also the figure an EBITDA multiple describes.

Written by Motion Advisory Partners as general guidance. Definitions depend on the agreement.