Glossary
Equity value
The value of the shares in a company: what the shareholders receive. It is derived from enterprise value by adding cash, subtracting debt and debt-like items, and adjusting for working capital against an agreed normal level.
In plain English
If enterprise value is the price of the business, equity value is the price of the shares. The difference is the company's financial position: cash makes the shares worth more, debt makes them worth less, and working capital above or below the agreed normal level adjusts the figure in either direction. Equity value is the total that is then paid, in whatever mix of cash, deferred, contingent or share consideration has been agreed.
Why it matters
Equity value is the number founders should focus on, because it is the one that reaches them. Two buyers offering the same enterprise value can arrive at very different equity values depending on what each treats as debt and what each considers normal working capital. The definitions are negotiated in the sale agreement and are worth as much attention as the headline.
What to watch for
- Debt-like items are a frequent source of surprise: accrued bonuses, unpaid tax, deferred income, lease liabilities and amounts owed to shareholders may all be treated as debt.
- Surplus cash may or may not be paid for in full. Some buyers cap the cash they will pay for, or treat part of it as working capital.
- The mechanism for finalising the figure, locked box or completion accounts, determines when the equity value is known with certainty.
- Equity value is then shared among shareholders according to their holdings and any preferences or options in place.
Written by Motion Advisory Partners as general guidance. Definitions depend on the agreement.