M&A Glossary
Enterprise value: the value of the business itself
Enterprise value is the value of the whole business regardless of who financed it. It covers both equity and debt. It is the number produced when EBITDA is multiplied by a multiple, and it is not the amount that reaches the seller’s account.
How it is calculated
Enterprise value = equity value plus interest-bearing debt less cash. In transactions the calculation usually runs the other way: enterprise value is set as EBITDA times a multiple, and net debt is then deducted to reach the amount for the owner.
Enterprise value answers the question of what the business is worth. Equity value answers the question of what the seller receives.
Why the multiple applies here
Comparing two companies with identical operating results, one with a loan and one without, you want to compare the businesses rather than their financing. EBITDA is measured before interest, so its natural counterpart on the value side is a measure that includes debt. That is why an EBITDA multiple gives enterprise value, not the price to the owner.
From enterprise value to price
Starting point
- normalised EBITDA
- times sector multiple
- = enterprise value
Less debt
- loans and borrowings
- finance leases
- shareholder loans
Plus cash
- bank balances
- deposits
- less operating cash
Adjustment
- working capital versus target
- = equity value
Frequently asked
Questions about enterprise value.
How does enterprise value differ from equity value?
Enterprise value includes debt, equity value does not. Moving from one to the other means deducting debt, adding cash and adjusting working capital.
Does cash in the company increase the price?
In principle yes, provided it is not needed to run the business. Operating cash the company must hold to make payments usually stays in the company and is not added to the price.
Does leasing count as debt?
Finance leases usually do. Operating leases are often negotiated and depend on whether the buyer treats the asset as essential to the business.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge