M&A Glossary
Equity value: what the seller actually receives
Equity value is the value of the shares, the amount due to the owner for the company. It comes from enterprise value after deducting debt, adding cash and adjusting working capital. It is the number in the agreement, not the number in the presentation.
Equity value versus enterprise value
The gap between these two figures is the most common source of disappointment for owners. A seller hears a multiple of six on EBITDA of five million and calculates thirty million. If the company carries eight million of debt and two million of cash, twenty-four million remains, before the working capital adjustment and before tax.
Enterprise value
- value of the whole business
- includes debt
- result of the EBITDA multiple
- the number quoted in conversation
Equity value
- value of the shares
- after net debt
- after the working capital adjustment
- the number in the agreement
What reduces equity value
Beyond bank borrowings, debt usually captures finance leases, shareholder and related-party loans, overdue public liabilities, undeclared dividends, provisions for disputes and settled severance obligations. Each of these is agreed in the contract, which is why the definition of net debt is often longer than the description of the price mechanism itself.
Frequently asked
Questions about equity value.
How do you calculate equity value?
Enterprise value less interest-bearing debt plus cash, adjusted for the difference between working capital at closing and the agreed target.
Is equity value what I receive in hand?
Not quite. Part may be held in escrow or settled through an earn-out, and tax comes after that. The amount paid at closing is therefore usually lower than the equity value stated in the agreement.
Can equity value be negative?
It can, if debt exceeds enterprise value. Such a company can still be sold, but the transaction takes a different form, for example assumption of debt instead of payment for shares.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge