Enterprise Value

Definition

Enterprise value (EV) is what the whole operation is worth to all capital providers combined: equity holders and lenders alike. It is the natural output of a multiple valuation: multiply normalised EBITDA by a sector EV/EBITDA multiple and you get the EV.

EV is not what the seller receives. To move from EV to the price for the shares (equity value), you subtract net financial debt and adjust for any deviation from normal working capital. That is why SME deals are almost always negotiated "debt-free, cash-free": the parties agree the EV first, and the debt position at closing determines what the seller actually takes home.

Worked example

A Ghent wholesaler is valued at 4.0x EV/EBITDA on €750k normalised EBITDA → EV = €3.0m. At closing it carries €400k bank debt and €120k surplus cash. Equity value = 3.0 − 0.4 + 0.12 = €2.72m, before the working-capital adjustment.

When it matters

EV is the figure you compare against sector multiples and other deals: equity value is not, because it depends on incidental debt and cash. A high-EV but heavily-indebted business nets the seller less than a debt-free business with a lower EV.

Frequently asked

What is the difference between enterprise value and equity value?

Enterprise value (EV) is the value of the whole operation to all capital providers; equity value is what remains for shareholders after deducting net debt. EV/EBITDA multiples produce EV; the sale price of the shares is equity value.

Why do buyers negotiate "cash-free, debt-free"?

It decouples the price from the incidental debt and cash position at closing. The parties agree the enterprise value; the seller keeps surplus cash and repays debt, or the price is adjusted accordingly.

Is surplus cash part of enterprise value?

No. Operating cash needed to run the business stays in; surplus cash is treated as a debt-like item and increases equity value on top of the EV.