Enterprise Value vs Equity Value: What Does the Seller Receive?
A buyer tells you they value your company at €12 million. It is natural to hear that as the amount that will reach your account. In most private company deals it is not. The figure in the offer is usually the enterprise value. What you are paid for your shares is the equity value, and the gap between the two can be large.
This article explains what each term means, how buyers move from one to the other, and what to check before you sign a letter of intent.
What enterprise value means
Enterprise value is the value of the business itself: its operations, customers, team and ability to generate profit. It does not depend on how the company is financed. Two identical businesses, one funded with bank loans and one with no debt at all, should have roughly the same enterprise value.
That is why buyers usually start here. They take normalised EBITDA or expected cash flow, apply a multiple or a discounted cash flow model, and arrive at a headline number. That number normally rests on two assumptions: the company is handed over cash free and debt free, and it has a normal level of working capital on the day of closing.
What equity value means
Equity value is what the shares are worth to their owners. It is the enterprise value after the balance sheet has been taken into account. In its simplest form:
Equity value = enterprise value, plus free cash, less debt and debt-like items, plus or minus the working capital adjustment.
Cash in the company increases what you receive. Debt reduces it, euro for euro. If the company holds less working capital at closing than the agreed normal level, the price goes down. If it holds more, the price goes up.
A worked example
Take a hypothetical company with normalised EBITDA of €2.0 million. A buyer offers a multiple of 6, so the enterprise value is €12.0 million. On the closing date the balance sheet shows:
free cash of €1.0 million;
a bank loan of €2.5 million;
equipment leases of €0.5 million;
a loan from the owner to the company of €0.4 million;
corporate tax for the past year, still unpaid, of €0.3 million;
staff bonuses earned but not yet paid of €0.1 million;
working capital of €1.8 million, against an agreed normal level of €2.0 million.
The bridge from enterprise value to equity value:
Enterprise value (6 × €2.0m): €12.0m
Plus free cash: €1.0m
Less bank loan: €2.5m
Less equipment leases: €0.5m
Less owner's loan to the company: €0.4m
Less unpaid corporate tax: €0.3m
Less unpaid bonuses: €0.1m
Less working capital shortfall (€1.8m against €2.0m): €0.2m
Equity value: €9.0m
A €12 million offer has become €9 million for the shares. Nothing unusual has happened. The buyer simply applied the assumptions that were in the offer from the start.
Two details matter for the owner. First, the owner's loan of €0.4 million is deducted from the equity value, but it is usually repaid to the owner at closing, so the owner still receives that money, just under a different heading. Second, €9.0 million is still not the amount that reaches your personal account. Part of the price may be held in escrow or paid later, and deal costs and personal tax come off as well.
Where sellers lose money in the bridge
The arithmetic is simple. The definitions are where the negotiation happens.
Debt-like items. Bank loans are clearly debt. Other items are less clear: unpaid tax, accrued bonuses, deferred income, customer deposits, pension obligations, transaction costs, legal claims. A buyer will want to treat them as debt, because each one reduces the price euro for euro. A seller will often argue that some of them belong in working capital. Every item needs a reasoned position.
Which cash counts. Not all cash on the balance sheet is free. Buyers often exclude cash needed for daily operations, deposits held as guarantees and cash that cannot easily be taken out of the company. If you expect to be paid for €1.0 million of cash, check how much of it the buyer actually counts.
The normal level of working capital. The target is negotiated, often as an average of recent months so that seasonality is taken into account. A target set too high creates a shortfall at closing and lowers the price. It deserves the same attention as the multiple.
Completion accounts or locked box. With completion accounts, the bridge is calculated on the closing date and adjusted afterwards. With a locked box, the balance sheet is fixed at an earlier date and the seller promises that no value leaves the company in between. The mechanism changes when and how the numbers are agreed, not the logic behind them.
What to check before you sign a letter of intent
Ask whether the offer is enterprise value or equity value. If it is enterprise value, ask the buyer to show the expected bridge to equity value.
Prepare your own net debt list. Go through the balance sheet with your accountant and list everything that could be treated as debt or debt-like, before the buyer's due diligence does it for you.
Analyse working capital month by month. Know your normal level and its seasonality, so you can discuss the target with data.
Compare offers on the same basis. A higher enterprise value with a strict debt definition can pay less than a lower one with a fair definition.
Put the key definitions into the letter of intent. Cash, debt, debt-like items and the working capital target are much easier to agree early than in the final weeks.
The bottom line
Enterprise value is the price of the business. Equity value is the price of your shares. The bridge between them is not a formality: it can take a significant part of the headline price, and most of it is decided by definitions agreed early in the process. Owners who model the bridge before the first offer can compare buyers properly and negotiate from facts.
At Conclave Partners we help owners of mid-sized companies prepare for a sale and compare offers on what they actually receive, working on a success fee basis. If you are thinking about selling in the next few years, a short conversation about your own bridge is a good place to start.