What is the difference between enterprise value and equity value?
Enterprise value is what the operating business is worth. Equity value is what reaches you — after debt is deducted and surplus cash added. The gap is often six figures.
Enterprise value is what the operating business is worth, debt-free and cash-free. Equity value is what actually reaches you once debt is deducted and surplus cash added. Almost every headline multiple produces the first, and almost every owner is thinking about the second.
The bridge between them
- Enterprise value
- €2,400,000
- 5× normalised EBITDA
- Less debt
- −€380,000
- loans, leases, tax owed
- Plus surplus cash
- +€120,000
- above the working capital peg
Equity value here is €2.14M — and that is before advisory fees and before tax.
What counts as debt
More than the bank loan. Finance leases, outstanding tax, deferred consideration from an earlier acquisition, shareholder loans, and often the pension deficit. Buyers define this broadly and the definition is negotiated, sometimes for weeks.
The item owners overlook
Surplus cash is only what sits above the working capital peg — the normal level of working capital the buyer expects to come with the business. Cash needed to run the operation is not yours to take, and the peg is usually set as a twelve-month average.
How to value a business includes the bridge as a step; common valuation mistakes covers the peg specifically.