Enterprise value vs equity value
How a company’s price is quoted for the whole business, enterprise value, and why the shareholders get less: equity value, net debt and cash-free, debt-free deals.
The price is for the business
Companies are priced as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Ten times 50 is 500. That is the enterprise value: the price of the whole business, however it happens to be financed.
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EBITDA is used because it ignores how the company is funded. Interest depends on the owner’s debt, and the new owner will bring its own. Two pet-food makers with the same EBITDA can be compared, whatever their bank balances look like.
The multiple is the haggle. Gus says 10×. A buyer looks at what similar companies sold for, how fast this one grows, and how much of the 50 is real. That last question is Act II.
The house and the mortgage
Sell a $400,000 house with $250,000 left on the mortgage and you do not pocket 400,000. The bank is repaid first. You keep 150,000: your equity. A company works the same way.
| Sale price | 400,000 |
| Mortgage repaid | (250,000) |
| Your equity | 150,000 |
Equity value
Biscuit Barrel owes 80 and holds 20 of cash, so its net debt (debt minus cash) is 60. Enterprise value less net debt is the equity value: 500 − 60 = 440. That is what Gus and the other shareholders receive.
| Enterprise value (10 × 50) | 500 |
| Debt repaid | (80) |
| Cash in the company | 20 |
| Equity value | 440 |
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Cash counts in the seller’s favour. Either the seller takes it out at closing, or it stays in the company and the buyer pays for it dollar for dollar. Gus ends up 20 richer both ways, which is why cash is netted against the debt.
Cash-free, debt-free
Most private deals are agreed cash-free, debt-free: the buyer pays the enterprise value, the debt is repaid out of it at closing, and the seller keeps the cash. The headline says 500. Gus’s check says 440.
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The fights come later, over what counts as debt. A bank loan clearly does. Unpaid bonuses, an overdue tax bill or a customer deposit can be argued either way, and every dollar called debt comes off the seller’s check.
Key terms
- Equity value
- Enterprise value minus net debt. What the shareholders get when the company is sold.
- Cash-free, debt-free
- The usual basis for a private sale: the buyer pays enterprise value, the debt is repaid from it and the seller keeps the cash.
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