Enterprise value describes what the ongoing business is worth, as if the company were debt-free and had no excess cash. In practice it is usually derived using multiples, for example a multiple of adjusted EBITDA. Alternatively, a discounted cash flow or capitalised earnings method is used.
Important for sellers: enterprise value is not the amount that lands in your account. Offers in a letter of intent often state an enterprise value. Financial debt and debt-like items are deducted from it, and free cash is added. Only then does the equity value result, i.e. the purchase price for the shares.
Because enterprise value is independent of financing, it allows companies with different levels of debt to be compared. What matters for the seller is which items count as debt in the purchase agreement. Pension provisions, lease liabilities or tax liabilities are frequently negotiated.
Example
Hypothetical example: A software company achieves adjusted EBITDA of €2.0 million. The buyer offers 6x, i.e. an enterprise value of €12.0 million. With net financial debt of €3.0 million, the seller receives €9.0 million for the shares.
Enterprise value vs. equity value
| Feature | Enterprise value | Equity value |
|---|---|---|
| What is valued | Operating business | Equity (shares) |
| Financing | Not taken into account | Taken into account |
| Typical use | Offer, multiple | Purchase price in the contract |
| Calculation | EBITDA x multiple | Enterprise value minus net financial debt |