Enterprise Value

Enterprise Value is the total value of a company, regardless of how it is financed. It includes the value for equity and debt providers together and shows what the operating business is worth overall. By deducting net debt, the value attributable to the owners can be derived from it. For listed companies it is usually calculated as market capitalisation plus financial liabilities less cash, supplemented by minority interests and other debt-like items such as underfunded pension obligations. Non-operating assets are deducted because they do not belong to the operating business.

The purpose of this construction is comparability: at the same valuation of the operating business, different net debt produces different equity values. Enterprise value multiples therefore make it easier to compare operating businesses. An important rule for using metrics follows: enterprise value pairs with pre-interest measures, meaning EBITDA, EBIT or revenue, while equity value pairs with post-interest measures such as net income in the price/earnings ratio. In transactions it is the customary negotiating figure, because it is independent of the accidental balance sheet position at the reference date. The reconciliation to the amount actually payable then follows through the equity bridge.

Most misunderstandings arise precisely in that reconciliation, because a high enterprise value combined with high debt means a considerably lower inflow for the sellers. What belongs to the operating business and what does not matters in practice, because non-operating assets such as a let property, a securities portfolio or a holding without operational connection must be valued separately and added to the result. Where their income is included in EBITDA, it is adjusted separately when valuing the operating business to avoid double counting. In the mid-market this point is frequently relevant, because private and business assets sit in one balance sheet and should be separated before a sale.