Equity Value

Equity Value is the part of the company value that belongs to the shareholders. It is calculated by deducting net debt from Enterprise Value. It corresponds to the amount that the owners receive for their shares in a sale.

In practice the calculation is longer, because alongside financial liabilities and cash, debt-like items and a working capital correction against the agreed normal level also enter the equity bridge. For listed companies equity value corresponds in principle to market capitalisation, meaning share count multiplied by price, with options and convertible instruments taken into account on a fully diluted basis. Consistent pairing of metrics matters: equity value goes with post-interest measures such as net income in the price/earnings ratio or the book value of equity, while EBITDA, EBIT and revenue belong with enterprise value. Two companies with identical operations can have the same enterprise value and entirely different equity values if one is heavily indebted. That is exactly where the practical significance for sellers lies: a high negotiated enterprise value says little about what actually arrives until debt and debt-like items are settled.

Where several share classes with preferential rights exist, equity value is moreover not distributed proportionally but according to the agreed distribution waterfall. It is advisable in conversations and documents always to state expressly which level a figure refers to, because misunderstandings here are the most common cause of later disappointment: a seller who reads an enterprise value as their own proceeds experiences a substantial correction at the equity bridge. Showing both figures side by side in offers and disclosing the reconciliation has proven itself.