A valuation metric representing the total value of a business, including both equity and net debt, reflecting what it would cost to acquire the entire company on a cash-free and debt-free basis.
In M&A, the question “what is this company worth?” has two very different answers depending on who you ask and which metric you use. Enterprise Value is the one that answers from the perspective of a buyer seeking to acquire the entire business: how much would it cost to buy both the equity and take over the debt, after deducting available cash.
Enterprise Value (EV) is a valuation metric that represents the theoretical cost of acquiring an entire company. Unlike Equity Value (which reflects only the value of shareholders’ stakes), EV includes both the equity value and the net debt of the business.
The basic formula is:
Enterprise Value = Equity Value + Net financial debt
Where:
Or, in more detail:
EV = Equity Value + Financial debt + Minority interests + Preferred shares - Cash and equivalents
Enterprise Value is the basis for the most widely used valuation multiples in M&A (EV/EBITDA, EV/Revenue) because it is independent of the company’s capital structure. This allows comparing companies with different leverage levels on an equal footing.
Example: two companies with the same business and identical operating results may have very different market capitalisations if one carries debt and the other does not. But their Enterprise Value will be similar, because it reflects the value of the operating business regardless of how it is financed.
The relationship between Enterprise Value and Equity Value is known as the “equity bridge” and is one of the most important concepts in acquisition negotiations:
| Item | Example |
|---|---|
| Enterprise Value (agreed) | 30M |
| - Financial debt | -8M |
| + Cash (excess) | +2M |
| - Debt-like provisions | -1M |
| + Working capital surplus/deficit | +0.5M |
| = Equity Value (price) | 23.5M |
In practice, the negotiation of a company acquisition typically agrees on an Enterprise Value first (usually as an EBITDA multiple) and then calculates the Equity Value — which is what the buyer actually pays the seller — through the bridge adjustments.
If similar companies in the sector trade or have been sold at an EV/EBITDA multiple of 7x, and the target company has an EBITDA of 3 million:
EV = 7 x 3M = 21M
A DCF model yields Enterprise Value directly (when free cash flow to the firm, FCFF, is discounted at the WACC).
EV = Market capitalisation + Net debt + Minorities + Preferred shares
The distinction between Enterprise Value and Equity Value is the source of the most frequent (and costly) misunderstandings in M&A negotiations:
If this distinction is not clarified from the outset of the negotiation, the parties may be discussing very different figures while believing they are in agreement.
A food company in southern Spain has 45 million in revenue and a normalised EBITDA of 5 million. An industrial buyer offers an Enterprise Value of 35 million (7x EBITDA).
The bridge to Equity Value:
Equity Value = 35 - 6 + 1.5 - 0.8 = 29.7M
The seller will receive 29.7 million. The 6 million in debt will be repaid at closing. The working capital adjustment will be settled within 90 days of closing pursuant to the completion accounts mechanism agreed in the contract.
Enterprise Value represents the total business value (equity + net debt), while Equity Value is what belongs exclusively to the shareholders. The bridge formula is: Equity Value = Enterprise Value - Net financial debt. In negotiations, the EV is typically agreed first and the price (Equity Value) is then calculated through adjustments.
Because Enterprise Value is independent of the capital structure. It enables comparing companies with different leverage levels using multiples such as EV/EBITDA. If the equity price were used, comparisons would be distorted by each company’s financing decisions.
Not directly. Cash is subtracted when calculating net debt, which is then added to Equity Value to arrive at Enterprise Value. Cash reduces EV because a buyer who acquires the company also acquires its treasury, which in practice reduces their net outlay.
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