Summary
Summary
- Enterprise value (EV) is the value of the operating business, independent of how it is financed. Valuation multiples such as EV/EBITDA or EV/revenue produce an enterprise value.
- Equity value is what the owners of the shares receive: enterprise value plus cash, minus debt and debt-like items, adjusted for working capital against a normal level.
- Most private deals are agreed on a "cash-free, debt-free" basis with a "normal level of working capital". Those words are what turn enterprise value into equity value.
- Debt-like items are where the money moves: deferred revenue, unpaid taxes, accrued bonuses, leases, deferred consideration from past deals and more can all be deducted.
- Owners should agree the definitions of cash, debt and working capital in the letter of intent, not leave them to the purchase agreement.
01 · Guides
Two values, one business
Pricing the operations vs paying the shareholders.
Enterprise value answers the question "what is the business worth as an operating machine?" It ignores how the company is funded: whether it holds lots of cash or carries a large loan, the operations are worth the same. That is why multiples are applied to enterprise value: EV/EBITDA, EV/revenue, EV/ARR.
Equity value answers "what do the shareholders get?" A buyer acquiring the shares takes over the cash and the debt inside the company. So the buyer pays more for spare cash it inherits and less for debt it will have to repay.
| Row | Enterprise value | Equity value |
|---|---|---|
| Measures | Value of operations | Value to shareholders |
| Affected by financing? | No | Yes |
| Used with | EV/EBITDA, EV/revenue, EV/ARR multiples | Price per share, P/E ratio |
| In an LOI | Usually the headline number | The amount actually paid for the shares |
| In a public company | Market cap plus net debt and other claims | Market capitalisation |
02 · Guides
The bridge from enterprise value to equity value
Add cash, subtract debt and debt-like items, adjust working capital.
The simplest form is: Equity value = Enterprise value + cash − debt. In real transactions the bridge has more lines, and each is negotiated.
- 01Plus cashFree cash in the business at completion. "Trapped" cash, customer deposits and cash needed to run operations are often excluded.
- 02Minus financial debtBank loans, shareholder loans, overdrafts, accrued interest and break costs on repaying them.
- 03Minus debt-like itemsObligations that behave like debt even if not called debt (see below).
- 04Plus or minus working capitalDifference between actual working capital and the agreed normal level, the peg.
- 05Minus transaction costs borne by the companyWhere the seller's deal fees are paid out of the company, they reduce equity value.
Common debt-like items
| Item | Why buyers deduct it | Seller counter-argument |
|---|---|---|
| Unpaid corporate tax for past periods | Relates to profits the seller earned | Usually accepted |
| Accrued but unpaid bonuses and commissions | Earned before completion, paid after | Accepted if genuinely accrued for past periods |
| Deferred revenue (in SaaS) | Cash collected; the buyer must deliver the service | It is part of normal working capital, and costs to deliver are lower than the cash |
| Finance leases | Function like borrowing | Accounting treatment varies; operating leases may be excluded |
| Deferred consideration or earnouts from past acquisitions | Money owed to former sellers | Usually accepted |
| Underfunded pensions | Long-term liability | Amount and assumptions are often debated |
| Capex backlog or overdue maintenance | Spending needed to keep the business running | Should be reflected in the price, not deducted |
03 · Guides
A worked example
Hypothetical numbers for a software business.
A buyer offers an enterprise value of $20 million for a software company, cash-free and debt-free with a normal working capital level of $0.5 million. At completion the company has the following balances. All figures are hypothetical.
| Line | Amount | Running total |
|---|---|---|
| Enterprise value | $20.0M | $20.0M |
| Plus free cash | +$1.5M | $21.5M |
| Minus bank loan and accrued interest | −$2.0M | $19.5M |
| Minus unpaid prior-year tax | −$0.3M | $19.2M |
| Minus accrued bonuses for last year | −$0.2M | $19.0M |
| Working capital $0.3M vs $0.5M peg | −$0.2M | $18.8M |
| Equity value paid for shares | — | $18.8M |
The owner also pays their own advisers and tax from that $18.8 million, and some of it may be deferred, escrowed or rolled over. Our M&A transaction costs guide and the LOI value decoder take the next steps from equity value to net proceeds.
04 · Guides
When the bridge is set
Locked box vs completion accounts.
Cash, debt and working capital change daily. The deal must pick a date for measuring them. In a locked box deal the bridge uses a past balance sheet and the equity price is fixed at signing. With completion accounts the bridge is estimated at completion and trued up afterwards. Our guide to locked box vs completion accounts compares the two.
05 · Guides
What owners should negotiate
Definitions are worth money.
- Put "cash-free, debt-free, normal working capital" in the LOI, with a short list of what counts as debt
- Agree how deferred revenue, leases, tax and bonuses are treated before exclusivity
- Agree the working-capital peg method (trailing average, seasonality) early. The NWC peg calculator helps
- Clarify whether transaction costs paid by the company reduce the price
- Check how earnouts and deferred payments are stated: as enterprise value or on top of it
For the earnings side of valuation, see EBITDA vs net income vs cash flow, and for software companies, ARR vs revenue. The SDE and EBITDA calculator estimates enterprise value from earnings.
Reference
Frequently asked questions
What is the difference between enterprise value and equity value?
Enterprise value is the value of the operating business regardless of financing. Equity value is what shareholders receive: enterprise value plus cash minus debt and debt-like items, adjusted for working capital.
What does cash-free, debt-free mean?
The seller keeps the free cash and repays the debt, or the price is adjusted for them, so the buyer pays the enterprise value for a business with neither spare cash nor borrowings.
What are debt-like items?
Obligations that behave like debt, such as unpaid past taxes, accrued bonuses, deferred consideration from earlier acquisitions, finance leases and sometimes deferred revenue.
Is the headline price in an LOI enterprise value or equity value?
Usually enterprise value. The letter of intent should state the basis so both sides know how the equity price will be calculated.
Why can equity value be higher than enterprise value?
When the company holds more free cash than it has debt and debt-like items, equity value exceeds enterprise value.
Is deferred revenue debt in a SaaS acquisition?
It is negotiated. Buyers may treat it as debt or a debt-like item; sellers argue it belongs in working capital. Treatment can move the price significantly.
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About the analyst
Joash Boyton
Founder and Managing Director, Acquiry · Melbourne, Australia · Global coverage
Joash Boyton is the Founder and Managing Director of Acquiry, an M&A firm built around buy-side acquisition origination. He works with strategic acquirers, private equity firms and advisers supporting buyers on mandates from USD $1M to $500M. Most of the work sits in technology, SaaS, fintech, payments, gaming and digital assets, and it is not limited to them: any sector, any market.