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Enterprise value vs Equity value

In M&A transactions, you often hear of EV or enterprise value when company transactions are reported. But on the stock market you only hear of share prices or market capitalisation, which represent equity value.

So what is enterprise value and how does it differ from equity value?

Put simply, enterprise value = equity value + debt – cash.

As a result, you can have two identical companies that have the same enterprise value, but may not have the same equity value, because of the existence of debt or excess cash on either of their respective balances sheets. The more the value of debt, the less the value of equity. And the more cash on the balance sheet, the greater the value of equity.

In M&A transactions, we try to neutralise the impact of debt or excess cash on a balance sheet, when assessing the real value of bids for the business. We do this by computing a value of the business that excludes debt and cash on the balance sheet.

We call this value the value of the enterprise, or enterprise value.

In deals, as there’s no such legal instrument to transact with that singularly represents enterprise value, as we can only transact using the shares of a business.

So your M&A advisor will normally ask for sellers to present their bid to be in the form of the enterprise value of the business. This is because enterprise value is a metric that’s easy to compare between bids.

But as most transactions are undertaken by a transfer of share ownership, your M&A advisor and (legal representative when drafting share sale documentation) will need to adjust the enterprise value to accommodate balance sheet debt (adjust downwards) and balance sheet excess cash (adjust upwards) when finally calculating the value of all the shares of the business.

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