Enterprise value, plainly
Enterprise value is the value of the business as an operating entity, independent of how it is financed. It answers: what is this business worth to whoever owns it, regardless of whether the current owner borrowed to build it or funded it from profits?
Equity value is what is left for the owner after the business's debts are settled and its surplus cash is taken out. Enterprise value is the price of the machine. Equity value is what lands in your account.
The bridge from enterprise value to your proceeds
Almost every offer is expressed as enterprise value on a cash-free, debt-free basis. Getting from there to what you receive involves several steps, each of which can move six figures.
| Step | Item | Amount |
|---|---|---|
| Start | Enterprise value (offer) | $2,000,000 |
| Add | Cash and equivalents retained | $140,000 |
| Less | Interest-bearing debt repaid | ($380,000) |
| Less | Capital leases and equipment finance | ($62,000) |
| Adjust | Working capital below target | ($55,000) |
| Less | Transaction costs — legal, accounting, broker | ($118,000) |
| Less | Escrow held back 12 months | ($100,000) |
| Cash at closing | Before tax | $1,425,000 |
An owner told 'we'll pay two million' hears two million. The bridge above turns that into $1,425,000 at closing, before any tax — and $100,000 of it is contingent on no indemnity claims. Nothing here is unusual or unfair. It is simply what the offer always meant, and the time to understand it is before you accept, not during closing.
What cash-free, debt-free actually means
This phrase appears in nearly every term sheet and is frequently misunderstood. It means the seller keeps the cash in the business and pays off the debt out of the proceeds. The buyer receives the business with neither.
- You keep the cash. It is not part of what is being bought, so it is added to your proceeds.
- You repay the debt. Bank loans, equipment finance, shareholder loans and capital leases come out of the price.
- Working capital is separate, and it is not cash. Receivables and inventory convey with the business at an agreed level.
- Accrued liabilities behave like debt. Unpaid taxes, deferred revenue and accrued vacation are commonly treated as debt-like items and deducted.
The debt line is obvious. What counts as debt-like is negotiable, and buyers push to expand it: deferred revenue, accrued bonuses, unfunded pension, a disputed tax assessment, even deferred maintenance. Each item moved into that column reduces your proceeds dollar for dollar. Get the definition agreed in the term sheet, not in the definitive agreement.
The working capital adjustment
The buyer expects to receive a business with enough working capital to operate normally. If you deliver less than the agreed target, the price falls; more, and it rises. The mechanism is fair. The disputes come from how the target is set.
A target is usually a trailing twelve-month average, which handles seasonality. A business that collects slowly in December and quickly in June needs a target that does not punish whichever month closing lands in.
The number itself, calculated from a stated period. The accounting policies used to compute it, so both sides measure the same way. The dispute mechanism, naming an independent accountant and who pays. Without all three, a post-closing true-up becomes a negotiation you conduct after you have lost your leverage.
Which value a multiple applies to
Multiples are quoted against enterprise value, not equity value. A business at 4.5× EBITDA means enterprise value is 4.5 times EBITDA — the bridge still has to be walked afterwards.
| Multiple | Applies to | Common use |
|---|---|---|
| EV / EBITDA | Enterprise value | The standard for companies with management in place |
| EV / Revenue | Enterprise value | Loss-making or early-stage businesses |
| SDE multiple | Usually a whole-business price | Owner-operated small businesses |
| P / E | Equity value | Public companies; rare in private deals |
Two offers at '4.5 times' can mean very different things if one is EV and the other is a whole-business price including assumed debt. Ask which value the multiple applies to and what is assumed in it before treating two numbers as comparable.