Enterprise Value vs. Equity Value: What's the Difference?

In an M&A transaction, you'll often encounter two different value concepts: Enterprise Value (EV) and Equity Value. They're often confused, but describe two different things.

Short answer: Enterprise value is the value of the operations themselves — independent of how the business is financed. Equity value is what the owner (the shareholder) actually ends up with, once you account for the business's debt and cash. The relationship is: Equity Value = Enterprise Value − Net Debt ± any Working Capital Adjustment.

Enterprise Value (EV)

Enterprise value expresses the value of the business's operations — that is, what the business itself is worth, regardless of whether it's financed with debt or equity. It's typically the figure you end up with when valuing a business based on EBITDA and a multiple, because the operating result (EBITDA) is also unaffected by the financing structure. See business valuation.

Equity Value

Equity value is the value that actually belongs to the owner/shareholder. Here you subtract the business's net interest-bearing debt — because debt needs to be repaid before the owner can withdraw the money — and add any cash. That's why equity value is typically (but not always) lower than enterprise value in businesses with debt, and can be higher in businesses with a large cash balance and little debt.

Why the difference matters

When a buyer says "I'll pay X kroner for the business", it's crucial to clarify whether this is enterprise value or equity value. A price negotiated as enterprise value needs to be adjusted for the business's debt and cash before you know what the owner actually gets paid at closing. See also net debt when selling a business and working capital adjustment, both of which help bridge the two figures.

A simple example

A business is valued at an enterprise value of DKK 20 million. The business has DKK 3 million in interest-bearing debt and DKK 1 million in cash — that is, net debt of DKK 2 million. Equity value therefore becomes 20 − 2 = DKK 18 million, which is the amount the owner can actually expect to be paid (before any working capital adjustment).