Enterprise value, equity value and your shares

A headline offer for a business is not always the amount shareholders will receive. Understanding enterprise value, equity value and the value of your own shares helps make the terms of an offer clearer.

These terms are connected. The important question is what a particular figure includes and how the proposed transaction moves from that figure to the consideration payable.

Enterprise value: the underlying business

Enterprise value refers to the value of the operating business before adjustments for its financing position. In a sale, a headline enterprise value is often quoted on a cash-free, debt-free basis, assuming a normal level of working capital.

It is not simply the total value of everything the company owns. The valuation approach will depend on the business and may consider earnings, cash generation, assets, prospects and risk.

Equity value: the value attributable to shareholders

Equity value reflects the value of the shares after relevant adjustments to enterprise value. In a typical transaction, agreed cash or cash-like items may be added, debt or debt-like items deducted, and working capital adjusted against an agreed level.

The precise treatment depends on the transaction documents. The definitions and calculation matter just as much as the headline figure.

What does cash-free, debt-free mean?

Cash-free, debt-free describes the basis of the headline valuation. It does not mean that cash and debt have no effect on the seller’s proceeds.

The treatment of cash, borrowings and other agreed items must be established as part of the transaction. Buyers and sellers also need to agree the working capital the business requires to continue trading.

Share value: understanding your interest

Share value usually refers to the value attributable to a particular shareholding. It is therefore related to equity value, rather than being a separate value to add to enterprise value.

Where shares have different rights, or only part of a company is being sold, the value of an individual holding may require separate consideration. It should not automatically be assumed to equal a simple percentage of a headline enterprise value.

The amount paid and when it is received

The agreed value of the shares and the cash received at completion may differ. An offer may include deferred payments or amounts dependent on future performance.

Personal tax and transaction costs can also affect what a seller ultimately retains. These should be considered with your advisers when assessing whether a proposal meets your objectives.

Questions to ask about an offer

Before comparing offers, establish whether each figure represents enterprise value or equity value, what adjustments are proposed and when the consideration would be paid.

Clear definitions at the outset help both parties understand the commercial agreement and reduce uncertainty as the transaction progresses.

Further reading: BDO’s explanation of completion accounts and equity value.

This article provides general information and is not valuation, tax or legal advice. Obtain advice appropriate to your circumstances.