Enterprise Value vs Equity Value

Enterprise value refers to the minimum collection of assets and liabilities required to operate a business, regardless of its financing structure. It serves as a common framework that allows for consistent valuation comparisons across different businesses. Think of it as the market value of a house, where equity value represents the value remaining once the debt is paid off to the bank. This analogy holds true for businesses as well.

The components typically included in enterprise value are:

Working capital: This encompasses accounts receivable, accounts payable, work-in-progress, credit accounts, inventory, prepaid expenses, employee provisions, and other current assets and liabilities.

Non-current assets necessary for business operations: This includes intangible assets like goodwill and intellectual property, along with other non-current assets that directly contribute to the functioning of the business.

On the other hand, enterprise value excludes certain items such as:

• Cash balances.
• Non-operating assets: These are assets like investments that are not directly linked to the expected profits of the business.
• Interest-bearing debt.
• Non-arms length or related party assets or liabilities that are not core to the business’s operation, such as loans to or from directors.
• Income tax provisions.
• Deferred tax liabilities.
• Future income tax benefits.

Additionally, surplus assets that are not actively employed in the operating business, such as investment properties, shareholdings in other entities, or loans to related parties, are not considered part of the enterprise value.

Equity value, on the other hand, represents the market value of the net assets of a business, including cash. It is the value attributable to the owners or shareholders. Equity value is

relevant in situations such as the sale of a portion of the business, bringing in new investors, selling to employees, or buying out a partner. Reporting to the Australian Taxation Office (ATO) often requires equity value to calculate capital gains.

In valuation methodologies like the discounted cash flow (DCF) or earnings multiple approaches, enterprise value is typically calculated. Firm-level cash flow proxies such as EBIT (or EBITDA) are used, along with the cost of capital of the enterprise (or EBIT or EBITDA multiples), to determine the enterprise value. Equity value can then be derived by subtracting net debt (long-term commercial debt less cash) from the enterprise value.

If you’re seeking to understand the value of your business and how growth can impact its potential value, contact us to learn more about our business valuation process and the benefits it can deliver. At Expert Business Valuations, we’re committed to providing you with the insights and knowledge necessary to make informed decisions about your business’s worth.