Valuation
Enterprise value and equity value: why the difference matters in a deal
A business can be worth £1 million on an enterprise basis without its shareholders receiving £1 million. The bridge between the two matters.
The first number is not the cheque
When I value a business, I usually start with a maintainable earnings assessment and the enterprise value: an estimate of the value of the operating business on an agreed basis. That is not necessarily the amount the shareholder will receive on completion.
Most SME offers are discussed on a cash-free, debt-free basis with an agreed normal level of working capital. Before any offer becomes meaningful, I want to know exactly what is included and what adjustments will be made.
A worked example
Assume an agreed enterprise value of £1,000,000. The company has £160,000 of surplus cash, £220,000 of financial debt and £40,000 more working capital than the agreed normal level. On those assumptions, the reference equity value is £980,000: £1,000,000 + £160,000 − £220,000 + £40,000.
Change the definition of cash, debt-like items or normal working capital and the amount can change. Director loans, unpaid tax, customer deposits and lease liabilities require specific attention. Not every balance-sheet item belongs in the same category, and nothing should be counted twice.
Working capital needs its own definition
An operating business needs enough receivables, stock and other working capital to continue trading. If the vendor extracts too much cash before completion, the buyer may have to inject it back immediately.
I prefer to agree the normal working-capital calculation and the relevant accounting policies at an early stage, rather than argue about them after the transaction is otherwise agreed.
How I would approach this in practice
I would scrutinise directors' loans, taxes, deferred income, debt-like liabilities and the normal working-capital target. These need explicit agreement in the heads of terms and final documents, not assumptions left to completion.
I would use the evidence to identify the key commercial assumptions, test alternative outcomes and decide what could realistically be done next. The point is not to produce a precise-looking number in isolation, but to reach a conclusion that can be explained and acted upon.
The transaction documents decide the final amount
Completion accounts and locked-box arrangements use different mechanisms to establish or protect the price. The share purchase agreement must define the relevant balances and adjustments precisely.
My starting point is simple: understand the operating value, then reconcile it properly to what is being bought and what will actually be paid.
General educational guidance only. Outcomes depend on the facts, evidence and transaction terms of each business. These are practical analytical perspectives, not legal, tax or regulated investment advice.