From Enterprise Value to Equity Value: The Bridge Every Seller Should Understand

"They offered eight times EBITDA" is how most conversations about selling a business begin. It sounds like a price. It is not. Eight times EBITDA is an enterprise value: what a buyer pays for the operations of the company, regardless of how they are financed. What the owners actually take home is the equity value, after everyone else with a claim on the business has been paid.

The bridge, step by step

• Net debt (240): bank loans and bonds minus cash. The cash counted here must be truly excess; the cash the business needs to operate is part of the enterprise.
• Leases (60): long-term rental obligations behave like debt and buyers will treat them as such.
• Minority interests (30): the share of subsidiaries that belongs to other owners.
• Pension deficits and provisions (20): obligations that will cost cash in the future.
• Non-operating assets (+40): investments, property or stakes not needed by the business add to the value.

In this example the headline value is 960 million, but the shareholders receive 650 million, about two thirds of it. Each line of the bridge is a negotiation. Agreeing that 20 million of cash is excess rather than operating, or that a provision is smaller than the buyer's estimate, moves the equity value as much as a sixth of a turn on the multiple.

Where sellers lose value

• Normalised working capital. Buyers set a target level; if the business is delivered with less, the difference is deducted from the price.
• Debt-like items. Deferred revenue, unpaid bonuses, tax liabilities and capital expenditure that was postponed all appear in the buyer's bridge.
• Adjusted EBITDA. One-off costs that the seller adds back must be documented; each one rejected is multiplied by the multiple.