Enterprise value (EV) represents the entire capital base of the business: it is what a buyer must pay to acquire 100% of the firm's assets and assume all its obligations. It equals equity value plus net debt (financial debt minus cash and cash equivalents). In deal announcements and CIMs, the 'valuation' figure quoted is almost always enterprise value — because it sounds larger.
Equity value is what shareholders receive at closing: EV minus net debt. This is the number that matters to a selling founder. A business valued at €20m EV with €4m of bank debt and €500k of cash carries €3.5m of net debt, meaning the seller receives €16.5m — not €20m. On top of this, further deductions apply: working capital adjustments, pension deficits, deferred tax liabilities, environmental provisions, off-balance-sheet items, and earnout contingencies.
The bridge from EV to equity value is where late-stage surprises hide. Common deductions that sellers overlook include: normalized working capital shortfalls (the business was running lean inventory before closing), capex commitments not yet spent, minority shareholder interests, and interest accrued on shareholder loans. Running a full equity bridge — ideally with your advisor before LOI — ensures no closing day shock.
Full equity bridge example
EV: €20m. Net bank debt: −€3.5m. Working capital shortfall vs peg: −€600k. Pension deficit: −€300k. Capital lease obligations: −€200k. Transaction bonus payable to management: −€400k. Total equity value at closing: €15m. Without running this bridge upfront, the seller expected €20m and received €15m — a €5m closing surprise.
Frequently asked questions
Why do sellers often confuse enterprise value and equity value?
Because deal announcements, press releases, and even investment bankers often cite enterprise value as 'the valuation' without clarifying the equity bridge. EV is the number that sounds most impressive; equity value is the number the founder takes home. Every seller should insist on a full equity bridge before signing an LOI.
What items reduce equity value below enterprise value?
Net debt (bank loans, overdrafts, bond debt minus cash), working capital adjustments (if actual WC at closing is below the agreed peg), transaction bonuses, pension deficits, environmental liabilities, deferred tax liabilities, capital lease obligations, contingent liabilities, and any earnout clawback provisions.
Can equity value ever exceed enterprise value?
Yes — when a company has net cash (more cash than financial debt). A business with €15m EV and €2m net cash has an equity value of €17m. This is common in capital-light services businesses or companies that have been deliberately deleveraged ahead of a sale process.