Enterprise value vs equity value

Enterprise value is the value of the operating business — the price an acquirer pays for the assets that generate earnings, regardless of how those assets are financed. It is capital-structure neutral: the same business carries the same enterprise value whether it is funded by debt, equity or both.

Equity value is what is left for the shareholders after the claims that rank ahead of them are settled. It is the number that determines the cheque the sellers actually receive. Confusing the two is not a technicality — it is the difference between what a headline offer says and what completion accounts deliver.

• Enterprise value

  The value of core operations, available to all providers of capital. Multiples such as EV/EBITDA are measured against this.

• Equity value

  Enterprise value less net debt and debt-like items, adjusted for working capital and other completion adjustments. This is what shareholders receive.

Net debt starts with the obvious — bank facilities, term loans, overdrafts and finance leases, less cash that is genuinely free to leave the business. The contentious part is the debt-like items: obligations that will consume cash after completion but do not sit in the loan account.

Each item must be evidenced and agreed in the completion mechanism. An item that is merely 'unfair' but not evidenced will not survive the price negotiation; an item that is evidenced but not raised is value the seller keeps.

• Defined benefit pension deficits

  The funding shortfall the buyer inherits, measured on an agreed actuarial basis.

• Unpaid or under-provided tax

  Corporation tax, payroll and indirect tax liabilities relating to pre-completion periods not reflected in the accounts.

• Deferred consideration and earn-outs owed

  Amounts payable to previous sellers of businesses the target itself acquired.

• Customer deposits and deferred revenue

  Cash received for work not yet performed, where the cost of performance falls on the buyer.

• Capex creditors and deferred capex

  Committed or overdue capital expenditure that the business must fund after completion.

• Lease liabilities

  Operating lease obligations capitalised under IFRS 16, where the parties agree they are debt-like.

• Restricted or trapped cash

  Cash that cannot be distributed — margin deposits, escrow balances or minimum operating balances — excluded from the cash offset.

Under completion accounts, the bridge is settled after completion using actual balances at the completion date — price certainty is deferred in exchange for accuracy. Under a locked box, the equity value is fixed off a historical balance sheet date, the seller is prohibited from extracting value after that date (leakage), and the buyer takes the economic risk and reward from the locked box date.

The choice changes where diligence effort goes. Completion accounts demand rigour on definitions and the measurement process. A locked box demands rigour on the historical balance sheet and on policing permitted versus prohibited leakage.