What Is Enterprise Value vs Equity Value?

Every week, I talk to a business owner who tells me they received an offer of "$5 million for the business" and assumes that means a $5 million check at closing. It never does. The gap between the headline number and what the seller actually walks away with is the single most misunderstood concept in M&A — and it comes down to the difference between enterprise value and equity value.

This is not academic. Getting this wrong means misunderstanding your offer by hundreds of thousands of dollars. Let me explain it the way I explain it to clients.

Enterprise Value: What the Business Is Worth

Enterprise value (EV) represents the total value of the business to any buyer, regardless of how it's financed. It's the answer to the question: "How much would it cost to acquire this entire business, including taking on all its obligations?"

When a buyer says your business is worth "5x EBITDA" and your EBITDA is $1 million, they're saying the enterprise value is $5 million. That $5M represents the total value of the operating business — the cash flows, the customers, the brand, the equipment, the team, everything that makes it go.

Enterprise value is the metric used in virtually all valuation multiples: EV/EBITDA, EV/Revenue, EV/SDE. There's a good reason for this: EV is capital-structure-neutral. Two identical businesses — one with no debt and one with $2M in debt — have the same enterprise value because the underlying operations are equally productive. The debt is the owner's problem, not the business's.

Equity Value: What the Seller Gets

Equity value is what belongs to the shareholders after all obligations are settled. It's the answer to: "How much does the seller actually put in their pocket?"

The formula connecting the two is straightforward:

Equity Value = Enterprise Value - Debt + Excess Cash

If the enterprise value is $5M and the business has $800K in outstanding debt (bank loans, equipment financing, SBA loans), the equity value is $4.2M. The buyer is paying $5M for the business — $4.2M to you and $800K to retire the debt at closing. From the buyer's perspective, the total acquisition cost is still $5M.

Excess cash works in reverse. If the business has $300K in cash sitting in the bank above what's needed for normal operations, the seller keeps that too. So the equity value would be $5M - $800K + $300K = $4.5M.

The Full Bridge: A Concrete Example

Let me walk through a real scenario I see all the time. A distribution company with $1M in EBITDA receives an offer at 5x, implying a $5M enterprise value. Here's how we get from that headline number to the seller's actual proceeds:

• Enterprise Value:               $5,000,000
• Less: Outstanding debt            ($600,000)
• Less: Equipment lease payoff      ($150,000)
• Plus: Excess cash                 $100,000
• Equity Value (pre-adjustments):  $4,350,000
•  
• Less: Working capital shortfall   ($120,000)
• Less: Transaction costs           ($180,000)
• Seller's Net Proceeds:          $4,050,000

The seller in this scenario receives $4.05M on a "$5 million deal." That's a $950,000 gap between the headline number and reality. Every dollar of debt, every working capital adjustment, and every transaction cost comes out of the seller's side. Understanding this math before you negotiate prevents unpleasant surprises at the closing table.

Working Capital: The Adjustment Most Sellers Miss

The enterprise value assumes the business comes with a "normal" level of working capital— enough inventory, receivables, and payables to operate on a day-to-day basis. If you've been running the business lean on inventory or collected receivables aggressively before closing, the buyer will insist on a working capital adjustment.

Here's how it works. The LOI establishes a "target" working capital level, usually based on a trailing twelve-month average. At closing, the actual working capital is calculated. If actual is below target, the difference comes out of the seller's proceeds. If actual exceeds target, the seller gets the excess.

For our distribution company, the trailing twelve-month average working capital was $620,000 (accounts receivable + inventory - accounts payable). At closing, actual working capital was $500,000 — the seller had been collecting receivables aggressively and slowing inventory purchases. The $120,000 shortfall was deducted from proceeds.

This catches sellers off guard constantly. They see the sale coming, they stop buying inventory, they chase every outstanding invoice, and they think they're being smart. Instead, they're just moving money from the working capital adjustment to their bank account — it nets to zero, but with more friction and a worse impression on the buyer.

Why Multiples Apply to Enterprise Value, Not Equity Value

This is a point of confusion for many business owners. When you hear that HVAC companies sell for "4-6x EBITDA," that multiple is applied to enterprise value. Why? Because EV is comparable across businesses regardless of their debt levels.

Consider two identical HVAC companies, each with $500K EBITDA. Company A has no debt. Company B has $1M in SBA loans from buying out a partner. Both businesses are equally valuable — they generate the same cash flows, serve the same markets, and have the same growth prospects. At 5x EBITDA, both have an enterprise value of $2.5M.

But the equity values differ dramatically. Company A's owner gets $2.5M (no debt to pay off). Company B's owner gets $1.5M ($2.5M minus $1M in debt). Same business, same multiple, very different checks at closing. The debt is the owner's problem — the business didn't become less valuable just because the owner borrowed against it.

If we applied multiples to equity value, we'd have to create different multiples for every level of indebtedness. That would make industry comparisons impossible. Enterprise value solves this by providing a debt-neutral metric.

Transaction Costs: The Final Haircut

Beyond the EV-to-equity bridge, sellers need to account for transaction costs that further reduce net proceeds:

• Broker or advisor fee: 6-10% of the transaction value, typically the single largest cost. On a $5M deal at 8%, that's $400,000.
• Legal fees: $25,000-$75,000 for the seller's attorney to negotiate and close the deal.
• Accounting fees: $10,000-$30,000 for tax planning, closing financial statements, and post-sale tax preparation.
• Escrow holdback: 5-15% of the purchase price held in escrow for 12-18 months to cover indemnification claims. You get this back eventually (usually), but not at closing.
• Taxes: Capital gains tax on the sale, which varies dramatically based on deal structure (asset sale vs stock sale), your basis in the business, and whether you live in a state with capital gains tax.

After all costs, a seller on a "$5 million deal" might net $3.2M-$3.8M in actual after-tax, after-fee, after-escrow cash. That's still a life-changing number, but it's a far cry from $5M.

How to Maximize Equity Value

Since you control the bridge between EV and equity value, here's what to focus on in the years before a sale:

Pay down debt. Every dollar of debt retired before closing is a dollar that goes to you instead of the bank. If your business has $500K in debt at 7% interest, the annual interest cost is $35K. Paying it off both increases your adjusted EBITDA (potentially increasing EV) and directly increases equity value.

Maintain normal working capital.Don't drain the business before closing. Keep inventory at normal levels, maintain your receivables cycle, and don't defer payables. Abnormal working capital invites adjustments.

Negotiate the working capital target.The target is negotiable. If your business is seasonal, argue for a target that reflects the closing month's typical working capital, not a twelve-month average. This can be worth six figures on the right deal.

The Bottom Line

Enterprise value is what the business is worth. Equity value is what you take home. The gap between them — driven by debt, working capital, and transaction costs — is where most sellers get surprised. Understanding the bridge before you start negotiating means you can evaluate offers clearly, plan your post-sale finances realistically, and avoid the sinking feeling when the closing statement shows a number materially different from what you expected.

When someone tells you their business sold for $5 million, now you know to ask the right follow-up question: "Enterprise value or equity value?" The answer changes everything.