Enterprise Value vs. Equity Value
Definition
Enterprise value is what the business is worth. Equity value is what the owner actually takes home. The difference is net debt and working capital.
Equity Value = Enterprise Value − Net Debt ± Working Capital Adjustment
- Enterprise Value = Normalized EBITDA × Valuation Multiple. This is the headline number — the total value of the business as an operating entity.
- Net Debt = Interest-bearing debt minus cash on hand. If the business owes 500K in the bank, net debt is $1.5M. That comes off the top before the owner sees a dollar.
- Working Capital Adjustment = Most transactions assume a “normal” level of working capital stays in the business. If actual working capital is above or below that peg at the time of transaction, the purchase price adjusts accordingly.
A business with 13M in equity value after netting out 500K working capital shortfall.
Why This Matters for Owners
Owners who only track enterprise value overestimate what they’ll take home. Every ownership decision — from debt strategy to working capital management to distribution timing — affects the gap between enterprise value and equity value.
In the iBD Ownership OS™, the owner’s Wealth goal on the Owner’s Scorecard™ is an equity goal, not an enterprise value goal. The five-year forecast and Value Gap analysis must track equity value to be meaningful. This distinction also explains why net debt reduction and working capital optimization are two of the four primary value levers — they close the gap between what the business is worth and what the owner actually receives.
Where This Concept Appears
- Module 2 (Expand Knowledge) — The Three Lenses of Value introduce market value and transaction value, which rely on this distinction
- Module 4, Lesson 7 — Fully defined with the formula and applied to forecast scenarios
- Module 4, Lesson 8 — Step 5 of the forecast implementation: translating enterprise value to equity value for each projected year