Understanding “Enterprise Value”
The problem is that many entrepreneurs believe they will receive the $5 million themselves, and in addition, the buyer will assume the $2 million of debt which is not the case in business acquisitions. If this were the case, then the Enterprise Value of such a transaction would actually be $7 million ($5 million of equity + $2 million of debt), which in our example would equate to seven times EBITDA, rather than the five times EBITDA the acquirer offered.
So remember, if you receive an offer for a company that is referred to as Enterprise Value, or the purchase price is referenced to a multiple of EBIT/EBITDA, this purchase price is the debt-free value, with a possible adjustment for excess/insufficient working capital in the company.
This article was written by Ron Dersch and was published in the March, 2006 issue of M&A Today.