Enterprise value vs equity value: what the owners actually receive

Two companies with the same revenue. Why do the owners receive different amounts?

Picture two companies in the same industry, each with R$ 40 million of annual revenue. A buyer will not pay the same for both, and the owners will not walk away with the same amount. There are two reasons, and they show up at different points in the calculation.

The first is margin. A business is valued on the cash it generates, not on its sales. A company with R$ 40 million of revenue and a 15% EBITDA margin generates R$ 6 million a year; one with a 10% margin generates R$ 4 million. Apply the EBITDA multiple for the industry and the first is clearly worth more. That figure is the enterprise value (EV).

The second is cash and debt. Two companies with the same enterprise value can have very different balance sheets: one carries bank loans and tax installment plans, the other has surplus cash in the bank. What is left for the shareholders after settling those items is the equity value.

The bridge from enterprise value to equity value

Going from one figure to the other takes a few steps:

Step	Effect	What it includes
Enterprise value	starting point	Value of the operation, from multiples or discounted cash flow
Loans and financing	subtract	Bank debt, working capital lines, equipment financing, finance leases
Excess cash	add	Cash and investments above what the business needs to operate
Tax installment plans	subtract	In Brazil, installment agreements with the tax authorities (parcelamentos, such as Refis) are common and treated as debt
Contingencies	subtract	Labour and tax lawsuits with a probable loss; in Brazil, labour claims are a frequent item in due diligence
Other debt-like items	subtract	Declared but unpaid dividends, overdue salaries, holiday pay or taxes
Equity value	result	What is shared among the owners of the shares

The first two steps make up net debt in the accounting sense. The rest are usually negotiated item by item, because each one is money the buyer will have to pay after taking over the company. If the buyer pays it, the buyer wants it off the price.

Not all cash counts. The business needs a minimum balance to pay suppliers and payroll. Only the amount above that minimum is added to equity value.

Normal working capital: the adjustment at closing

A buyer pays for a business that operates with a certain level of receivables and inventory, net of payables. This is the normal working capital, usually the average of the last 12 months to smooth out seasonality.

If working capital at closing is below that level, the buyer will have to inject cash to get the business running as before, so the shortfall is deducted from the price. If it is above, the excess may be added. In practice this stops a seller from collecting receivables early or delaying suppliers to build up cash just before the sale: what goes into the bank comes out in the adjustment.

Agree on the reference level and the calculation method in the letter of intent, before granting exclusivity. Leaving it to the end invites disputes that tend to reduce what the seller receives.

Illustrative example: same revenue, different outcome for the owner

Three fictitious companies with the same revenue and the same multiple, to isolate the effect of margin and of debt. Figures in R$ million.

	Company A	Company B	Company C
Revenue	40.0	40.0	40.0
EBITDA margin	15%	10%	15%
EBITDA	6.0	4.0	6.0
EV/EBITDA multiple (illustrative)	6.0x	6.0x	6.0x
Enterprise value	36.0	24.0	36.0
Loans and financing	(4.0)	(4.0)	(12.0)
Excess cash	3.0	3.0	0.5
Tax installments and contingencies	(0.5)	(0.5)	(2.5)
Equity value	34.5	22.5	22.0

A and B differ in margin: same net debt, but B is worth R$ 12 million less as a business. A and C run the same operation with the same enterprise value, yet the owner of C receives R$ 12.5 million less because the company carries more loans, less cash and more tax and labour liabilities. B and C end up with similar equity values by opposite routes. These figures are illustrative only; real multiples vary by industry, size and risk.

Before comparing an offer, find out which basis it is on

An offer “for the company” can mean two different things:

• Enterprise value basis (cash-free, debt-free): the buyer offers a price for the operation and deducts net debt and other agreed items at closing. You receive less than the headline figure.
• Equity basis (for the shares): the figure is already what the shareholders receive for 100% of the shares, subject only to agreed adjustments such as working capital.

Comparing an equity offer with an enterprise value valuation, or the reverse, leads to the wrong conclusion. Ask the buyer to state the basis in writing and to list what it treats as debt. Our guide on what to do when you receive an offer to buy your business covers the other questions worth asking.

The same logic applies between partners. When a partner leaves, the share is calculated on equity value, not on enterprise value; see how to value a partner’s share.

How this shows up in the sample study

In the Meu Equity sample valuation report, prepared for a fictitious company, the enterprise value range is R$ 35.0 to 41.0 million. After net debt of R$ 2.1 million, equity value is R$ 32.9 to 38.9 million.

The company received an offer of R$ 33.0 million for all of its shares. Set against enterprise value, it would look below the range. Set against equity value, which is the correct basis, it sits at the floor of the range. It is not an offer out of line with the market, but it leaves little room in the seller’s favour, and the report shows where there is a case for asking more.

Where to start

If you are asking yourself what your business is worth, the business valuation calculator gives a first estimate of enterprise value; subtract your net debt to approximate equity value. For a figure that justifies every step of the bridge, Meu Equity prepares a business valuation and shows the path from enterprise value to what reaches the shareholders.