Two numbers sit at the centre of almost every business valuation conversation; enterprise value and equity value.

They are related. They are not the same. And confusing them can materially affect negotiations, exit expectations, and deal outcomes.

Have you ever wondered why your accountant, broker, or advisor gives you one number while your bank shows another? It often comes down to capital structure.

Understanding enterprise value and equity value is key. It helps you interpret offers, model exits, and plan strategically. Knowing how to switch between the two is essential.

What Enterprise Value and Equity Value Actually Measure

Enterprise Value (EV)

Enterprise value represents the total value of the operating business. It counts this value regardless of how the business is funded.

In simple terms:

Enterprise Value = Equity Value + Debt – Cash

It reflects what a buyer would effectively pay to acquire the business operations. Enterprise value usually comes from multiplying EBITDA (or sometimes EBIT) by a factor, or from a discounted cash flow analysis.

Equity Value

Equity value is what the shareholders actually receive after debt is settled.

Equity Value = Enterprise Value – Net Debt

This number is key for owners during a sale. It shows the cheque at settlement, before tax and transaction costs.

Why the Distinction Matters in Transactions

Let’s use a practical example. A specialty retail business generates:

• EBITDA: $1.0 million

• Market multiple: 4.0x EBITDA

• Enterprise Value: $4.0 million

Now assume the business has:

• Bank debt: $1.2 million

• Cash: $200,000

• Net debt: $1.0 million

The likely equity value is:

$4.0m – $1.0m = $3.0 million

This is a material difference.

Many owners focus on the enterprise value headline multiple. The key number for me is the equity value after accounting for debt, working capital changes, and transaction costs, especially if there is a share sale transactions and not just selling the business assets.

At RJD Advisory, we routinely bridge enterprise value to expected seller proceeds so there are no surprises.

When to Use Enterprise Value vs Equity Value

Use Enterprise Value when:

• Comparing operating performance across businesses

• Analysing EBITDA multiples

• Benchmarking against industry transactions

• Assessing capital structure neutrality

EV allows apples-to-apples comparisons because it removes financing differences.

Use Equity Value when:

• Modelling sale proceeds

• Structuring buy-ins or buy-outs

• Planning succession

• Assessing shareholder value

Equity value reflects what remains for owners.

Common Pitfalls We See in SMEs

1. Treating EV as “what I’ll get”

Enterprise value is not take-home value. Debt should be repaid. We must meet the working capital targets.

2. Mixing SDE and EBITDA multiples

Seller’s Discretionary Earnings (SDE) are often used for smaller owner-operated businesses. EBITDA is more common in mid-market transactions.

Applying the wrong multiple to the wrong earnings base distorts outcomes.

3. Ignoring lease liabilities and contingent obligations

In many industries like retail, hospitality, healthcare, lease commitments function like debt.

If not correctly accounted for, equity value expectations can be overstated.

4. Not understanding working capital pegs

Most transactions are completed on a “cash-free, debt-free” basis with a normalised working capital target.

If working capital falls short, the purchase price is adjusted down.

How Business Valuation Methods Connect to EV and Equity Value

Market Multiples

If a business earns $500,000 EBITDA at 4.0x multiple:

• Enterprise value = $2.0 million

• Less net debt of $900,000

• Equity value = $1.1 million

This reconciliation step is critical.

Discounted Cash Flow (DCF)

DCF produces enterprise value based on forecast free cash flow. You then subtract net debt to reach equity value.

DCF is powerful but sensitive to:

• Growth assumptions

• Discount rates

• Terminal value inputs

Asset-Based Approach

Often used for capital-intensive or distressed businesses. Here, equity value may approximate net asset value; particularly if earnings are weak.

Turning Enterprise Value into Equity Outcomes

Ultimately, enterprise value is theoretical unless it translates into equity value. To maximise equity value:

• Reduce net debt ahead of sale

• Optimise working capital

• Normalise owner remuneration

• Remove discretionary expenses

• Clean up the balance sheet

Deleveraging before a sale can greatly boost shareholder outcomes.

RJD Advisory’s Approach

At RJD Advisory, we:

• Benchmark EBITDA and SDE against transaction data, where available

• Build business valuation bridges from EV to equity

• Model working capital adjustments

• Stress-test assumptions

• Prepare owners for real-world negotiations

We focus on what matters:

Not just what the business is worth, but what you are likely to receive.

Our Virtual CFO services boost enterprise value now. They also help turn that value into better equity outcomes when it counts.

Final Thoughts

Enterprise value and equity value are not interchangeable.

Enterprise value reflects operational worth. Equity value reflects owner outcome.

Understanding the difference allows you to:

• Interpret offers accurately

• Model exit scenarios clearly

• Make cleaner strategic decisions

If you're considering an exit, raising capital, or need clarity, start with an independent business valuation. Also, review your capital structure.

📞 Book a free consultation today to discuss a business valuation for your business and the next steps.