Enterprise value is what a business's operations are worth to all its capital providers; equity value is what is left for shareholders after debt-holders take their slice. The bridge between them is simple to write — equity value = enterprise value minus net debt (with adjustments) — and expensive to misunderstand: almost every painful surprise in a business sale traces back to the two sides using the same word for different numbers, or fighting at completion over what counts as "debt".
Here is the distinction properly, the bridge in full, and where deals actually gain and lose money on it.
Two values, one business
Think of a house bought with a mortgage. The house is worth £500,000 — that is the enterprise value, what the asset is worth regardless of how it was financed. The owner's equity is £500,000 minus the £300,000 mortgage: £200,000. Same house, two numbers, both correct.
A company works identically. Enterprise value (EV) prices the trading operations — the number a buyer means when they say "we value the business at 6× EBITDA". Equity value is what the shareholders receive once the company's own borrowings are settled or assumed. A business "worth £12 million" with £3 million of bank debt delivers £9 million to its owners; the same business with £2 million of surplus cash delivers £14 million. Headline multiples describe the enterprise; sellers bank the equity.
The bridge, in full
The complete version, as valuation professionals run it:
Equity value = EV − net debt − preference shares − minority interests + non-operating assets
- Net debt: borrowings minus genuinely surplus cash — with "surplus" doing heavy lifting, because cash the business needs to operate is not available to hand to sellers;
- Preference shares and shareholder loans rank ahead of the ordinary equity and come off first — a detail that restructures the waterfall entirely in venture-backed companies, where a £30 million headline can leave common shareholders with little once preference stacks unwind;
- Minority interests: value belonging to outside shareholders of subsidiaries;
- Non-operating assets — the investment property, the legacy portfolio — add back, because the operating multiple never valued them.
One consistency rule keeps multiples honest: EV pairs with pre-interest metrics (EV/EBITDA, EV/EBIT), because EBITDA belongs to all capital providers; equity value pairs with post-interest earnings (P/E). Comparing your company's EV/EBITDA to a peer's P/E is the unit error that produces most amateur valuation nonsense.
Where deals fight: "cash-free, debt-free" and debt-like items
Private company deals are typically struck on a cash-free, debt-free basis with a normalised working capital adjustment: the buyer pays the enterprise value for the operations, the seller keeps surplus cash and clears the debt, and the price adjusts if working capital at completion deviates from an agreed normal level (the "peg"). Every term in that sentence is negotiable, and the negotiation is where headline value quietly moves:
- Debt-like items. Buyers argue that anything resembling a future cash obligation is debt: pension deficits, deferred consideration from past acquisitions, accrued bonuses, dilapidations, corporation tax due, customer deposits — and, since IFRS 16 put leases on balance sheets, lease liabilities. Each reclassification moves pounds from seller to buyer at 1:1. The debt-like schedule deserves more negotiating attention than the multiple, and rarely gets it;
- The working capital peg. The completion adjustment is normally actual working capital minus the agreed target — so, all else equal, a higher target reduces what the seller receives and a lower target increases it. On a £10m headline with £1.2m actual working capital, a £1m target delivers £10.2m; a £1.5m target delivers £9.7m. Buyers therefore argue the target up and sellers argue it down; twelve-month averages, properly normalised for growth and seasonality, are the defensible middle;
- Trapped cash. Cash in overseas subsidiaries, regulatory deposits or customer accounts is not surplus, whatever the balance sheet says.
Sellers preparing for market should run this bridge on their own numbers before buyers do: know your likely debt-like list, your true surplus cash and your working capital profile, and the letter-of-intent conversation starts from your analysis instead of theirs. It is standard preparation in our sale mandates, and it changes outcomes more reliably than another round of multiple-haggling.
Why the distinction matters beyond deals
The same bridge runs through fundraising (pre-money valuations are equity values; option pools and convertibles move them), management incentives (growth-share hurdles and option strikes reference equity value, and the debt structure can strand employee equity underwater while the enterprise thrives), and financial reporting, where valuation concepts from the same family appear in impairment testing and purchase price allocation (with their own measurement rules). Anyone reading a valuation report — or a term sheet — should reflexively ask which value is on the page and what bridges it to the money shareholders receive.
Acumon prepares valuations and runs the completion mechanics — debt-like negotiations, working capital pegs, the lot — through our valuations team, alongside financial due diligence for buyers testing a target's bridge from the other side. If a number matters to you, make sure you know which of the two it is.