What is the difference between enterprise value and equity value?

Enterprise value is the price of the whole operating business regardless of financing. Equity value is what is left for shareholders after subtracting net debt and other senior claims. EV / EBITDA uses enterprise value; P / E uses equity value.

Why is enterprise value used for the deal multiple?

Because it is capital-structure neutral. Two companies with the same operations but different debt loads have different equity values but comparable enterprise values, so EV / EBITDA compares them on an apples-to-apples basis.

Enterprise Value (TEV) - Definition, Formula & the EV Bridge

Enterprise Value (TEV, or total enterprise value) is the total value of the operating business, independent of how it is financed. It is what an acquirer pays for the whole enterprise: Enterprise Value equals Equity Value plus Net Debt, plus preferred stock and minority interest, less investments in associates. Because it sits above the capital structure, two businesses with identical operations but different debt loads have comparable enterprise values even though their equity values differ.

Why it matters

EV is the basis for the entry and exit multiple (EV / EBITDA) and the starting point of the bridge down to the equity check the sponsor actually writes. Get the EV right and you can walk to the equity; get it tangled with equity-level items and the whole Sources & Uses table is off.

Worked example

From multiple to equity value

At 6.0x on $25M EBITDA, enterprise value is $150M. If the business carried $75M of net debt at close, the equity value would be $75M. In a clean cash-free, debt-free deal, equity value equals enterprise value. The full walk from EV to the equity purchase price, including diluted shares and lease adjustments, is laid out in the Enterprise Value vs Equity Value guide.

The common mistake

Mixing EV and equity-value inputs in the same calculation. Dividing equity value by EBITDA, or forgetting to subtract net debt when walking from EV down to the equity purchase price, produces a number that looks plausible and is wrong. Keep the bridge clean: enterprise value for the operating multiple, then subtract net debt and other senior claims to reach equity value.