What is the difference between enterprise value, equity value and selling price?
For Canadian owners buying or selling a privately owned company, three valuation terms — enterprise value, equity value and selling price — drive negotiations and are easy to confuse. Understanding each helps you make informed decisions and avoid leaving value on the table.
Enterprise value (EV) — the total value of the business, including its operations, debt and cash. It is calculated as EV = market value of equity + total debt − cash and cash equivalents. A firm with $5 million in equity, $2 million in debt and $500,000 in cash has an enterprise value of $6.5 million. EV shows the full cost of acquiring the business, including the liabilities a buyer inherits.
Equity value — the shareholders' share after all debts are accounted for, derived as equity value = enterprise value − total debt + cash. In the same example, equity value is $5 million — the proceeds a seller pockets after settling debts, or the cost to own the company outright.
Selling price — the actual amount agreed between buyer and seller. It is typically based on equity value but varies with deal structure, negotiations and market conditions, and may include earn-outs or working-capital adjustments. A tech startup with $10 million in equity value might sell for $9.5 million on risk concerns, or command a premium for unique assets like proprietary technology.
Why do these terms matter? Sellers aim to maximize equity value for a higher payout, while buyers negotiate a selling price reflecting a fair enterprise value; misunderstanding the terms causes misaligned expectations that can derail deals. Engage professionals, assess debt and cash carefully, negotiate strategically and weigh share-versus-asset tax implications.
Key facts: enterprise value, equity value and selling price
Enterprise value = equity + total debt − cash; the full cost including inherited liabilities
Equity value = enterprise value − debt + cash; the owner's share after debts
Selling price = the agreed amount, based on equity value but adjusted for structure, earn-outs and working capital
Sellers maximize equity value; buyers negotiate price to a fair EV; share versus asset structure affects tax
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Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
