What is the difference between price and enterprise value?

Buyers and sellers often use “price” loosely to mean several different numbers, and the gap between them is exactly where closing-day disputes come from. Enterprise value, equity value and the final cheque are related but not identical, and knowing which one is being discussed at any point in a negotiation matters.

What enterprise value actually measures

Enterprise value represents the value of the business’s operations, what it would cost to acquire the whole operating entity, debt included, on a basis independent of how the current owner happens to have financed it. It is the number that lets buyers compare businesses with different capital structures on a like-for-like basis, because it strips out the effect of one seller carrying debt and another carrying none.

How equity value differs

Equity value is what the ownership stake is actually worth: enterprise value adjusted for the target’s debt and cash. A business with debt on its books is generally worth less to the buyer of the shares than the same business debt-free, because the buyer is effectively taking on that debt as part of the deal; cash sitting on the balance sheet works the other way, adding to what the buyer is receiving.

Where working capital fits in

Most Canadian deals are negotiated on a cash-free, debt-free basis, with a working capital target, often called a peg, specifying how much working capital has to remain in the business at closing. If the actual working capital at closing differs from the peg, the price is trued up, which is why the final wire amount on closing day can differ from the number that was verbally agreed weeks earlier.

Why this matters when comparing offers or multiples

A multiple quoted in conversation is almost always an enterprise value multiple against normalized earnings, not a promise about what a seller will actually receive. Comparing two offers, or comparing a quoted multiple to what a specific seller expects to walk away with, requires working through the debt, cash and working capital adjustments in each case rather than comparing headline numbers directly.