When a business owner or investor asks "What is this company worth?", the right answer depends on exactly what is being valued. A company with the same ability to generate profit can have two very different valuations depending on whether you look at it from the shareholder's point of view (equity value) or from the point of view of a potential buyer who will take on the debt (enterprise value).
Confusing these two concepts is one of the most common valuation mistakes — and one of the most expensive. In M&A deals, the final price is usually expressed in terms of enterprise value and then adjusted to arrive at the price paid for the shares (equity value). Understanding the difference is essential before you sit down to negotiate.
What is enterprise value (EV)?
Enterprise value (EV) —also known as firm value or total enterprise value— is a measure of a company's total economic value, regardless of how it is financed. It represents what it would cost to take full control of the business: buy the equity and take on the debt, net of available cash.
Unlike equity value (which only measures the value attributable to shareholders), EV reflects the value of the business activity itself. That's why it is the preferred metric in comparable valuation: it lets you compare companies with very different capital structures on a like-for-like basis.
In practice, when a buyer considers an acquisition, the first thing they calculate is EV — because that is the "total price" of the deal. They then negotiate how that EV is split between the equity they will pay the sellers and the debt they will take on (or repay at closing).
The EV formula: calculate your company's value
The enterprise value formula combines five components. The full formula is:
EV = Equity value + Financial debt + Minority interests − Cash and cash equivalents − Investments in associates
Each component has its own logic:
- Equity value (+): The value of the shares to shareholders. For listed companies, it is market capitalization; for private companies, the agreed or calculated valuation.
- Financial debt (+): Bank loans, bonds, finance leases. It is added because the buyer takes on this debt — if they want to "clean up" the company, they will have to pay it off.
- Minority interests (+): When a company fully consolidates a subsidiary it does not own 100% of, the portion of value attributable to minority shareholders is added to EV.
- Cash and cash equivalents (−): Subtracted because available cash reduces the net cost of the deal. If you buy a company with €10M in cash, you "recover" that €10M when you acquire it.
- Investments in associates (−): Minority stakes in other companies (where there is no consolidation) are subtracted because they are not part of the core operating business.
Step-by-step example
Imagine a Spanish industrial SME with the following figures:
- Equity value: €50M (valuation agreed with the buyer)
- Financial debt: €12M (bank loan)
- Cash and cash equivalents: €4M
- Minority interests: 0 (no subsidiaries)
- Investments in associates: 0
- EBITDA for the last fiscal year: €6M
Applying the formula:
EV = 50 + 12 − 4 + 0 − 0 = €58M
And the EV/EBITDA multiple:
EV/EBITDA = 58 / 6 = 9.7x
This 9.7x multiple is what an analyst would compare with similar transactions in the sector to check whether the valuation is in line with the market. If comparable deals close at 8x–10x, the valuation is within range. If they close at 6x–7x, the price could be too high.
Why it matters in M&A: the price adjustment at closing
In M&A deals, buyers almost always propose the price in terms of EV on a cash-free, debt-free basis — that is: "I'll pay X in enterprise value, assuming the company reaches closing with no debt and no cash".
What actually happens is that the company does have debt and does have cash at closing. That's why the share purchase agreement (SPA) includes an adjustment mechanism:
- A target EV is agreed (for example, €58M)
- The actual net debt at closing is determined (debt − cash)
- The price paid for the shares = target EV − net debt at closing
If, in our example, financial debt at closing were €12M and cash €4M, net debt would be €8M. The price paid to shareholders (equity value) would be: 58 − 8 = €50M. This matches the initial equity valuation.
But what happens if, between signing the SPA and closing, the company takes on more debt or burns through cash? This is where the concepts of locked-box net debt and completion accounts come in — mechanisms that protect the buyer if the financial position deteriorates between signing and closing.
This is one of the reasons why a good M&A advisor and a specialized lawyer are critical: the difference between EV and equity value translates into millions of euros changing hands depending on how the SPA clauses are drafted.
Special cases that complicate EV
In practice, calculating EV can be more complex than the basic formula. Some cases to keep in mind:
Negative EV. When a company has a very large amount of cash relative to its equity value and debt, EV can turn out negative. It is not a math error — it means that, in theory, buying the company "pays you" the excess cash. It is very rare among SMEs but does happen at some listed companies with large historical cash reserves (typically in tech or pharma).
IFRS 16 and operating leases. Since 2019, IFRS 16 has required operating leases to be recognized as debt on the balance sheet. This can artificially inflate "financial debt" if it is not adjusted. Many analysts exclude IFRS 16 operating leases from the EV calculation to maintain comparability with historical data.
Provisions and debt-like liabilities. Unfunded pensions, warranty provisions, deferred payments to the seller... All of these can be treated as "debt-like items" and added to EV. In M&A deals, defining what counts as debt and what doesn't is one of the most technical negotiations in the SPA.
Normalized working capital. In some deals, in addition to net debt, the price is adjusted for deviations in working capital from a "normalized" level. This prevents the seller from taking money out of the company before closing (reducing working capital and, in effect, transferring value into their own pocket).
EV/EBITDA: the most widely used multiple in M&A
The EV/EBITDA multiple is the most widely used valuation ratio in business sales. It measures how much the buyer is paying for each euro of EBITDA the company generates.
Why is EV (and not equity value) used in the numerator? Because EBITDA is calculated before interest — it is a metric that measures the cash-generating capacity of the operating business, regardless of how it is financed. For consistency, the numerator (EV) must also be independent of the financial structure. If we used equity value / EBITDA, we would be mixing metrics that treat debt differently.
In the Spanish mid-market, typical EV/EBITDA multiples vary widely by sector: industrial can be at 5x–8x, professional services at 6x–9x, and technology and software at 10x–15x or more. If you want to go deeper, we have a dedicated guide on EBITDA multiples applied to valuation.
Conclusion: EV is the language of deals
When you get to the negotiating table in an M&A deal, everyone will be talking in terms of enterprise value. Multiples will be calculated on EV. Offers will be presented in EV. Negotiations will focus on how EV is adjusted at closing to arrive at the actual share price.
Understanding EV is not optional — it is the foundation for any serious conversation about valuation. And for a typical Spanish SME, where financial debt and cash can move the final price by 10% to 30%, mastering these concepts can translate directly into millions of euros.
