3.07: Enterprise value

The enterprise value of a business is the value of the operational business. The enterprise value is funded by all sources of capital, i.e. both shareholders’ funds and term debt.

Enterprise value is distinguished from the equity value of the company in that the equity value of the company includes adjustments for all additional assets and liabilities that are extraneous to day-to-day business operations (e.g. redundant assets, term loans and shareholder loans).

Enterprise value therefore includes all working capital and operating capital assets (at fair market value), as well as goodwill. If cash balances are material, they may be treated as either a deduction from term debt or as a redundant asset.

Enterprise value is the value of the core operational business.

Enterprise value is usually found by (a) capitalizing free cashflows using the weighted average cost of capital or, (b) if there is no goodwill, by adding operational working capital to the fair market value of operational capital assets.

Contact MVI for assistance in determining the fair market value of your enterprise.