Before you start
- Enterprise value describes the operating business. Equity value describes the owners’ interest after the relevant adjustments.
- A cash-free, debt-free price still needs an agreed working capital basis.
- Do not count the same liability in both net debt and working capital.
- Equity value, cash received at completion and after-tax proceeds are different figures.
Start by naming the thing being valued
Enterprise value is the value of the business operations, separate from how they are funded. Under a common transaction basis, this includes the operating assets and an agreed normal level of working capital, with cash and financing debt dealt with separately.
Equity value is the value attributable to the owners of the entity after allowing for debt, surplus cash and other relevant assets or liabilities. Grant Thornton’s Australian explanation makes this distinction explicitly: the trading business and the entity that owns it are not the same valuation subject.
Read the assumptions before using either number. Some small-business prices exclude stock, property or particular assets. A report should say what is included rather than relying on the label “business value” to settle the question.
A worked example of the price adjustments
Imagine a share sale with an agreed enterprise value of $1.5 million. For this example, operating equipment and normal working capital are included. The company has $120,000 of surplus cash available to the buyer and $300,000 of bank debt. Working capital delivered at completion is $40,000 below the agreed target.
The assumed contract adjusts the price dollar for dollar for these items. This is a teaching example, not a valuation or a standard contract formula. Actual definitions and settlement arrangements need to be agreed for the transaction.
| Item | Adjustment | Running amount |
|---|---|---|
| Agreed enterprise value | $1,500,000 | $1,500,000 |
| Add surplus cash included | + $120,000 | $1,620,000 |
| Subtract bank debt | - $300,000 | $1,320,000 |
| Subtract working capital shortfall | - $40,000 | $1,280,000 |
The illustrative equity purchase price is $1.28 million before transaction costs, tax and any payment deferral. It is not $1.5 million of immediate personal cash.
Working capital is where vague offers become expensive
A buyer needs enough operating resources to continue trading. For a transaction, working capital is usually defined through an agreed set of accounts, often including trade debtors and stock less trade creditors and operating accruals. Its contractual definition may differ from the accounting textbook formula.
Suppose the agreed normal balance is $250,000, but only $210,000 is delivered. The $40,000 shortfall in the example reduces the price because the buyer must fund the missing operating resources. A surplus might increase the price under the same mechanism, subject to agreed quality and valuation rules.
PwC Australia identifies normalised working capital and the enterprise-to-equity adjustments as specific sale agreement issues. Review monthly balances and seasonality before choosing a target. Slow stock, overdue debtors and unusual year-end payment timing can distort a simple average.
Check cash and liabilities line by line
Not every dollar shown in the bank is freely available surplus cash. Some may be restricted or needed under the agreed operating basis. If cash is distributed to the seller before completion, it cannot also be counted as cash delivered to the buyer.
Debt also requires a definition. Bank loans are an obvious starting point, but equipment finance, shareholder loans, unpaid taxes and other obligations may need separate treatment. Lease liabilities and employee entitlements can be especially sensitive to the accounting basis and contract terms.
Assign each item to one part of the calculation. Deducting a liability as debt and also leaving it in a working capital shortfall charges for it twice. If a shareholder loan is repaid to the seller, distinguish that repayment from the price paid for the shares.
Put three figures beside every offer
Create a one-page comparison showing the total agreed consideration, the cash expected at completion and the estimated amount left after costs and tax. Keep contingent earn-outs separate because their payment depends on future conditions. Show vendor finance with its repayment timetable and security.
For example, if $200,000 of the illustrative $1.28 million price is deferred, only $1.08 million is scheduled for completion before any other deductions. That does not make the deferred amount worthless, but it creates timing and recovery risks the seller needs to assess.
Request a draft completion statement early. A clear schedule is easier to discuss than discovering just before settlement that the buyer and seller have used the word “price” to mean different things.
Sources and further reading
The examples in this guide are illustrative. These references explain the underlying principles and offer further practical guidance.
- Grant Thornton Australia: Business valuation vs entity valuation
Supports the distinction between operating business value and the value of the entity after relevant assets and liabilities.
- PwC Australia: Sale and purchase agreement services
Identifies enterprise-to-equity adjustments, normalised working capital, accounting policies and completion mechanisms as transaction issues.
- business.gov.au: Selling your business
Australian government guidance on the sale process, professional advice and the obligations that need to be considered when a business changes hands.
General information for Australian business owners. A valuation depends on the business, valuation date, purpose and evidence. Seek advice on your circumstances before a transaction or ownership change.
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