What is Enterprise Value? A Real-World Guide for Business Owners

When you’re preparing to sell your business, one of the first questions you’ll ask, and rightly so, is: “What’s my business worth?” Many owners jump straight to the number they hope to walk away with, often called net proceeds. But there’s a bigger, more comprehensive number that reflects the full value of the transaction: Enterprise Value.

Enterprise Value (EV) is not a number buyers necessarily use to “value” or compare businesses, it’s the framework that ultimately dictates how the deal is structured and how the total economic value of the sale is delivered to you, the seller. And importantly, not all of this value is paid at closing; some may come later, through mechanisms like seller financing, earn-outs, stock, or consulting agreements.

The Real Definition of Enterprise Value

In our engagement agreements, we define Enterprise Value as:

“…the sum of all cash and non-cash consideration paid, delivered or made in connection with a disposition, including, but not limited to, payments made to the seller in the form of cash, property, promissory notes or securities; business property; accounts receivable; intellectual property; general intangibles; property rights; licensing rights; all cash or non-cash deals made between buyer and seller resulting in a benefit to either party; debts assumed or acquired; and any amounts payable to seller or owners (or others affiliated or related with seller) under non-compete, earn-out, performance-based payments, consulting or other agreements.”

That may sound like a mouthful, but here’s the idea in plain English:

Enterprise Value is the total economic value of everything the buyer agrees to provide in exchange for your business, no matter how it’s structured.

Why Enterprise Value Matters to You

Enterprise Value is what you’re really negotiating for in a sale. It reflects the full consideration the buyer is offering, but it also shapes the structure of the deal, how much is cash at closing, how much is deferred, and what risks or contingencies are attached.

For example:

• Cash at closing is certain and immediate.

• Earn-outs are contingent on future performance and carry risk.

• Seller notes or buyer-assumed debt may affect timing and tax treatment.

• Stock in the buyer’s company may offer upside, or downside, beyond closing.

Understanding your total EV, and the components that make it up, helps you assess the trade-offs between certainty, timing, and risk.

Here’s a simple example:

• Business A: $1M EBITDA, no debt.

• Business B: $1M EBITDA, $3M debt.

If the market dictates a 5x EBITDA multiple, both businesses have an EV of $5M, because both produce the same operational earnings. But for Business B, the seller must pay off $3M in debt at closing, so their net proceeds (take-home cash) is only $2M.

In some rare cases, a buyer may agree to assume the $3M in debt as part of the deal structure, but the EV remains $5M either way. What changes is how that $5M is split between cash at closing and debt assumption.

How Enterprise Value Affects Deal Structure at Closing

Here’s how the different parts of EV show up in your deal structure:

1️⃣ Debt Payoff or Assumption

Most buyers require the seller to deliver the business free and clear of debt. That means you use part of the purchase proceeds to pay off your loans at closing. In some larger or strategic deals, buyers may assume certain debts instead, in which case you keep more cash at closing, but the EV stays the same.

2️⃣ Earn-Outs and Contingent Payments

If a portion of your price depends on hitting future performance targets, those payments still count toward EV. However, they affect your risk, because they’re not guaranteed cash at closing. Understanding what portion of your EV is contingent is key to evaluating the quality of an offer.

3️⃣ Non-Compete and Consulting Agreements

It’s common for buyers to structure part of the deal as payments for your agreement not to compete, or for consulting services during the transition. These amounts are still part of EV, even though they’re separate from the “purchase price” of the assets or stock.

4️⃣ Stock or Equity in Buyer’s Business

In some cases, buyers may offer you shares in their company or a new entity instead of cash. These securities have value, and they’re included in EV, but they carry different risks and tax implications than cash.

Key Takeaways

✔️ Enterprise Value is the total value the buyer pays, regardless of how it’s structured.

✔️ EV includes more than just cash at closing, it also includes debt assumption, earn-outs, consulting agreements, stock, and more.

✔️ The way EV is delivered determines your risk, taxes, and ultimate take-home amount.

As you think about selling your business, focus not just on “the number,” but on what’s behind the number. A good advisor will help you break down any offer into its components and compare them fairly.

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If you’d like help understanding your business’s value and how deal structure impacts what buyers will pay and ultimately what your true enterprise value is, reach out to Matt Perkins & Carson Bomar M&A Intermediaries and the Co-Founders of **Exit Game Plan**. We’re happy to have a confidential, no-pressure conversation to help you plan your exit the right way.