Enterprise Value (“EV”)

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What It Means

Enterprise Value, also knows as Enterprise Valuation or simply as “EV”, refers to the total valuation a Buyer is willing to pay for a company. There are several methods commonly used by Buyers for calculating Enterprise Value, including:

• EBITDA Multiple

• Discounted Cash Flow

• Asset-Based

• Market Comparables

Each of these methods has benefits and drawbacks. Usually, more than one method is considered to provide a sanity check and help a Buyer zero in on a fair market range for a Business Valuation.

Some factors that commonly affect Enterprise Value include:

• Company Growth - Past performance is the single most reliable indicator of a company’s potential future performance. Buyers will look back over the past 3 to 5 years of a company’s financial statements and look to a growth measure like CAGR to project revenues forward into the future.

• Industry Growth - The old adage “a rising tide lifts all ships” is true in the oceans and it’s also true in business. Industry growth signals to a Buyer that a company can grow without the need to steal market share from competitors based on price competition.

• Profit Margins - Higher profit margins provide a protective buffer that gives a company some flexibility on price, reducing risk to a Buyer. They are a good sign that a company’s products or services do not compete on price and the cash flows they produce can be used to fund growth or pay down debt incurred in an Acquisition.

• Customer Retention - Having a low customer Churn Rate is a key success factor for growth, especially in a an industry with high Customer Acquisition Costs. Every customer retained is one more customer that does not have to be replaced in order to grow.

• Recurring Revenue - Recurring Revenue, in the form of an ongoing subscription relationship, is very highly valued by Buyers and therefore is a very strong driver of Enterprise Value.

• Access to Capital - The more capital a Buyer has access to, the more inclined they may be to offer a higher purchase Price in an Acquisition. Capital can come from a number of sources and depends heavily on the nature and type of Buyer involved.

Why It’s Important

Enterprise Value represents the total value placed on a company, but it doesn’t necessarily represent the proceeds that a Seller can expect to pocket from an Acquisition, as the actual Purchase Price is often subject to a number of adjustments. The underlying structure of the deal and the timing of cash flows can have a substantial impact on the attractiveness of a potential deal. Working with an experienced advisor will help ensure that these considerations are appropriately taken into account when considering any offer.

Related Terms

• Acquisition

• Asset-Based Valuation

• Due Diligence

• Discounted Cash Flow Analysis

• EBITDA Multiple

• Purchase Agreement

• Zone Of Possible Agreement (“ZOPA”)

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