The Enterprise Value to Equity Value Bridge
When a buyer says "we'll pay 7x EBITDA," they're quoting an enterprise value, not what the seller walks away with. Converting enterprise value to seller proceeds:
Enterprise Value (EBITDA × Multiple)
– Total debt (term loans, lines of credit, notes payable)
– Debt-like items (deferred revenue, unfunded pension, earnout obligations)
+ Cash (subject to debt-free, cash-free treatment)
+/– Working capital adjustment (vs. peg)
= Equity Value (Seller Proceeds)
A business with $5M EBITDA priced at 7x has a $35M enterprise value. But if the business carries $4M of debt, the seller receives approximately $31M — not $35M. Understanding this bridge is fundamental to evaluating any offer.
Why EBITDA Multiple ≠ Price
Two offers at the same EBITDA multiple can produce very different seller proceeds:
- One buyer assumes $4M of debt; another requires it paid off at close — same headline multiple, different net proceeds
- One buyer treats a deferred revenue liability as debt-like; another doesn't — can be $500K+ difference
- Working capital peg disputes can add or subtract hundreds of thousands at close
Common Debt-Like Items
These items reduce enterprise value to equity value at close and are commonly missed by sellers unfamiliar with deal mechanics:
- Deferred revenue (revenue received but not yet earned — a liability to deliver future services)
- Accrued but unpaid vacation and PTO
- Underfunded pension obligations
- Customer deposits
- Capital lease obligations
- Earnout obligations from prior acquisitions
- Transaction costs (advisor fees, legal fees, QoE costs — often deducted at close)
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