The term “business enterprise value” (BEV) is widely used in mergers and acquisitions (M&A) talks and reporting, but it has the same meaning outside of that context. We’ll define business enterprise value, look at how it’s determined through a business enterprise value appraisal, and compute a business enterprise valuation in this post.
What is business enterprise value?
In a nutshell, business enterprise value is the whole value of a running business in terms of how much it would cost to buy it.
This is the cost of buying 100% of a publicly traded firm’s stock (basically taking it private), plus company debt, minus cash reserves for a publicly traded corporation. This would be the sum of the market value of the owners’ equity plus total debt, minus cash and cash equivalents in the case of a private corporation. Enterprise value is a measure of a company’s market value, regardless of the financial structure used to fund its operations. Business valuation is a common method for calculating BEV.
How does a business enterprise valuation establish value?
Because business enterprise valuation is concerned with determining a company’s overall going concern worth, it considers all of the company’s tangible and intangible assets, as well as the future value of growth potential. Certain intangible assets are often not recorded in the balance sheet unless a company is acquired. The following are examples of intangibles:
- Intellectual property (IP) such as trademarks and patents,
- Assembled workforce and skilled management,
- Customer Relationships representing the existing customers and the value of having an existing customer over acquiring an new one,
- Economic goodwill, not to be confused with accounting goodwill, including reputation, operating procedures and systems, legal agreements like operating and franchise agreements, leases, contracts, and working capital.
Unlike a market capitalization, which is just the number of shares outstanding multiplied by the current share price, the BEV provides a more holistic view of the company’s value as a continuing concern. In addition to cash reserves, enterprise value contains preferred stock and debt, which each represent claims against the corporation. As a result, it is the most accurate portrayal of the company’s worth, accounting for all assets and liabilities.
How To Calculate A Business Enterprise Value Appraisal
The enterprise value is computed by adding market capitalization, preferred stock, and debt to the balance sheet, then removing cash and cash equivalents. It equals the cost of purchasing each share of common and preferred stock, as well as the outstanding debt. Because the cash belongs to the buyer once they have entire possession of the company, it is deducted from the total.
The method for estimating the enterprise value of a public firm differs from the method for calculating the enterprise value of a private company, when there are no stock measures to compare and financials are not publicly available. More information about private firm value can be found here.
For the purposes of this article, we will concentrate on the stock and debt procedure used to calculate public company enterprise values:
- Calculate the company’s market capitalization, by multiplying the number of shares of common stock by the current price per share.
- Calculate the debt represented by preferred stock. Though preferred stock can differ in terms, in general, it represents future claims against the company.
- Calculate all other debt. When acquiring a business, the buyer also acquires its debts.
- Subtract cash and cash equivalents from the sum of 1, 2, and 3. If the business has cash, that cash is part of its enterprise value and transfers with the ownership of the company. Because the new owner can take that cash and pocket it, the cash essentially reduces the cost of purchasing the business. Therefore, it is subtracted when calculating enterprise value.
The above criteria and computations can be used to assess business enterprise value in M&A deals where a public firm is being purchased. However, the major method used by valuation professionals to evaluate the commercial enterprise value is the Discounted Cash Flow Model. Due to the scarcity of data on private enterprises, enterprise values for private companies are determined using the three standard valuation methodologies of market, income, and cost.
Need help determining the enterprise value of your business?
Taqeem has assisted businesses in a range of industries in obtaining accurate asset and business values. For a wide range of enterprises and situations, we have vast expertise applying all valuation methodologies. Our valuation and transfer pricing experts have worked with some of the world’s top corporations.
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