When valuing a business for sale purposes it is important to consider the difference between the enterprise value and the equity value of the business. The difference between the two values is often critically important to the seller as the equity value is more closely aligned with the net cash proceeds which are likely to be received following completion of the sale transaction.
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\n\nMost business owners considering the sale of their business obtain a valuation in order to understand how much they would likely receive on sale. For this reason it is usually best to seek an equity valuation as this extension of an enterprise value calculation considers the impact of surplus assets and net debt. The following example provides further explanation.
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\n\nIn an asset sale (as opposed to a share sale) most businesses are sold on a cash free and debt free basis meaning that the business owner will need to pay out the relevant debts of the business and also keep the surplus cash (excess of working capital). On the pretense of these terms, the equity value will closely align to the likely cash proceeds.
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\n\nFurther, in share / unit sale transaction, the buyer acquires all of the equity interests of the entity and consequently all of the assets and liabilities of the entity. Again under this scenario the business owner would be most interested to know the equity value of their business interest prior to going to contract as this will closely correlate with the net sale proceeds.
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