From Enterprise Value to Equity Value: The Three Documents

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When a buyer agrees an enterprise value for a business, that figure is not what the selling shareholders receive. Enterprise value is a measure of what the business is worth as a whole. Equity value — the amount that actually lands in sellers' hands — is what remains after debt has been repaid, the balance sheet has been adjusted to a normalised position, and the proceeds have been distributed according to the ownership structure. Three documents determine how that conversion works: the cap table, the debt schedule, and the balance sheet. Missing or misreading any one of them will produce an inaccurate picture of what a transaction is actually worth to the individuals selling.

The Gap Between Enterprise Value and Equity Value

Enterprise value is calculated from trading performance — typically a multiple of EBITDA. It represents the total value of the business regardless of how it is financed. Equity value is what belongs to shareholders after all claims on the business ahead of equity have been satisfied.

The gap between the two is not fixed. It is determined by the specific financial position of the business at completion: how much debt it carries, what the balance sheet looks like relative to a normalised working capital position, and whether any liabilities exist that have not been fully captured in the headline valuation. A business agreed at a £10 million enterprise value may deliver £8 million of equity value to its shareholders, or £11 million, depending on the balance sheet position at completion.

Understanding the three documents that determine that gap is one of the most practically important things a selling founder can do before entering a process.

The Cap Table

The cap table — short for capitalisation table — is the equity document. It shows every share in issue, by class and by holder, together with every instrument that could convert into equity before or at completion: options, warrants, and convertible loan notes. A fully diluted cap table shows the ownership structure as it will look once all of those instruments have been exercised or converted, representing the true distribution of equity value among all potential claimants.

The cap table answers a specific question: once proceeds are available for equity holders, who gets paid, in what proportion, and in what order. For a straightforward owner-managed business with a single class of ordinary shares and two shareholders, that question is trivial. For a business that has taken investment, issued preference shares with a liquidation preference, or granted EMI options to management, the fully diluted cap table can produce a materially different picture from the basic shareholding register.

The cap table is an equity document only. It does not capture debt instruments that will simply be repaid at completion rather than converting into equity. Those belong in the debt schedule.

The Debt Schedule

The debt schedule captures every debt instrument in issue: bank loans and revolving credit facilities, loan notes issued to investors or vendors in a prior transaction, director loans, and any other financial instrument that carries an obligation to repay. These are claims on the business that sit ahead of equity — they must be repaid or redeemed at completion before any proceeds reach the shareholders.

In transaction terms, debt instruments are typically treated as debt and debt-like items in the completion accounts mechanism. The agreed enterprise value is reduced by the total of these items to arrive at an initial equity value. A business with £2 million of bank debt, £500,000 of outstanding loan notes, and £300,000 of director loans sitting on its balance sheet at completion will see those amounts deducted from the enterprise value before shareholders receive anything.

The debt schedule also captures instruments that are debt-like in economic substance even if not formally classified as debt: finance leases, deferred consideration from a prior acquisition, unfunded pension obligations, and certain tax liabilities. Buyers and their advisers will identify these items during due diligence. Sellers who have not already mapped them will encounter them as price chips late in the process.

The Balance Sheet

The balance sheet provides the full picture within which the debt schedule sits. Debt instruments are one category of liability on a balance sheet, but they are not the only category that affects equity value in a transaction.

Working capital is the most immediate balance sheet variable. Most transactions include a working capital mechanism that compares the actual working capital at completion to a normalised target peg. If working capital at completion is below the peg — because debtors have been collected aggressively, creditors have been stretched, or stock has been run down in anticipation of the sale — the shortfall is deducted from the equity proceeds. If working capital is above the peg, the seller receives a corresponding uplift.

Beyond working capital, the balance sheet will show provisions, deferred income, contingent liabilities, and any obligations that affect the business's net asset position. A pension deficit, an unrecognised tax provision, or a warranty claim from a prior transaction that has been noted but not quantified will all affect the equity value a buyer is prepared to pay — and may not be fully visible in either the cap table or the debt schedule alone.

The balance sheet is therefore the context within which the other two documents operate. A clean cap table and a mapped debt schedule sitting on top of a balance sheet with a material undisclosed liability will still produce a nasty surprise at completion.

How the Three Work Together

The relationship between the three documents is sequential in a transaction. Enterprise value is agreed based on trading performance — the multiple applied to normalised EBITDA. The balance sheet, through the working capital mechanism and the debt and debt-like items adjustment, converts that enterprise value into an equity value. The cap table then determines how that equity value is distributed among the holders.

A seller who understands all three before entering a process is in a materially stronger position than one who understands only the headline multiple. The questions that matter are: what does the fully diluted cap table say about who participates in the proceeds and on what terms; what debt and debt-like items will be deducted from enterprise value at completion; and does the balance sheet contain any liabilities that a buyer's due diligence team will identify and price into a revised offer.

The time to answer those questions is before the process begins, not during it.

GRAX Connection

Acquire: A buyer constructing an acquisition price needs all three documents to model the true cost of a transaction. The enterprise value agreed with the seller is the starting point, not the finishing point. The balance sheet and debt schedule determine the actual cash outlay; the cap table determines who the buyer needs to negotiate with and what instruments need to be cancelled or assumed at completion.

Exit: For a selling founder, the gap between enterprise value and equity value is the number that determines what lands in their bank account. Preparing all three documents in advance of a sale process — rather than allowing a buyer to construct them during due diligence — gives the seller control of the narrative, reduces the risk of late-stage price adjustment, and accelerates the transaction timetable.

This content is for information only and does not constitute legal, tax, or financial advice. Always take professional advice before making decisions that affect your business or personal tax position.