Enterprise value vs. equity value explained simply

The equation — Equity Value = Enterprise Value minus Net Debt minus Other Debt-Like Items — bridges the gap between a P&L-based valuation (usually derived through different valuation methods at different levels) and the key balance-sheet items, showing what shareholders actually receive at closing.

A buyer pays for the company as a whole, but any outstanding debt must be settled because it reflects money already borrowed from the future, while cash reduces the price because it represents money already earned in the past.

In practice, net debt includes all interest-bearing obligations (bank loans, leases, shareholder loans) minus cash and equivalents that are truly available at closing. In addition, other debt-like items such as tax provisions, pension obligations, and working-capital adjustments are captured separately, as they behave like debt in economic terms even though they don’t bear interest.

It’s the bridge that turns the enterprise value into what shareholders receive on bank account, the equity value.

Net financial debt

Net financial debt captures the company’s pure financing position — the balance between interest-bearing liabilities and available cash. It isolates what the buyer must assume or repay to deliver a debt-free, cash-free business. This category typically includes

• bank liabilities,

• shareholder loans,

• and financial leases,

• offset by cash and equivalents 

Bank liabilities form the core of net financial debt and are usually the least ambiguous component in an enterprise-to-equity value bridge. They include term loans, revolving credit facilities, overdrafts, and any other interest-bearing instruments owed to banks.

Shareholder loans are financing provided by the company’s owners, usually structured as on-balance-sheet debt and not pure equity. They are often used to fund growth or bridge financing gaps. They resemble standard loans — they can carry interest, have repayment terms, and appear as liabilities on the balance sheet. In the context of M&A, however, there is little ambiguity: shareholder loans are always treated as part of net debt. The reason is simple — these loans represent money owed to the sellers and they want their money back.

Financial leases represent long-term obligations to use assets owned by third parties — typically real estate, vehicles, or equipment — and are recognized as interest-bearing liabilities under IFRS 16. They resemble debt because they commit the company to fixed future payments that a buyer must honor after closing. While the accounting treatment can vary across jurisdictions, the commercial reality in M&A is straightforward: leases are treated as part of net debt. A buyer acquiring the business assumes these payment obligations just like bank debt, so they must be reflected in the enterprise-to-equity value bridge. In practice, deal teams review the accounting treatment to avoid double counting — financial leases are added to debt, while operating leases stay embedded in the business plan.

Cash and equivalents represent the offsetting side of net debt — the liquid funds that reduce a buyer’s payment for the business. In principle, this includes unrestricted cash in bank accounts and short-term deposits readily available at closing. In practice, however, much of what appears as cash on the balance sheet is not truly available or transferable. Items such as restricted accounts, escrow balances, or trapped cash in subsidiaries are often excluded during SPA negotiations. The guiding principle is economic control: only funds that can be freely accessed and used by the buyer on day one qualify as cash-like. Everything else, regardless of accounting presentation, remains part of the transaction bridge rather than a credit against debt.

Other debt-like items

Other debt-like items capture non-financial obligations that economically behave like debt — liabilities the buyer must assume even though they are not interest-bearing loans. These items are a frequent focus of due diligence and SPA negotiations because they directly affect the equity value once identified. Typical examples include

• tax provisions and receivables,

• pension obligations,

• and working-capital adjustments

All designed to ensure the company is handed over free of historical liabilities and with a normal level of liquidity to continue operating seamlessly post-closing.

Tax provisions and receivables capture the company’s net position with the tax authorities — what it still owes versus what it can claim back. Provisions include unpaid corporate income tax, wage tax, or VAT that relate to pre-closing periods and are therefore treated as debt-like items, reducing equity value. Conversely, tax receivables — such as prepayments or refundable credits — are considered cash-like and increase equity value if they are collectible and clearly attributable to the seller’s period. The main idea is to transfer the company free of any tax burdens.

Pension provisions capture the company’s unfunded or underfunded obligations toward employee retirement schemes. They represent past commitments to employees that will result in future cash outflows and are therefore treated as debt-like items in an M&A context. Typical examples include defined benefit plans or legacy pension promises. Because these obligations economically relate to past service, the buyer effectively inherits the liability at closing. The main idea is to transfer the company free of hidden employee-related liabilities.

Working capital adjustments ensure the company is transferred with a normal level of short-term liquidity needed to run day-to-day operations. Without this mechanism, sellers could artificially boost cash — for example, by running down inventory or aggressively collecting receivables — which improves net debt but leaves the buyer with an empty warehouse and no liquidity buffer. The higher liquidity requirement effectively acts as a quasi increase in the purchase price for the buyer. To prevent this, the parties compare the actual working capital at closing with a target or normalized level agreed in the SPA. Any shortfall reduces equity value; any surplus increases it. The main idea is to hand over the business neither overfunded nor underfunded, but with the working capital needed to operate smoothly from day one.

How is net debt determined in an enterprise value to equity value bridge?

The sellers usually make the first net debt proposition, which buyers often take at face value when submitting an indicative offer — always subject to due diligence. During due diligence, the buyer’s transaction services team (often a Big 4 FDD advisor) reviews the accounts in detail to verify the seller’s proposal, identify hidden liabilities, and flag any reclassifications or adjustments. This stage is where both parties need to align on what truly counts as “debt” and what remains part of normal operations.

Items that are usually set in stone include:

• Bank liabilities

• Shareholder loans

• Finance leases

• Cash and cash equivalents (after adjusting for restrictions)

Items that are more debatable include:

• Working capital deviations

• Tax provisions and receivables

• Pension liabilities

• Operating leases or IFRS 16 reclassifications

• Supplier financing, factoring, or other off-balance-sheet exposures

Ultimately, determining net debt is a negotiation between accounting form and economic substance — the process that transforms enterprise value into the seller’s true equity proceeds.