Definition - What does Equity Value mean?
In the context of a private business, equity value is the value of the company's shares and loans that the shareholders have made available to the business. It is calculated by taking enterprise value, adding redundant assets, and then subtracting debt net of cash available. Once the total equity value is determined, it can be further separated into the value of shareholders' loans and shares outstanding (common and/or preferred).
Equity value and market capitalization are similar terms that are sometimes used interchageably. However, the difference is that market capitalization only considers the value of the company's common shares and treats preferred shares and shareholders' loans as debt, whereas equity value will include these instruments in its calculation since they are more like equity in a private business.
Divestopedia explains Equity Value
Equity value is an important number for a business owner to know when selling a business. It represents the amount of pre-tax dollars the seller will receive after the company debt has been repaid.
When an offer for the sale of a business is received, the purchase price usually represents the enterprise value of the company which includes all of the outstanding debt. This is not the ultimate pre-tax dollars that the seller will realize from the sale.
The "house" example is useful for a seller to understand the difference between equity value and enterprise value. Think of a house that carries a mortgage. The final price of the house would represent the enterprise value of a business. The value of the house less the outstanding mortgage would represent the equity value. This equity value represents the final dollars that the seller puts in his/her jeans.
Join thousands of others with our weekly newsletter