Why It Matters
Enterprise value is the standard way buyers, brokers, and lenders talk about what a business is worth. It captures the total value of the operating business independent of how it has been financed, which is why it pairs naturally with EBITDA, also calculated independent of financing.
For an owner-operator, knowing your enterprise value is useful even without an active sale process. It tells you what the business is worth today and what specific improvements would change that number. A small business that increases Adjusted EBITDA by $50,000 and operates in an industry with a 5x multiple has just added $250,000 in enterprise value.
How to Calculate It
The formula applies a market multiple to Adjusted EBITDA:
The multiple varies by industry, business size, and a set of factors specific to how the business operates. For owner-led businesses generating $1 million to $10 million in revenue, multiples typically fall between 3x and 6x, with healthcare services and technology-enabled services commanding higher ranges.
As an example, a business with Adjusted EBITDA of $590,000 in an industry with a 4x multiple has an enterprise value of $2,360,000.
What Owners Commonly Miss
Enterprise value is not what the seller walks away with at closing. The seller’s actual proceeds are equity value, which is enterprise value minus net debt. A business with an enterprise value of $2,360,000 and net debt of $213,000 produces equity value of $2,147,000, which is what the seller actually receives. Every dollar of net debt reduces proceeds dollar for dollar, which is why managing debt levels matters well before any sale process begins.