Business Valuation vs Entity Valuation

By their definition, Enterprise Value (also known as Business Value) and Equity Value both provide an opinion as to the value of an asset, but differ in what they value.

Enterprise Value seeks to value the trading business, including intangible assets such as goodwill, whereas Equity Value seeks to value the corporate structure from which the business operates, being the Enterprise Value plus Surplus Assets/Liabilities.

Worked Example: the Jones Family Trust

Mr Jones runs a plumbing business via a family trust, the Jones Family Trust. The family trust also has loans payable to the beneficiaries and external bank debt.

A forensic accountant was engaged to provide their opinion as to the value of the Jones Family Trust.

The Enterprise Value attributed to the business operated by the family trust was $500,000, by reference to future maintainable earnings (FME) of $250,000 and an earnings multiple of 2.0x.

However, the Equity Value attributed to the Jones Family Trust was only $50,000.

How can this be? The family trust had external bank debt of $100,000, and amounts owing to the beneficiaries of $350,000, resulting in a reduction to the Enterprise Value of $450,000, to the Equity Value of $50,000.

So, the next time your matter involves the valuation of a business, remember that the Enterprise Value (the business value) and Equity Value (the value of the structure) are two very different things.