The enterprise value to equity bridge for a fair value mark, line by line, and how much each judgment moves a leveraged company's equity.
Everything a buyer would have to pay off, or would inherit, before the shareholders are paid: debt at its repayment amount, less only the cash that is genuinely free, then the debt-like items and the claims of other shareholders. On an illustrative company worth 120.0 million, a simple "loans less cash" bridge gives equity of 80.00. The full bridge gives 53.32 million, and the fund's 70 per cent is worth 37.32. Every line except the term loan contains a judgment.
Worked in full in The Private Markets Valuation Specialist by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The bridge from enterprise value to equity value looks like arithmetic, and that is why it is under-reviewed. In a leveraged company, equity is the thin residual at the bottom of the capital structure, so an item worth a few per cent of enterprise value can be worth ten or twenty per cent of the mark. Here is the bridge, line by line, and what each judgment moves.
The company earns EBITDA of 16.0 million, measured after IFRS 16, so lease costs sit below EBITDA. At a calibrated multiple of 7.5 times, enterprise value is 120.0 million. The fund holds 70 per cent of the ordinary shares, and there are no preference shares, so equity divides pro rata.
| Item | Adjustment | Running total |
|---|---|---|
| Enterprise value, 16.0 × 7.5 | 120.00 | |
| Term loan, face | −48.00 | 72.00 |
| Prepayment fee, 1% | −0.48 | 71.52 |
| Revolving facility drawn | −6.00 | 65.52 |
| Cash 14.0, less 5.0 trapped and minimum operating cash | +9.00 | 74.52 |
| Lease liabilities | −11.00 | 63.52 |
| Pension deficit 4.0, net of tax at 25% | −3.00 | 60.52 |
| Deferred consideration on a bolt-on | −2.50 | 58.02 |
| Deferred VAT and overdue tax | −1.50 | 56.52 |
| Minority interest in a subsidiary | −3.20 | 53.32 |
| Equity value, 100% | 53.32 | |
| Fund's 70% | 37.32 |
Equity = EV − debt at repayment amount + free cash − debt-like items − minority interests
120.00 − 48.48 − 6.00 + 9.00 − 11.00 − 3.00 − 2.50 − 1.50 − 3.20 = 53.32
The bridge totals 66.68, or 55.6 per cent of enterprise value. Keep each line in its own cell with a source reference, and sum them with =EV+SUM(adjustments) rather than a single typed net debt figure.
| Change | Equity | Change | Change in equity |
|---|---|---|---|
| Count all cash, including trapped | 58.32 | +5.00 | +9.4% |
| Omit leases with a post-IFRS 16 EBITDA | 64.32 | +11.00 | +20.6% |
| Pension gross of tax | 52.32 | −1.00 | −1.9% |
| Ignore the prepayment fee | 53.80 | +0.48 | +0.9% |
| Leave out deferred consideration | 55.82 | +2.50 | +4.7% |
| Leave out deferred VAT | 54.82 | +1.50 | +2.8% |
| Leave out minority interest | 56.52 | +3.20 | +6.0% |
| All favourable omissions together | 77.00 | +23.68 | +44.4% |
The leases are the largest single item: omitting them while capitalising post-IFRS 16 EBITDA takes the lease cost out of earnings and never deducts the obligation, so the leases vanish from the valuation altogether, and it lifts equity by 20.6 per cent. Most of the other items are a few per cent of equity each, but all the favourable omissions together come to 44.4 per cent. That is more than a full turn of multiple, which here is 16.0 million, 30.0 per cent of equity. A valuation committee will argue for an hour about a quarter of a turn and approve the bridge in a minute.
Leverage is what makes this matter. One per cent of enterprise value is 1.20 million, which is 2.3 per cent of equity. The thinner the equity, the more each line of the bridge is worth relative to the mark, and the more it deserves the same evidence as the multiple.
Taking net debt from the company's covenant compliance certificate or management accounts and subtracting it in one line. Those definitions are written for other purposes: a covenant definition may exclude the revolver, net all cash, or leave out leases and pensions. Here, loans less all cash gives 80.00 of equity, 26.68 too much, an overstatement of 50.0 per cent. Rebuild the bridge from the balance sheet and the facility agreements every quarter, and reconcile it to the prior quarter line by line.
Debt at its repayment amount, free cash only, every debt-like item, then the other shareholders: 53.32 here, not 80.00. The free workbook on the bridge and the equity waterfall walks a seven-component net debt and then a preference stack, and a related article shows how the multiple at the top of the bridge is calibrated.
Yes, if the multiple is applied to EBITDA measured after IFRS 16, because lease costs are then excluded from earnings. In this illustrative case omitting 11.0 of lease liabilities raises equity from 53.32 to 64.32, or 20.6 per cent. On a pre-IFRS 16 basis the liability is not deducted, but the peer multiples must be measured the same way.
No, only cash that is free for shareholders. Cash trapped in a subsidiary, customer deposits and the minimum needed to operate stay in the business. Excluding 5.0 of the 14.0 here lowers equity by 5.00, or 9.4 per cent of the 53.32 equity value.
Because equity is the residual. With enterprise value of 120.0 and equity of 53.32, one per cent of enterprise value, 1.20 million, is 2.3 per cent of equity. Leaving out every judgment line that flatters the mark, from trapped cash to leases, adds 23.68 million, 44.4 per cent of equity and more than a full turn of multiple.
The bridge from enterprise value to the value of a security is worked in the companion files for chapters 8 and 9 of The Private Markets Valuation Specialist. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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