Understanding the numbers · Topic guide
Enterprise value
The value of the operating business before agreed adjustments for cash, debt and other balances.
Enterprise value is useful because it separates the price of the operation from the way that operation is financed. In a simple earnings-multiple illustration, sustainable annual earnings multiplied by the negotiated multiple produce an enterprise value. That calculation does not yet state how much the seller receives for shares or how much cash the buyer must bring to completion.
The collection’s smaller-business valuation examples pair an earnings basis with a multiple and then discuss cash-free, debt-free terms. The definitions matter: two-year pretax profit and EBITDA are different measures, while exceptional cash, borrowings and working capital can change the eventual shareholder payment. State the metric and period beside the enterprise-value figure. Watch source Watch source
Think of enterprise value as the starting point of a bridge. Identify the cash, debt and other agreed adjustments before calculating equity value; then separate completion cash from deferred payments and transaction expenses. A headline price may remain unchanged while those other amounts move. The source’s brief explanation of equity value subtracts debt but omits cash and other adjustments, so it cannot serve as a full completion statement. A valuation is also not a financing approval: lenders and investors must independently accept the underlying business and proposed allocation of risk. Watch source
Follow the connections
Equity value · Valuation multiples · Working capital.
Continue in the course: Valuing a small business.
See it in an example
- Hypothetical
A £3.5m valuation from two years of earnings
Average the stated pretax profits and compare how the chosen year changes the apparent multiple.
Numbers in context
- Suggested entry valuation · 1–3.5x annual profit; 10x called badRule of thumb
Sey argues for a modest entry price relative to annual earnings.
This is his valuation preference, not a market-wide fair-price range.
- Target cash and seller funding · £2.5m from own balance sheet; £0.5m apparently seller financePersonal experience
The account combines balance-sheet cash with an apparent seller-funded component.
Missing terms prevent reconstruction of the complete purchase price and funding stack.
- Conservative entry multiple · About 2x conservative future profitRule of thumb
Experience with a cyclical downturn leads Sey to favor a lower price based on conservative future earnings.
A personal risk preference is not a universal valuation formula.
- Preferred entry multiple · 3–3.5–4x earnings; earlier ceiling 4–5xRule of thumb
Sey discusses several acceptable entry multiples and warns against stretching the price.
His stated ceilings vary by episode and example; the range is not transaction-market evidence. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- LOI economics example · £1m earnings; £3.5m EV (3.5x); £2.5m at close (2.5x); £1m over 3 or 4 yearsHypothetical
An LOI example separates enterprise value, completion cash and later payments.
The later-payment period varies between three and four years; this is not a signed transaction.
Sources & further viewing 4 videos
The explanations on this site are independent synthesis. Follow each original for full context. A reported experience is not independent proof of a transaction.
- Educational LOI/heads of terms
- Rule of thumb Two-year pretax earnings average
- Educational NAV EV equity simplification