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Enterprise Value Calculation

We've been asked recently about the concept of Enterprise Value and how it is calculated. Briefly, Enterprise Value attempts to calculate the value of the operating business of a firm without regard to its capital structure or (ideally) other non-operating factors like an unusually large cash balance.

Here are the two formulas we typically use for public companies.

1 - Enterprise Value = (Fully Diluted Shares * Current Stock Price) plus Debt (long and short term, including capital leases) less any option exercise proceeds for unexercised, in-the-money options included in Fully Diluted Shares less cash & marketable securities.  We try to exclude from Fully Diluted Shares all out-of-the-money options and warrants. [UPDATE 9/8/10:  We changed our calculation to subtract off cash and marketable securities as noted.]

2 - Enterprise Value = (Fully Diluted Shares * Current Stock Price) less Current Assets plus Total Liabilities less any option exercise proceeds for unexercised, in-the-money options included in Fully Diluted Shares.  We try to exclude from Fully Diluted Shares all out-of-the-money options and warrants.

While the formula many use is probably something similar to #1, we  also look at #2 as some companies have unusual balance sheet items that can distort the result of #1. #2 may also be more applicable when you are trying to look at valuations for asset purchase transactions where the bulk of current assets and total liabilities are left behind with the seller (as in hosting.)  Circumstances may also dictate using a hybrid formula to ensure a logical result.

As always, if you have any questions please do not hesitate to contact us. 

Author: Hillary Stiff,  Managing Director of Cheval Capital. Hillary has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including NTT/Verio, The Endurance International Group and Web.Com among many others.  She has helped complete over 250 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale. 

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed.  Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.