When assessing an acquisition, which value more accurately reflects the price an acquirer pays?

When assessing an acquisition, which value more accurately reflects the price an acquirer pays?

• A. Enterprise Value
• B. Equity Value
• C. Net Working Capital
• D. Earnings Before Tax

Answer: (A)

In evaluating an acquisition, the amount you effectively pay to take control of the business is best represented by Enterprise Value. This measures the total cost to acquire the company’s ongoing operations, accounting for the capital structure you inherit or refinance. It combines the value of the equity with the debt that comes with the business and subtracts the cash you would receive back, plus any minority or preferred interests as applicable. In short, it reflects what a buyer would actually fund to own and run the business. Equity value, by contrast, only tells you the value to shareholders and doesn’t account for debt you must assume or cash you can strip out, so it can misstate the real price of the deal. Net working capital is a liquidity measure—how much working capital the business needs day-to-day—not the price to acquire it. Earnings before tax is a profitability metric, useful for performance analysis, but not a price tag. For example, if the target has equity value of 100 and net debt of 20 minus cash of 5, the enterprise value is 115. That 115 reflects the true buyout cost for the operating business, since you’d be taking on the debt and receiving only the residual cash, aligning the price with what the buyer must fund to own the enterprise.

In evaluating an acquisition, the amount you effectively pay to take control of the business is best represented by Enterprise Value. This measures the total cost to acquire the company’s ongoing operations, accounting for the capital structure you inherit or refinance. It combines the value of the equity with the debt that comes with the business and subtracts the cash you would receive back, plus any minority or preferred interests as applicable. In short, it reflects what a buyer would actually fund to own and run the business.

Equity value, by contrast, only tells you the value to shareholders and doesn’t account for debt you must assume or cash you can strip out, so it can misstate the real price of the deal. Net working capital is a liquidity measure—how much working capital the business needs day-to-day—not the price to acquire it. Earnings before tax is a profitability metric, useful for performance analysis, but not a price tag.

For example, if the target has equity value of 100 and net debt of 20 minus cash of 5, the enterprise value is 115. That 115 reflects the true buyout cost for the operating business, since you’d be taking on the debt and receiving only the residual cash, aligning the price with what the buyer must fund to own the enterprise.