When an owner hears that a comparable company "sold for eight times," the figure that lodges in memory is enterprise value. The figure that reaches the owner’s account is equity value. The distance between the two is not a rounding error. It is the sum of every structural decision made in the years before the sale.
What sits between the two numbers
Enterprise value is the price of the operating business, before anyone accounts for how it was financed. Equity value is what remains after debt is repaid, cash is adjusted, and every obligation that transfers with the company is settled. Working capital targets, deferred compensation, unfunded buy-sell commitments, earn-out structures and tax leakage all live in that gap.
The headline multiple is a statement about the business. The equity proceeds are a statement about its structure.
Why the gap is structural, not transactional
Most of what erodes equity value at closing was set years earlier: the entity form chosen at formation, the way owner compensation and related-party arrangements run through the P&L, the concentration of revenue in a few relationships, the personal guarantees that lenders will require to be released. None of these are negotiated at the deal table. They are discovered there.
What the diagnostic examines
- Normalization adjustments a buyer will insist on, and whether the owner’s assumed EBITDA survives them
- Concentration and transferability: how much of the value depends on the owner remaining
- Debt, guarantees and obligations that move from enterprise value to equity value at closing
- The tax path from gross proceeds to net, given the current structure
Enterprise Value Integrity measures whether enterprise value is credible, defensible and transferable, based on normalized financial performance, market-based assumptions and the structural realities underlying the business. It is the first of the five structural exposures because every other exposure eventually shows up here.