Do you know the difference between Market Cap and Enterprise Value (EV)? Market Cap is the value of a company’s common stock (# of shares outstanding X share price). If you wanted to acquire a company it could cost more or less than its Market Cap. Enterprise Value is a metric that describes the total cost to acquire a company. It is a combination of the value of common stock, preferred stock, cash, and debt. Determining the Enterprise Value of a public company is easy — most stock reporting services do it automatically. Calculating the Enterprise Value of a private company is a lot harder.

The Basics of Enterprise Value Calculations

Enterprise value is perhaps the most common metric used to describe the value of a company. The formula for enterprise value is pretty straight forward:
Enterprise Value Formula=
+ common equity at market value (this line item is also known as “market cap”)
+ debt at market value (here debt refers to interest-bearing liabilities, both long- term and short-term)
– cash and cash equivalents
+ minority interest at market value, if any
+ preferred equity at market value (preferred shares/liquidation preferences)
+ unfunded pension liabilities and other debt-deemed provisions
– value of associate companies

Most major stock reporting services will calculate Enterprise Value automatically for public companies. Here is Google (Alphabet)’s enterprise value I typically use Yahoo Finance’s key statistic feature to find the enterprise value of public companies.

Enterprise Value is different than a stock’s market capitalization. Market cap is the value of a company’s equity or stock. Market cap only addresses a part of the value of a company. It is equal to the number of outstanding shares multiplied by the current share price. While Google’s market cap is $839.8 billion, its’ enterprise value is $765.91 billion since they carry $3.9 billion in debt and they have $102.25 billion in cash.

Market Cap, cash, and debt are the most common metrics in Enterprise Value. The other components (preferred equity, minority interests, unfunded pension liabilities, value of associate companies) occur, but not as frequently.

Enterprise Value is the primary metric used to describe the value of a tech company. Valuations are often expressed using ratios such as Enterprise Value/Revenue or Enterprise Value/EBITDA.

How to Calculate the Enterprise Value of a Private Company

There is a three step process for estimating the Enterprise Value of a private company:

Calculate Enterprise Value Private Company

There is no reliable public source of private company’s market cap, debt, or cash. Instead you will need to use estimates and other sources of relative valuation. There are seven variables in the Enterprise Value calculation. For private companies you will only be able to estimate one factor – the size of their revenues. You can then use both publicly and privately reported Enterprise Value/Revenue multiples to estimate the Enterprise Value of a private company. While this method is not as comprehensive as the official formula, it generally produces estimates that are within +/- 25% of the actual Enterprise Value.

1. Estimate Company Revenues

There are fee-based subscription services like Pitchbook, Hoovers from D&B, and Privco. While these services are great, they are expensive for the typical product manager.

There are also many free resources that offer revenue information for private tech companies’ revenues. The absolute accuracy of their data is hard to prove, but they are generally in the ballpark of what the actual revenues are. Two excellent free resources include Owler and Crunchbase. Both offer free subscriptions. They provide a plethora of other competitive information. Checkout Crunchbase’s profile of Infusionsoft – a marketing automation provider. Here is Owler’s overview of Infusionsoft. You can learn about VC fundraising history, website traffic analysis, ad keywords, headcount, acquisitions, and competitors. I also use LinkedIn’s paid service, Sales Navigator, to learn about headcount by department, recent hires, promotions, etc.

If none of these approaches work for you, it is possible to estimate private company revenues using a headcount proxy. Companies that are in the same industry tend to have similar ratios of revenue/headcount and operating income/headcount. You can examine the filings of public companies to determine a range of ratios. In every 10-K Annual Report there is a section that lists the total number of employees. Divide that into the reported revenue to get revenue/headcount ratio. Consider the following table:

To estimate the revenue for the private company you are interested in, find the total employee count (LinkedIn, Owler, or Crunchbase) and apply the Revenue/Headcount ratio from your analysis of public companies example of their peers. You can use the same ratios for private competitors reported by Owler or Crunchbase. Consider this table for marketing automation providers:

2. Estimate EV/Revenue Multiple

There are three methods for estimating EV/Revenue Multiples.  They include public company comps, fairness opinions, and industry analyst reports.  Industry analyst reports to be the easiest to use.

Public Company Comps

If there are public companies in your industry you can use them to determine average EV/Revenue multiples.  Consider the following table:

Public Company Comps

These are some metrics from public companies in the supply chain management space. When referencing public companies, your private company will usually be valued at a discount. Public companies have annual audits by independent accountants, have to comply with Sarbanes Oxley, and other regulations like the Foreign Corrupt Practices Act. Also, public company’s equity is liquid — you can buy and sell it on stock exchanges. Private companies can’t do that. The size and revenues are also different. If your firm is $35 million in size you cannot expect to command the same valuation as a Google or SAP. Typically the enterprise private firms are discounted by 30% to 40% in comparison to public companies.

Fairness Opinions

When a public company is acquired their board of directors are required to get a fairness opinion. A fairness opinion is a professional evaluation by an investment bank as to whether the terms of the, acquisition are fair. You can often find fairness opinions in the definitive proxy statements associated with the merger.

For example, here are some excerpts from a fairness opinion associated with the acquisition of Cayenne Software that I played a major role in 1999.

Precedent Transactions Analysis. AH&H analyzed publicly available information for selected, completed transactions (i.e., mergers and acquisitions) involving financially distressed target companies from a variety of industry segments (i.e., Precedent Transactions). The Precedent Transactions reviewed were, in order of date announced: (i) Visigenic Software, Inc. / Borland International, Inc. (Inprise); (ii) Individual, Inc. / Desktop Data, Inc. (NewsEDGE); (iii) CompuRAD, Inc. / Lumisys, Inc.; (iv) NetFrame Systems, Inc. / Micron Electronics, Inc.; (v) Imex Medical Systems, Inc. / Nicolet Biomedical, Inc.; (vi) Somatix Therapy Corporation / Cell Genesys, Inc.; (vii) Compression Labs, Inc. / VTEL Corporation; and (viii) Altai, Inc. / PLATINUM technology, inc. In examining the Precedent Transactions, AH&H assessed certain financial characteristics of the acquired company relative to the consideration offered. AH&H reviewed the value of the consideration paid (the “Transaction Value”) in the Precedent Transactions as a multiple of LTM revenues, LTM operating income and LTM net income, and as a multiple of the book value of common stockholder’s equity. In addition, AH&H reviewed the premiums/discounts of the offer prices to the closing stock prices one day, one week and four weeks prior to the announcement date of the Precedent Transactions.

Such analyses of the Precedent Transactions indicated that: (i) Transaction Values as a multiple of LTM revenues ranged from 0.3x to 5.4x, and the median value was 1.3x; and (ii) Transaction Values as a multiple of the book value of common stockholders’ equity ranged from 1.7x to 43.5x, and the median value was 5.5x. As a result of losses incurred by Cayenne and the target companies in the Precedent Transactions analysis, the corresponding multiples of LTM operating income and LTM net income implied by the acquirors’ offers were not meaningful.

Such analyses of the Precedent Transactions indicated that: (i) Transaction Values as a multiple of LTM revenues ranged from 0.3x to 5.4x, and the median value was 1.3x; and (ii) Transaction Values as a multiple of the book value of common stockholders’ equity ranged from 1.7x to 43.5x, and the median value was 5.5x. As a result of losses incurred by Cayenne and the target companies in the Precedent Transactions analysis, the corresponding multiples of LTM operating income and LTM net income implied by the acquirors’ offers were not meaningful.

Unfortunately, you may not be able to find some fairness opinions that are relevant to your specific situation. Fairness opinions are paid for by the acquired company to justify the actions of the board of directors to the shareholders. It is rare for a firm to determine that an acquisition price was unfair.

Industry Valuation Reports

Industry analyst reports are the easiest and fastest way to find valuation multiple information. One of my favorite sources for technology companies is the Software Equity Group (SEG). Allen Cinzori and his team publish quarterly and annual reports on the state of M&A and valuations in the technology space. They also are pretty good investment bankers as well. Here is a link to their research reports.

Below is a snippet from their most recent report:

EV/Revenue Multiples

You can use the relative EV/TTM revenue multiples as a rough guide to estimate the value of a private company. Use your estimate of the company’s revenues, apply the industry median multiple, then discount the result like you would for a private company.

3. Discount Private Company Valuation

You cannot apply the EV/Revenue multiples of public companies to private companies. Private companies are valued at a discount to public companies for many reasons:

  • Public company revenues are often significantly higher than private companies
  • Private company’s stock or equity is not liquid. Public company stock can be bought and sold everyday with transparent pricing
  • Public companies financial records are audited annually. Many private companies are not.
  • Public companies have to comply with transparency regulations like Sarbanes Oxley (SOX). Most private companies do not go through the formal CEO/CFO SOX section 404 certification

As a result, private companies are valued at anywhere from a 10% to 50% discount to public companies.

Enterprise Value Calculation Summary

Enterprise Value is a useful metric in assessing the value of a company. At the end of the day, however, company value is determined by what a willing buyer is willing to pay in the current market. External factors such as where public markets are at a point in time, and the availability of debt to finance transactions can have a significant influence on the value of a company aside from revenues and profitability. To calculate the Enterprise Value of a private company you need to 1) estimate revenues 2) estimate the EV/Revenue multiple and 3) Discount the private company valuation.

Here is a simple calculator you can use to estimate Enterprise Value for a private company:

Time needed: 1 minute.

How to Calculate the Enterprise Value of a Private Software Company

  1. Estimate Enterprise Value/Revenue multiple

    2.1 Use industry analyst resources like the Software Equity Group’s periodic research to find current EV/Revenue ratios.
    2.2 Multiply the estimated revenues by the average EV/Revenue ratio found in the research report to get a raw estimated Enterprise Value

  2. Estimate the revenue of the company

    1.1 Use free resources like Owler and Cruchbase to find revenue estimates
    1.2 Use headcount proxy. Most firms in the same industry/vertical have similar ratios of employee headcount to revenue. Use tools like
    LinkedIn to determine headcount. Use 10-K filings files with SEC to find headcount and revenue information for public companies
    in same industry/vertical.
    1.3 Calculate average and median Headcount/Revenue metric
    1.4 Estimate the revenues for the private company you are studying by multiplying company headcount by average revenue/headcount

  3. Discount raw estimated enterprise value

    3.1 Discount by 10% to 40% to account for non-public stock, unaudited financials, and non-certification of regulatory compliance (SOX)

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