Enterprise Value vs Equity Value

Enterprise Value vs Equity Value:

What Agency Founders Need to Know Before Selling

If you’ve started getting curious about what your agency might be worth, maybe a competitor just sold, maybe you’ve had an unsolicited approach from a private equity buyer, or maybe you’re just starting to think about your exit, you’ve probably come across two terms that get thrown around as if they mean the same thing: enterprise value and equity value.

They don’t mean the same thing. And the gap between them can be the difference between celebrating a great outcome and feeling like you’ve been shortchanged at completion. So let’s untangle this properly, because understanding it now will save you a lot of confusion, and possibly some money, when you’re sat across the table from a buyer.

The headline number isn’t always the number you get

Here’s the thing that catches a lot of founders out: when someone says “we’d value your agency at £3 million,” that figure is very often the enterprise value, not the amount that’s going to land in your bank account.

Enterprise value is essentially the value of the business itself, the operating engine. It’s what a buyer is paying for your ability to generate revenue and profit, stripped of how you happen to have financed or capitalised the business up to this point. It typically gets calculated using a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation), so if your agency does £600,000 of EBITDA and buyers in your space are paying a 5x multiple, you’re looking at an enterprise value of around £3 million.

Equity value, on the other hand, is what’s actually due to you, the shareholder, once the deal is adjusted for the cash sitting in the business and any debt it owes. It’s the number on the completion statement. And for a lot of agency founders, it can be meaningfully different from that headline enterprise value figure, in either direction.

Why the two numbers diverge: cash, debt, and cash-free, debt-free

Almost every private business sale is done on what’s called a cash-free, debt-free basis. This phrase gets used constantly in heads of terms and LOIs, and it’s worth actually understanding rather than skimming past.

The logic is simple, even if the mechanics feel fiddly at first:

Cash-free means any cash sitting in the business at completion belongs to you, the seller, not the buyer. You built it up, it’s yours, and it gets added on top of the enterprise value when calculating what you’re paid.

Debt-free means any debt the business owes, bank loans, director’s loans, invoice finance facilities, bounce-back loans, HMRC time-to-pay arrangements, that sort of thing, needs to be paid off out of the proceeds, or deducted from what you receive. The buyer isn’t taking on your debt as a freebie; they’re paying you for a clean business and expecting any liabilities to come out of your pocket, not theirs.

So the bridge from enterprise value to equity value looks like this:

Equity Value = Enterprise Value + Cash – Debt (and debt-like items)

That last part, debt-like items, is where things get more interesting than a simple bank balance check. Dividends declared but unpaid, outstanding corporation tax, unpaid pension contributions, deferred consideration from a previous acquisition you made, even certain accrued liabilities can all get treated as debt-like and deducted. A good corporate finance adviser will help you understand exactly what’s likely to be swept into this category before you’re negotiating with a buyer’s finance team who has every incentive to interpret it broadly.

The working capital adjustment – the bit that catches agencies out

This is the part that trips up service businesses more than almost anything else, and digital marketing agencies are no exception.

Buyers don’t just want a debt-free business with cash sat separately, they also want to buy a business that has enough “normal” working capital to keep trading on day one without needing to inject fresh funds immediately. Working capital, broadly, means your debtors (money clients owe you) plus prepayments, minus your creditors (money you owe suppliers) and accruals, the day-to-day fuel that keeps operations running.

Here’s why this matters so much for agencies specifically: your working capital position can swing a lot depending on billing cycles, retainer structures, and how good, or not, your credit control has historically been. If you’ve got a habit of letting client invoices run 60 to 90 days rather than the 30 you’re supposed to enforce, your debtor book might look inflated at the moment of sale compared to a “normal” month.

The deal process usually involves agreeing a target working capital figure, essentially what a normal, sustainable level of working capital looks like for your business, often based on an average over the preceding 12 months. At completion, your actual working capital gets compared against that target:

– If you deliver more working capital than the target, you typically get paid extra, pound for pound.
– If you deliver less, the shortfall comes off your proceeds.

This is where founders sometimes get an unwelcome surprise. If you’ve been rewarding yourself with big dividends every quarter and running the business fairly lean on cash and debtors right before a sale, you might come in under target and see deductions you weren’t expecting. Conversely, if you tighten up your credit control and let some client prepayments build up in the run-up to a sale, you can genuinely add real value to your equity proceeds, not through EBITDA growth, but simply through better working capital management. It’s one of the few levers you can pull relatively quickly in the final 6 to 12 months before a deal.

What this looks like in practice for an agency

Let’s put some illustrative numbers on it, purely to show the mechanics, not as anything to bank on.

Say your agency generates £500,000 of EBITDA and the market is paying a 5x multiple for agencies of your size and profile. That gives you an enterprise value of £2.5 million.

Now the bridge to equity value:

– You’ve got £150,000 of cash in the business, add that back.
– You’ve got a £100,000 bounce-back loan and a director’s loan of £40,000 still outstanding, deduct £140,000.
– Your normalised working capital target, based on the last 12 months, is £180,000. On completion day, your actual working capital (client debtors less supplier creditors, roughly) comes in at £160,000, £20,000 short. Deduct that too.

So: £2,500,000 + £150,000 – £140,000 – £20,000 = £2,490,000 equity value, almost exactly the enterprise value in this case, but only because the various adjustments happened to roughly cancel out. In a lot of real deals they don’t cancel out at all, and the gap between the headline enterprise value and what actually lands can be six figures either way.

What this means for you as a founder thinking about a sale

A few practical takeaways worth sitting with:

Don’t get anchored on the multiple alone. A buyer offering a slightly lower EBITDA multiple but a genuinely clean balance sheet, or agreeing a favourable working capital target, can easily net you more cash than a headline-grabbing higher multiple with a messy debt position and an aggressive working capital target.

Get your house in order well before you go to market. Clear out any legacy director’s loans, sort out any HMRC arrangements, tidy your debtor ledger, and understand what a genuinely “normal” level of working capital looks like for your business over a full year, not just a good month. Buyers and their advisers will scrutinise this closely, and the earlier you understand your own numbers, the stronger your negotiating position.

Get proper advice on the definitions. The precise wording of what counts as “debt-like” and how working capital is defined and calculated is genuinely negotiable, and it’s often decided in the small print of the SPA (sale and purchase agreement) rather than the headline heads of terms. This is exactly where a good corporate finance adviser and solicitor earn their fee, the difference between a founder-friendly definition and a buyer-friendly one can be a meaningful chunk of your proceeds.

Model it early, not at exchange. If you’re even vaguely considering a sale in the next couple of years, it’s worth getting a proper enterprise-to-equity value bridge modelled out now, based on your current numbers, so there are no surprises when a real offer lands on the table.

The bottom line

Enterprise value tells you what a buyer thinks your agency is worth as an operating business. Equity value tells you what you’re actually walking away with. The gap between them is built from cash, debt, and working capital, and for agency founders, working capital in particular deserves far more attention than it usually gets, because it’s genuinely something you can influence in the run-up to a sale.

If you’re starting to think seriously about an exit, get a proper valuation conversation going well before you’re in live negotiations. Understanding this bridge now means no unpleasant surprises later, and might even put a bit more in your pocket on completion day.