How to Calculate Enterprise Value: A Step-by-Step Guide for Business Owners

Introduction

Enterprise Value (EV) is a key financial concept that provides a comprehensive measure of what a business is worth. Unlike basic metrics like net income or revenue, EV reflects the total value of the business, including its operations, financial obligations, and capital structure. For private business owners, understanding how to calculate enterprise value isn’t just for investment bankers or accountants—it can help inform critical decisions related to selling, succession planning, financing, or even resolving disputes. This article walks through how to calculate EV in a clear, step-by-step way.

What Is Enterprise Value?

Enterprise Value or EV represents the total value of a business, irrespective of how it's financed. It includes:

• The value of core business operations (usually measured by future expected cash flows)
• Debt and other financial obligations (what a buyer would need to pay or assume)
• Adjustments for excess cash or non-operating assets (which may not be part of the deal)

In short, EV is what a buyer would pay to acquire the entire business before accounting for how the deal is financed. It reflects the fair market value of both tangible and intangible assets tied to operations.

Methods to Calculate Enterprise Value

There are several approaches to calculate EV. 

1.  Income Approach (Discounted Cash Flow)
2. Market Approach (Comparable Multiples)
3. Asset-Based Approach

Income Approach (Discounted Cash Flow)

For private businesses, the most practical and defensible method is the Income Approach:

• This method estimates the present value of projected future free cash flows.
• A discount rate is applied to reflect the time value of money and business risk.
• Especially useful for businesses with stable operations and forecastable earnings.

Market Approach (Comparable Multiples)

• EV is estimated by applying industry multiples (e.g., EV/EBITDA) to your business.
• While popular in theory, it's challenging for private companies without access to market comps.

Asset-Based Approach

•  - Suitable for asset-heavy businesses or those without stable cash flow.
• - EV is based on the fair market value of assets used in operations.

Step-by-Step: How to Calculate Enterprise Value

Here’s a simplified step-by-step guide using the Income Approach:

 Step 1: Project Future Free Cash Flows (FCF)

• - Forecast your business’s free cash flows (cash generated from operations minus capital expenditures).
• - A typical forecast period might be 3 to 5 years.

 Step 2: Choose a Discount Rate

• Select a rate that reflects your company’s risk profile.
• For small businesses, a buildup rate (rather than WACC) may be more appropriate.

 Step 3: Calculate the Present Value of Cash Flows

• Use the discount rate to calculate the present value of each year’s cash flows.
• Add a terminal value to reflect the value beyond the forecast period.
• Sum of these present values = Enterprise Value

Optional Step: Adjust for Non-Operating Assets

• EV reflects operational value. If the business holds non-operating assets (e.g., excess cash or investment property), exclude them here and consider them separately when determining equity value.

Example: Simple Calculation

• Forecasted FCF: $1M/year for 5 years
• Discount rate: 15%
• Terminal value at end of Year 5: $6.67M (based on a 6.7× multiple of final-year FCF)
• Present value of FCF + Terminal Value = Approx. $12.9M EV

Note: Using a 6× multiple implies a discount rate of 16.67%. If your discount rate is 15%, the more precise corresponding multiple would be 6.67×. Choosing the multiple should reflect your expectations about long-term risk and growth.

EV vs. Equity Value: A Quick Reminder

To determine what a business owner might "take home," calculate Equity Value:

Equity Value = Enterprise Value – Debt + Cash + Redundant Assets

This bridges the value of the business to the value of the owner's interest in it.

Why This Matters for Business Owners

• Sale or Succession Planning: Understand your business's true worth before entering negotiations.
• Strategic Decision-Making: Evaluate the impact of investments and operational improvements.
• Litigation or Shareholder Disputes: Use defensible valuations for fair settlements.

Knowing your enterprise value provides clarity and confidence when making high-stakes decisions.

Limitations and Considerations

• Forecasting Risk: Estimating future cash flows requires judgment and realism.
• Discount Rate Sensitivity: A small change in rate can significantly affect EV.
• Professional Input: A CBV or valuation expert can provide objective, supportable EV calculations.

Conclusion

Enterprise Value is more than a buzzword—it’s a fundamental metric for understanding what your business is truly worth. While public companies have stock prices to guide them, private business owners can calculate EV by focusing on projected cash flow and business fundamentals. With a clear understanding of EV, you can plan more effectively, negotiate with confidence, and make better decisions for the future of your business.

If you'd like help determining your business’s enterprise value, reach out to Troy Valuations for expert, personalized support.

Downloadable Resource: For a printable version of the sample DCF table, click here to download the PDF. For an editable Excel version where you can try your own numbers, click here to download the Excel file.