Top 7 Mistakes to Avoid When Using Enterprise Value in Business Valuation

Introduction

Enterprise Value (EV) is a powerful tool in business valuation, but like any tool, it must be used properly to provide useful insights. Many private business owners and even advisors make avoidable mistakes when estimating or interpreting EV. These errors can lead to overvaluation, undervaluation, or misinformed decisions in transactions, litigation, or strategic planning. In this article, we highlight the most common pitfalls when applying enterprise value in private business contexts—and how to avoid them. 

If you're new to this concept, start with our step-by-step guide on how to calculate enterprise value to understand the foundation before diving into these common mistakes.

1. Confusing Enterprise Value with Equity Value

Perhaps the most frequent mistake is using EV and equity value interchangeably. While they are related, they are not the same.

• Enterprise Value reflects the value of the entire business, including both debt and equity.
• Equity Value is what remains after subtracting debt and adding back cash and non-operating assets.

Why it matters: Using the wrong measure can lead to misleading conclusions—especially in negotiations or shareholder disputes.

This confusion is so common we’ve written a full guide comparing enterprise value and equity value to help business owners understand the difference.”

Tip: Always clarify whether you're referring to EV or equity value, and ensure the context supports the metric.

2. Relying Solely on EBITDA Multiples Without Adjusting for Risk or Cash Flow Quality

Using a multiple of EBITDA to estimate EV is common, but it requires judgment. Multiples vary by industry, company size, and risk profile.

• Not all EBITDA is equal. One-time gains, unusual expenses, or aggressive accounting can distort it.
• Industry multiples found online or from public companies may not apply to small private businesses.

Tip: Normalize EBITDA for unusual items, and consider how your business's risk profile compares to the market data.

3. Ignoring the Role of Redundant or Non-Operating Assets

EV is meant to reflect the value of operating assets only. Including cash, investment property, or unrelated assets inflates the result.

Tip: Calculate EV using only assets tied to operations. Add back cash and other non-operating items only when determining equity value.

4. Misusing the Terminal Value

Terminal value often makes up a large portion of a DCF-based enterprise value, and it’s easy to misuse:

• Applying an arbitrary multiple without checking if it matches the discount rate or growth assumptions.
• Assuming indefinite growth at unrealistic rates.

Tip: Use either the Gordon Growth model (with a modest perpetual growth rate) or a capitalization multiple that aligns with your risk assumptions (e.g., 6.7x for a 15% discount rate). 

5. Using a Public Company WACC for a Private Company

Weighted Average Cost of Capital (WACC) is often too theoretical or difficult to apply in small private businesses.

• Public WACC calculations reflect market expectations, tax advantages, and liquidity that private firms do not share.

Tip: Use a build-up approach for discount rates that reflects the specific risk profile of your business. Avoid overcomplicating with public market inputs.

6. Overlooking Working Capital Needs and Capital Expenditures

Free cash flow should account for reinvestment needs—both working capital and capital expenditures. Ignoring these creates an inflated EV.

Tip: Base projections on realistic, sustainable cash flows after accounting for what the business needs to grow or maintain operations.

7. Applying EV-Based Ratios for Benchmarking Without Context

Private businesses often compare their EV/EBITDA ratios to industry averages without knowing how those averages were derived.

• Public company ratios reflect different financing structures and market expectations.
• Without access to comparable private company data, the benchmark may not be relevant.

Tip: Focus on internal benchmarking over time, or compare only to companies with similar size, margins, and risk.

Conclusion

Enterprise Value is an essential concept in business valuation, but it’s not plug-and-play. It requires thoughtful application and a clear understanding of its components. Avoiding these common mistakes ensures your EV calculation reflects reality—not assumptions.

Once you’re confident in your EV calculation, learn how to use enterprise value to evaluate business performance over time.

If you’re unsure whether your valuation approach is grounded and defensible, reach out to Troy Valuations for expert support. We help private business owners understand and apply enterprise value the right way.