Total Enterprise Value

What is Total Enterprise Value (TEV)?

TEV is a figure that represents the “fair” price that would be paid if the company were to be acquired that includes the value for goodwill. It is the “salable” value and a more accurate estimate because it includes elements that go beyond simply adding up the assets minus liabilities.

Consider two similar sized houses for sale in a neighborhood. Even though they are equal in terms of bedrooms, bathrooms and garages, the likely sale price will differ based on the appeal of other tangibles such as landscaping, kitchen layout, color scheme etc. So too with business.

Simply speaking, if the “curbside appeal” of a company is high, the transaction value it attracts will also be improved.

The formula is TEV=EBITDA x MoE where;

EBITDA is Earnings (or Net Profit) Before Interest, Tax, Depreciation & Amortization

....but the real number being used by people to value your company will NOT be the one that appears on your P&L.  If you have had unexpected events like a fire or large gain/loss of a client/s or perhaps an "unusual" item such as family members on the payroll, excessive expenses like personal travel or country club memberships, your EBITDA will be adjusted or "normalized".  In fact, most companies will have an adjustment...

MoE is the Multiple of Earnings factor

There are almost 30 components, including a number of subjective ones (like “strength of management”) that have an impact on determining the correct multiple. For a private company, the likely range is somewhere between 2.5 and 8. Although it can be higher, this is rare and definitely an exception.

Here are two companies with the same revenue;

  EBITDA MoE

TEV (EBITDA x MoE)

Company A $700,000 5.0 $3.5m
Company B $1,000,000 6.5 $6.5m
Difference $300,000 1.5 $3,000,000

A small increase in EBITDA and a better MoE has a dramatic effect...

Company B is worth almost twice that of Company A, even though their sales are identical and there is only a $300,000 difference of EBITDA!

Swiss Avenue Partners helped Best Rank reorganize our entire financial reporting system into profit centers. This effort was instrumental in helping me understand exactly where we were making the most profit and where we were losing the most money. I can now make educated decisions based on this new structure.    - Matt Walker

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