Enterprise value, or total enterprise value, is an economics measurement reflecting the total market worth of an enterprise. It’s the sum of claims made by all stakeholders: owners, lenders and borrowers. The total value of any enterprise is the difference between its net tangible assets (such as land and machinery) and its value to other parties. In simple terms, enterprise value takes into account the value of the company to the external world, minus the value of its own tangible assets. As any business person will know, it’s very important to maximise your enterprise value.
Some people may view enterprise value as a static, fixed value. Others will see it as a measure of the value added by each individual part of the business. The most common way to view enterprise value is to view it as the market share of the business in relation to other similar businesses.
To arrive at a calculated enterprise value, one needs to calculate how much total market share of a business has relative to its competitors. It then needs to consider how that market share has changed over time and how it might change in the future. This article examines how these factors affect enterprise value.
For example, if a business was losing its total market share as a result of reduced profits and increasing customer turnover, then the business’s overall value would be reduced. However, if a company was gaining market share because of better customer service and a more favourable business environment, then the value of the business would increase.
To arrive at the enterprise value of any business, one should look at its financial statements, balance sheet and cash flow statement. These documents will give the owner and manager an idea of the health of the business. If the business appears to be doing well financially, it will be in a strong position to negotiate a favourable deal.
Looking closely at the financial reports, you’ll see that the business spends money. A business that is in debt will often struggle to find a lender willing to lend it money to increase its value and will have to increase its borrowing. An enterprise that is consistently in surplus will find that it can borrow money for little or no cost from other businesses willing to lend.
Cash flow is one of the most important factors when considering the values of any business. A company must ensure that its cash flows are sufficient to meet its normal operating costs and make a profit.
The cash flow of an enterprise also reflects the cash the company makes from investments. The more cash it makes, the more value it has. Therefore, a business with a high cash flow will have a higher value.
Cash flow is usually measured by cash paid out in loans or dividends received. Cash that goes to investing and building new products or infrastructure will create a positive cash flow. This cash flow can be negative if the business borrows for investment purposes.
A business may have increased its value because it has become more efficient. This will reflect on the numbers in the accounts. If a business is less than two years old, it may be seen as a risk. This means that it may not be able to pay its debts and that its cash flow is affected by changes in interest rates, the size of its workforce and the economy.
The level of competition in the industry is also reflected in the enterprise value. Companies that are the smallest or which have the lowest number of competitors in their field have a lower value than larger companies with more customers. Companies that are not as successful tend to have a higher value.
There are certain industries, such as health care, where there are fewer choices. that are considered to be “competitive industries” by the accounting standards used. The accounting principles used to determine enterprise value use this industry as a base for comparison.