GLOSSARY
What Is Enterprise Value? | Agency M&A Definition
Enterprise value (EV) represents the total value of an agency as a business, including both equity and debt. It is calculated as the purchase price of all ownership interests plus outstanding debt, minus cash and cash equivalents on the balance sheet. In agency M&A, enterprise value is the headline figure that frames the entire negotiation.
Enterprise Value in Agency M&A
When a buyer says they will pay “6x EBITDA” for a marketing agency, they are typically quoting enterprise value — not the cash the seller walks away with. The distinction matters because enterprise value includes the agency’s debt obligations, which the buyer usually assumes or requires to be paid off at closing. For a digital marketing agency with minimal physical assets, enterprise value is driven almost entirely by intangible factors: client relationships, brand reputation, team capabilities, and the predictability of future cash flows. Buyers evaluating a creative agency typically arrive at enterprise value by applying a multiple to adjusted EBITDA or SDE, then adjusting for working capital, debt, and cash. Understanding the bridge from enterprise value to equity value (what the seller actually receives) is critical. An agency with $4M enterprise value but $400K in outstanding debt and a $200K working capital shortfall delivers only $3.4M to the seller. Founders who focus solely on the headline multiple without understanding these adjustments often face unpleasant surprises at the closing table.
How Enterprise Value Affects Agency Valuation
Enterprise value establishes the framework for every other financial term in the deal. The multiple applied to earnings — whether 4x, 6x, or 8x EBITDA — produces the enterprise value, but the seller’s net proceeds depend on the balance sheet adjustments that follow. Agencies carrying significant debt (SBA loans, lines of credit, equipment financing) see their seller proceeds reduced dollar-for-dollar. Conversely, agencies with excess cash on the balance sheet receive additional value. Working capital targets also affect the final number: if the agency’s net working capital at closing is below the agreed target, the purchase price is reduced accordingly. Sellers should clean up the balance sheet 6-12 months before a sale to maximize the conversion from enterprise value to cash in pocket.
Example
A paid media agency has adjusted EBITDA of $600K. A buyer agrees to a 6x multiple, setting enterprise value at $3.6M. At closing, the balance sheet shows $150K in outstanding debt (a line of credit) and $80K in excess cash. The working capital target is $200K but actual working capital is $160K, creating a $40K shortfall. The seller’s equity value is calculated as: $3.6M (EV) – $150K (debt) + $80K (cash) – $40K (working capital adjustment) = $3.49M. The $110K gap between enterprise value and equity value underscores why sellers must understand balance sheet mechanics, not just the headline multiple.
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