Enterprise Value to Equity Value bridge explained for Healthtech Founders

For healthtech founders, understanding the bridge from Enterprise Value (EV) to Equity Value is critical for M&A. While a buyer's offer is typically based on a company's EV, the value of its operating business, the actual cash you receive as a founder is based on its Equity Value. The bridge is a simple calculation that adjusts the EV for your company's balance sheet to determine the final payment to shareholders.

The Core Formula 💰

The foundational formula for the EV-to-Equity Value bridge is:

Equity Value = Enterprise Value - Net Debt + Other Adjustments

Let's break down the key components:

Enterprise Value (EV): This is the headline number in an M&A offer. It represents the value of your company's core operations, independent of how it's financed. It's what the buyer is paying for your business itself. In healthtech, EV is often calculated using a multiple of your revenue or EBITDA (e.g., EV = Revenue x 5x).

Equity Value: This is the final value attributable to shareholders. It is the amount of cash you, your co-founders, and investors will receive at closing.
 
 The Bridge: A Closer Look 🌉

The difference between EV and Equity Value is a function of a company's balance sheet. The buyer typically wants to acquire your operating business "cash-free, debt-free," meaning they aren't paying for your cash on hand and won't be inheriting your debt.

Net Debt: This is the most significant adjustment. It represents your company's total debt minus its cash and cash equivalents.

Formula: Net Debt = Total Debt - Cash & Cash Equivalents
Impact: Any debt on your balance sheet will reduce the final Equity Value. Conversely, any cash on hand will increase it, as it's typically distributed to shareholders.

Healthtech Context: Be sure to include all debt-like items, which might be less obvious in a tech company, such as capital leases, unfunded pension liabilities, or deferred revenue that is treated as a liability in the deal structure.

Other Adjustments: In a real-world M&A deal, other balance sheet items can impact the final price. These are often negotiated and will depend on the deal's specific terms.

Preferred Stock: Any value owed to preferred stockholders (e.g., from a Series A or B round) is subtracted from the EV. The proceeds from the sale are distributed according to a pre-defined waterfall, with preferred shareholders often getting paid before common shareholders.

Working Capital Adjustments: Buyers will often set a target for a company's working capital (current assets minus current liabilities). If your working capital at closing is below the target, the purchase price may be reduced. If it's above, it may be increased.

Transaction Costs: Legal, investment banking, and accounting fees related to the deal are typically paid out of the proceeds, reducing the final amount distributed to shareholders.
 
An Example for a Healthtech Startup 🏥

Let's imagine your digital health company, "HealthMetrics," has received an offer.

Proposed Enterprise Value (EV): $50 million (based on a 5x multiple of your $10M in ARR)
Now, let's look at your balance sheet to calculate the final Equity Value.

Cash on hand: $3 million
Total Debt: $5 million (e.g., a bank loan for equipment)
Preferred Stock: $8 million (the liquidation preference for your investors)
Working Capital Adjustment: Let's assume a negotiated negative adjustment of $500,000.
Transaction Costs: $1.5 million

The Bridge Calculation:

Start with EV: $50,000,000
Subtract Total Debt: - $5,000,000
Add Cash: + $3,000,000
Subtract Preferred Stock: - $8,000,000
Subtract Working Capital Adjustment: - $500,000
Subtract Transaction Costs: - $1,500,000
Final Equity Value = $33,000,000

Key Takeaway: The "cheat sheet" is to remember that the EV is not the cash you'll walk away with. You must account for all financial obligations and adjustments to bridge from the EV to the final Equity Value that is paid out to you and your investors.

To discuss how Nelson Advisors can help your HealthTech, MedTech, Health AI or Digital Health company, please email [email protected]