Enterprise Value or Equity Value for IOI terms?

July 31, 2025

by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Lima, Peru

Hi everyone, what is common rule in IOI (or LOI): to state percentages calculated from Enterprise Value (MVIC) or from Equity Value (MVIC net of debt)? For example, if a company is valued at 100 and carries long term debt of 20, the percentages of cash at closing, seller note, earnouts, and/or rollover are calculated from 100 or 80?

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1) I do not understand why the need for % in IOI or LOI. 2) Value of a business per Corporate Finance, is Enterprise Value, not Equity Value. Equity Value is used by the appraisal profession b/c they need such value for gift tax, damages, etc. Appraisal profession serves IRS and Courts. 3) In M&A, almost all (close to 100%) transactions occur at Enterprise Value. I have yet to see an M&A transaction occur on an Equity Value basis. 4) Keep in mind that most all databases have their own definition of "Price" b/c the collected data may not capture all elements of the balance sheet that are part of the Enterprise Value. For example, Price in some databases only includes fixed assets and goodwill; "Price" excludes all other assets and all liabilities. 5) I have been involved with many Asset and Stock deals over the 35+ years. In both, Price is defined on an Enterprise Value basis. Many LOIs say, "Buyer will pay $X for a DFCF balance sheet. The structure may be a Stock sale or an Asset sale TBD during DD." 6) Enterprise Value vs. MVIC. Enterprise Value excludes debt and debt-like liabilities. MVIC, to my knowledge, only excludes debt. 7) Some people assume that in a Stock sale buyer assumes all liabilities of seller. This is incorrect. In M&A, a buyer CANNOT assume seller's debt unless buyer's new lender wants to be in a second position behind seller's lender. (There are some, but very rare, exceptions like IRB.) 8) So, to answer the question, stay on EV in IOI or LOI. Hope the long answer does not bother you.

Reply by a searcher
from The University of Chicago in Nashville, TN, USA

You can do it either way but for many traditional search deals they are done as a cash free / debt free so you would use Enterprise value and it is their responsibility to pay off the long term debt at close. Just specify it in the IOI or LOI.

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