It is not uncommon for litigation to stem from disagreements over the value of privately-held companies and ownership interests in those entities. In those situations, many different values are often discussed as the parties attempt to reach a resolution. It is important to make sure that the parties are speaking the same language as far as the type of value being considered—equity value, enterprise value or invested capital value. While these three types of value are related, there are significant differences between them and understanding those differences is important in reaching a fair resolution. With this in mind, I will walk through the differences in equity, enterprise and invested capital value to give attorneys additional tools to effectively navigate valuation-related disputes and negotiations.

Setting the Stage

Let's assume we have a dispute in which Party A believes that a company's value is $7 million while Party B believes it is $4 million. Are the parties really $3 million apart? We cannot tell based on the numbers alone because they do not tell the entire story—the type of value needs to be defined to give the numbers context. Therefore, before comparing the different values, we must have an understanding of the different types of value that can be determined for a company's capital structure.