Private Equity Valuation Explained: EV vs Equity Value, Multiples & Price
Learn the EV vs equity value bridge, the multiples PE uses (EV/EBITDA, P/E, EV/Revenue), and how funds decide if a price is actually a good deal—plus interview questions and a quick practice plan.
Note
Module Reading: This article accompanies the Valuation Fundamentals module in our Private Equity interview prep track.
Why This Matters in PE Interviews
Private equity interviews don't test whether you can recite definitions. They test whether you can think like an investor:
- What am I actually buying (equity vs enterprise)?
- Which multiple is consistent with that (EV-based vs equity-based)?
- What makes the price "good" (returns, downside protection, exit options)?
If you can explain valuation cleanly, you instantly signal "IB technicals + investor judgment." This article gives you the complete framework.
EV vs Equity Value: The One-Sentence Difference
The Core Distinction
Enterprise Value (EV) = value of the entire business operations to all capital providers (debt + equity).
Equity Value = value attributable to common shareholders only (what the equity is worth).
PE translation: Deals are often quoted on an enterprise value basis (headline price), and then converted into the equity check via net debt and other adjustments (the bridge). In private M&A, bids are commonly framed as enterprise value assuming a "cash-free, debt-free" balance sheet, with adjustments for net debt and often working capital.
The EV ↔ Equity Value Bridge (What to Add/Subtract)
You'll see two "bridges" in interviews:
A) Equity Value → Enterprise Value (trading comps)
You start from the market cap, then adjust to a capital-structure-neutral value:
EV = Equity Value + Net Debt + Preferred Stock + Minority InterestStart with market cap (share price × diluted shares), then add all non-common equity claims to get the total business value.
EV=Enterprise ValueEquity Value=Market Cap (Share Price × Diluted Shares)Net Debt=Total Debt minus CashPreferred Stock=Preferred equity claimsMinority Interest=Non-controlling interest in subsidiariesWhy subtract cash in net debt?
Because EV is meant to reflect the value of operating assets, and excess cash is a non-operating asset in most contexts. When you acquire a company, you "get" its cash—it reduces your effective purchase price. That's why EV formulas commonly use debt minus cash.
B) Enterprise Value → Equity Value (deal / purchase price)
If you have an EV from a multiple or DCF, you "bridge down" to equity:
Equity Value = EV − Net Debt − Preferred Stock − Minority InterestStart with Enterprise Value, then subtract all non-common equity claims to get what equity holders receive.
This mirrors how cash-free/debt-free deal math links EV to the equity proceeds in practice.
What Exactly Sits in "Net Debt"?
Net Debt Components
| Term | Definition | Note |
|---|---|---|
| Usually Included | Short-term + long-term interest-bearing debt, lease liabilities (depending on context) | Core debt |
| Debt-Like Items | Unfunded pensions, certain provisions, off-balance-sheet obligations | Deal-dependent |
| Subtract | Cash and cash equivalents | Reduces net debt |
Key Rule PE Interviewers Love
Be consistent: your numerator (EV) and denominator (EBITDA / EBIT / earnings) must be defined on the same basis. If you include leases in debt, you should use EBITDAR (EBITDA before rent) or adjust accordingly.
Why Do We Add Minority Interest?
Because consolidated financials often include 100% of a subsidiary's EBITDA, even if you don't own 100% of it. Adding non-controlling interest makes the EV/EBITDA multiple consistent (apples-to-apples)—the numerator reflects 100% ownership, and so does the denominator.
Multiples That Matter in PE (and When to Use Each)
The "Default" PE Multiple: EV/EBITDA
EV/EBITDA is the workhorse multiple in PE because:
- EBITDA is pre-interest, so it relates to all capital providers, making EV/EBITDA capital-structure-neutral.
- It's often more comparable across firms with different leverage than equity-only multiples.
When EV/EBITDA is Strongest
- Mature businesses with steady operating earnings
- Capital-intensive sectors (often used in practice)
- When comparing companies with different debt levels
Common adjustments: PE firms use "Adjusted EBITDA" for one-offs, run-rate synergies, and normalization. Interviewers will ask what you'd adjust and why.
When You Use EV/Revenue
EV/Revenue is used when:
- EBITDA is low/negative, noisy, or temporarily depressed
- You're valuing earlier-stage or margin-transition stories
- High-growth companies where current profitability is less meaningful
Warning
When using EV/Revenue, you must then underwrite margins—because revenue alone says nothing about cost structure. A 10x EV/Revenue company with 5% margins is very different from one with 40% margins.
When You Use P/E (Equity Multiple)
P/E is equity-only, so it's most useful when:
- Comparing businesses where capital structure isn't the main differentiator
- You're specifically focused on equity-holder economics
PE interview nuance: Funds still think in EV terms for the transaction, but P/E can show how the public market prices the equity (helpful for exit comps in some cases).
When to Use Which Multiple
| Aspect | EV-Based | Equity-Based |
|---|---|---|
| EBITDA (stable) | EV/EBITDA ✓ | Don't mix |
| Revenue (growth stage) | EV/Revenue ✓ | Don't mix |
| Net Income | Don't mix | P/E ✓ |
| Negative EBITDA | EV/Revenue ✓ | N/A (negative earnings) |
"Good Price" in PE: Price vs Value vs Returns
Here's the mental model interviewers want:
Price (What You Pay)
- Usually quoted as EV = EBITDA × multiple
- In deals, EV is a headline number that later bridges to equity proceeds (cash-free/debt-free logic)
Value (What It's Worth to You)
Value is what you can justify based on:
- Business quality (durability, pricing power, moat)
- Value creation plan (growth, margin, operational levers)
- Capital structure (how much leverage is safe)
- Exit options (multiple + buyer universe)
Returns (What PE Ultimately Cares About)
A PE fund can "overpay" on multiples and still win if:
- EBITDA grows faster than expected
- Deleveraging is strong (FCF pays down debt)
- Exit multiple holds up or expands (less controllable)
The Real Definition of 'Good Price'
So a "good price" is not just "cheap vs comps." It's: Can I hit my target MOIC/IRR with a downside case that doesn't kill me?
A Simple End-to-End Example (Interview Style)
Walkthrough: Computing EV and Bridging to Equity
Given:
- Share price = €20
- Diluted shares = 50m → Equity Value = €1,000m
- Debt = €600m
- Cash = €100m → Net Debt = €500m
- Minority interest = €50m
- Preferred stock = €0
Enterprise Value:
EV = 1,000 + 500 + 50 = €1,550m
If EBITDA is €155m:
EV/EBITDA = 1,550 / 155 = 10.0x
Now flip it like a deal:
- If you agree to buy at 10.0x EBITDA and EBITDA is €155m → EV = €1,550m
- Equity value you're effectively paying (simplified):
- Equity = EV − Net Debt − MI = 1,550 − 500 − 50 = €1,000m
That's the bridge in 20 seconds.
Interview Questions + The Answers You Want to Give
The 6 Traps That Kill Otherwise-Strong Candidates
Avoid These Mistakes
- Mixing EV and equity multiples — Don't pair EV with net income, or P/E with EBITDA. Match the metric to the value measure.
- Forgetting dilution — Use diluted shares (accounting for options/convertibles) for equity value, not basic shares.
- Hand-waving net debt — "Debt minus cash" is fine for basics, but know that debt-like items (pensions, leases) exist and may need to be added.
- Ignoring minority interest when using consolidated EBITDA — If you use 100% of EBITDA, EV must reflect 100% ownership.
- Using EV/Revenue without a margin story — Revenue multiples are meaningless without understanding the path to profitability.
- Talking "cheap vs comps" instead of underwriting returns — PE isn't public markets. A "cheap" deal can still be a bad investment if returns don't work.
Practice This the Way Interviews Actually Test It
Reading helps, but interviews reward fast recall under pressure. You need to practice until the EV↔equity bridge is automatic.
The Fastest Path on Finance Interview Prep
- Learn Mode (Valuation Fundamentals module): Drill EV↔equity bridge questions until they're automatic
- Review Mode: The platform resurfaces the bridge items you keep missing
- Drill Mode (timed): 10–15 question sprints so you can do the math calmly in real interviews
If you're new to this, start with 5 free questions in the Private Equity track and move into the Valuation Fundamentals module once the basics click.
Key Takeaways
Summary: PE Valuation Essentials
| Term | Definition | Note |
|---|---|---|
| Enterprise Value | Value to all capital providers (debt + equity) | Headline deal price |
| Equity Value | Value to common shareholders only | What you actually pay/receive |
| The Bridge | EV = Equity + Net Debt + Preferred + Minority Interest | Memorize this |
| EV/EBITDA | Capital-structure-neutral multiple | PE default |
| Good Price | Returns work with downside protection | Not just 'cheap' |
Frequently Asked Questions
Is EV the same as purchase price?
Often EV is the headline price, but the equity you pay/receive depends on net debt and other adjustments (and sometimes working capital true-ups). EV tells you the total business value; the equity check is what changes hands.
When is P/E better than EV/EBITDA?
When you specifically care about equity-holder earnings and the capital structure differences aren't the core driver of comparability—for example, comparing banks or insurance companies where capital structure is less variable.
Why can EV/EBITDA be misleading?
Because EBITDA ignores CapEx and working capital needs—two things that heavily impact real cash flow and debt paydown. A company trading at "8x EBITDA" might look cheap, but if it needs massive CapEx to maintain earnings, the effective cash flow multiple is much higher.