Since most people are familiar with the construct of a home purchase and a mortgage the easiest and most general explanation is that the value of a home is the price you paid for it. If you borrow money from a bank to fund the purchase then that debt plus the amount you put towards the purchase equal the home’s value:
Purchase Price = Amount put down + Amount of mortgage
We can translate that to the value of an acquisition in much the same way:
Enterprise Value of a company = Equity + Debt
Headlines will often read that a certain company is the most valuable in the world. Reading more closely that value will be referred to as either market capitalization or enterprise value.
The market capitalization of a publically traded company is the value of its current share price multiplied by the number of shares outstanding.
The enterprise value of a company is the market capitalization of a company plus its outstanding debt. For simplicity, we omit the discussion around cash and excess cash.
Enterprise Value of a company = market capitalization (equity) + Debt
So in practice consider this situation. The enterprise value of a target company is established at $30 million. The company holds $10 million of debt. Therefore:
Enterprise Value = Equity Value + Debt
$30 million = $20 million of equity + $10 million of debt.
At a hypothetical deal closing the acquirer could show up with $20 million in cash and assume the debt of $10 million or the acquirer could show up with $30 million where the seller would use $10 million of the cash payment to extinguish the debt outstanding. In either case the acquirer would own an asset that was at that moment valued at $30 million dollars.