Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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What is Invested Capital?
MVIC (Market Value of Invested Capital) is the amount of money raised by issuing securities to shareholders and bondholders, and typically includes total debt and any capital lease obligations.
The Market Value of Invested Capital Equation
The Market Value of Invested Capital (or MVIC) is equal to the market value of the owners’ equity plus any long-term interest bearing debt. Similar to Enterprise Value, Market Value of Invested Capital is a measure of total firm value, representing the value of all core operations of a business.
What MVIC Means for Small Businesses
MVIC is used widely to measure the value of small businesses, representing the total capital invested in the company, including any tangible assets and goodwill.
In the context of selling a small business, MVIC generally does not include any consulting agreement values, the value of any business-owned real estate, or any contingent portion of the purchase price (such as an earnout payment). It does, however, include the value of any non-compete agreements with the outgoing management team, and may include the value of any current assets that are transferred to the buyer.
Why MVIC Is the Preferred Method for Assessing a Small Business
First, most small business sales are structured as asset transactions, in which the buyer pays MVIC for the business, receiving all assets as a part of the transaction (and potentially assuming some liabilities as well).
Second, small business owners often have a controlling ownership interest in the company. This means that the owner is capable of changing the business’s capital structure by simply changing the balance between equity and debt capital.
The Difference Between Market Value of Invested Capital and Enterprise Value (EV)
While both EV and MVIC are measures of total business value, both are considered to be ‘capital structure neutral’, and both facilitate a relative value analysis. Yet there are significant differences between the two.
Put simply, MVIC includes cash assets, while EV excludes such assets. However, the inclusion or exclusion of cash can vary widely, so it is important to investigate the most appropriate way to calculate your business’s Market Value of Invested Capital.
As an example, some businesses may include all cash in MVIC, while others may include only an operating level of cash. Conversely, some professionals may exclude all cash from EV calculations, while others may exclude only excess cash.
When comparing your firm’s value to others, it doesn’t matter if you choose to use an MVIC or EV valuation. What is important is that you make apples to apples comparisons. Make sure you use the same valuation method for comparison, and be sure that cash assets are included or excluded in the calculation the same way across companies.
