Loan to Enterprise Value: a Worked Example

A bank lending against a building reads its security through the value of that building. A lender to a buyout often has nothing comparable to value. The premises are leased, the equipment would fetch little at auction, and most of the price paid was for goodwill: the customers, the staff, the name. The security that matters is the business as a going concern, usually held through a share pledge and general security over the operating companies. Loan to enterprise value is the lender's reading of that security: how far the business can fall in value before a sale would not repay the debt.

It also shows where each lender sits. A senior lender reads the ratio on the senior debt. A second-lien or mezzanine lender reads it on everything ranking ahead of it plus its own tranche, because in a sale the senior debt is paid first. The same business can stand at 40% for one lender and 50% for the next.

The last line is why a lender reads the ratio beside debt to EBITDA. Leverage says how many years of earnings the debt represents; the multiple says how many years of earnings a buyer will pay for. The ratio is one divided by the other. A business at six times leverage is lightly lent against if buyers pay fifteen times for businesses like it, and heavily lent against if they pay seven.

Three inputs need care. Debt should include whatever would rank with or ahead of the tranche in a sale, even if it is not called a loan: finance leases, a vendor loan that is not subordinated, PIK interest added to principal. Enterprise value should carry its source and date, whether the price paid, a valuer's report, the owner's own carrying value or the lender's estimate. And the multiple must apply to the same EBITDA the lender uses, not an adjusted figure on one side and a reported one on the other.

A private equity fund buys a group of audiology clinics, constructed for this page like every figure in it, for an enterprise value of US$96m, twelve times EBITDA of US$8.0m. It funds the price with a senior term loan of US$38.4m, a second-lien loan of US$9.6m and US$48m of equity. Two years later EBITDA is US$7.2m, and recent sales of similar clinic groups point to ten times rather than twelve. Debt is held flat to keep the example simple, and the multiples are the example's, not a view of the market.

Earnings fell by a tenth and leverage rose by two-thirds of a turn, a change a leverage covenant might tolerate. The cushion beneath the second-lien lender fell from half the business's value to a third, and more than half of the lost value came from the multiple, which the clinics did not control. Read on leverage alone, this is a business that has weakened. Read on enterprise value, the owners' equity has halved, a sponsor with less to protect is less likely to put in more money, and a second fall of the same size would leave the second-lien loan with nothing beneath it.

The ratio shares its abbreviation with the loan to value ratio on property, but the value behind it behaves differently. A building's value comes from a valuer who can point to sales of similar buildings, and the building still stands if the tenant leaves. An enterprise value exists only while the business trades: a clinic group whose audiologists walk out is not worth ten times anything. A property ratio is also commonly tested against a fresh valuation. Loan to enterprise value is more often read at approval and in portfolio reviews, because valuing a whole business on every test date would be costly and contestable.

Who sets the value matters as much as the number. A 2025 report on Australian private credit, prepared for ASIC by independent reviewers, found that internal valuations by credit staff or deal teams create conflicts where fees depend on those values, and, in real estate lending, a lack of clarity over whether a quoted loan-to-value ratio rested on cost, current value or forecast completion value. Those findings concern fund and property valuations, but the questions carry over: a lender reading loan to enterprise value in any market asks which value, set by whom, and when.

DEFINED IN ONE PARAGRAPH → · BANK LOAN VS PRIVATE CREDIT → · SECOND LIEN →

At approval the ratio is the lender's check on the price. A buyer paying a high multiple can show acceptable leverage on optimistic EBITDA and a low ratio on its own price. The lender tests both by asking what the business would be worth at a lower multiple, and how much of the debt that value would still cover. The question is not whether the price was right but how wrong it can be before the lender's money is at risk.

After completion it is a monitoring figure and a negotiating one. When an owner asks for a dividend recapitalisation or more debt, it argues from a higher value; the lender argues from the multiple that recent sales support. And when trading weakens, the ratio tells the lender how much the owners still have to lose, which bears on whether they will fund a cure or step back.

SPONSOR-BACKED LENDING → · EQUITY CONTRIBUTION →