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Business Valuation Glossary

Below is list of some of the more frequently used terms in the business valuation industry. As a customer and savvy business professional, you may already be familiar with these fundamentals and what they really mean to your business.

Adjusted Book Value

The book value that results after one or more asset or liability amounts are added, deleted or changed from the respective book amounts.

Asset Based Approach

A general way of determining a value indication of a business's assets and/or equity interest using one or more methods based directly on the value of the assets or the business less liabilities.

Asset Sale

A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.

Book Value

With respect to assets, the capitalized cost of an asset less accumulated depreciation, depletion or amortization as it appears on the books of account of the enterprise. With respect to a business enterprise, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities of an enterprise as they appear on the balance sheet. It is synonymous with net book value, net worth and shareholder's equity.

Business Valuation

The act or process of arriving at an opinion or determination of the value of a business or enterprise or an interest therein.

Capitalization

The conversion of income into value. The capital structure of a business enterprise. The recognition of an expenditure as a capital asset rather than a period expense.

Capital Structure

The composition of a business entity's invested capital.

Capitalizing Net Income

Determining a future value for the company by dividing the pro forma net income by the required Return on Investment (ROI).

Cash Flow

The excess of sources of cash over uses of cash.

Deal Structure

The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. The sale could take the form of an asset sale or a stock sale.

Discount Rate

A rate of return used to convert a monetary sum, payment or receivable in the future into present value.

Earnout

The portion of the purchase prices that is contingent on future performance. It is payable to the sellers only when certain pre-defined levels of sales or income are achieved in the years after acquisition.

EBIT

Earnings before interest and taxes.

EBITDA

Earnings before interest, taxes, depreciation, and amortization.

Equity

The owner's interest in property after deduction of all liabilities.

Financial Recasting

Financial recasting of the historical financial statements adds back items such as superfluous, excessive, or discretionary expenses and non-recurring revenues and expenses. Recasting provides an economic view of the company, and allows meaningful comparisons with other investment opportunities.

Free Cash Flow

Cash available for distribution after taxes but before the effects of financing. Calculated as debt-free net income plus depreciation less expenditures required for working capital and capital items adjusted to remove effects of financing.

Going Concern

An operating business enterprise.

Goodwill or Intangible Value

The amount by which the consideration paid exceeds the fair market value of the company's operating assets.

Income Approach

A general way of determining value of a business, business ownership interest or security using one or more methods wherein a value is determined based on anticipated benefits.

Intangible Assets

The intangible assets will usually consist of goodwill and going concern value, certain types of intangible property that generally relate to the workforce, information base, know-how, customers, suppliers, or systems in place producing cash flow, proprietary rights (such as; patents, copyrights, trade marks, or trade names), covenant not to compete or similar items.

Liquidation Value

The value of a company assuming the assets of the company are sold piecemeal (not as part of an on going business enterprise) with-appropriate time ' for exposure to the marketplace.

Market Approach

A general way of determining a value indication of a business, business ownership or security using one or more methods that compare the subject to similar businesses, business ownership interests or securities that have been sold.

Market Multiple

A factor that can be applied to the subject company's financial, operating or physical data to generate an indication of value. The market multiple is derived from observed transactions in the marketplace where the value can be divided by the comparable companies' financial, operating or physical data to generate the market multiple.

Net Assets

Total assets less total liabilities.

Net Cash Flow

Cash available for distribution after taxes and after the effects of financing. Calculated as net income plus depreciation less expenditures required for working capital and capital items.

Net Income

Revenue less expenses, including taxes.

Non-Operating Assets

Assets shown on the company's balance sheet that are not used in the operation of the business. That is, "extra" assets that are not necessary to generate the revenue and cash flow stream being valued.

Normal Working Capital

The amount of working capital needed by the company to sustain operations throughout the year. Calculated as the average of current assets (which include a normal amount of necessary cash) minus current liabilities on a monthly basis over the most recent twelve months.

Present Value

The value today of a future payment, or stream of payments, discounted at a risk-adjusted rate of return.

Pro Forma Statements

Hypothetical statements. Financial statements as they would appear if some event, such as increased sales or production, were to occur.

Rate of Return

An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment.

Stock Sale

A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

Tangible Assets

Tangible assets that may be included in the sale of a business usually consist of accounts receivable, inventory, leasehold improvements, furniture and fixtures, equipment, land and building.

Terminal Value

The value of the company at the end of the five-year pro forma period. Terminal value is determined by dividing the fifth year pro forma cash flow (normalized for depreciation and capital expenditures) by the required Return on Investment.

Valuation Approach

A general way of determining value using one or more specific valuation methods. (See Asset Based Approach, Market Approach and Income Approach definitions.)

Valuation Method

Within valuation approaches, a specific way to determine value.

Valuation Multiple

A factor wherein a value or price serves as the numerator and financial, operating or physical data of the company being valued serve as the denominator.

Value

The amount at which a business enterprise passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts.

Working Capital

The excess of current assets over current liabilities.

If you need clarification on business valuation terminology or methods, please contact us today or call us at 877-VALU-BIZ.

 


Great advice from my valuator!

"It was great to have a professional advisor sit down with me and explain the purpose and benefits of the valuation. I learned a lot more about my business once the appraisal process was complete. We received some great advice along the way on how to increase the value of our company and now have an excellent business broker lined up when we get ready to sell the business!"

- Harold G.
Business Services Company
California

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