Business Valuation Glossary
Your comprehensive guide to business valuation terminology. Over 100 key terms and definitions explained by a Certified Valuation Analyst.
A - C
Adjusted EBITDA
EBITDA that has been normalized to remove one-time, unusual, or non-business expenses to show the true operating performance of a business. Common adjustments include owner compensation normalization, personal expenses, and one-time costs.
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A business valuation method that determines value based on the company's underlying assets minus its liabilities. Most appropriate for asset-heavy businesses, holding companies, or liquidation scenarios.
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The process of determining the economic value of a business or business interest. Often used interchangeably with business valuation, though some professionals distinguish between formal appraisals and valuations based on purpose and standards.
Capitalization Rate
The rate of return used to convert a single period's earnings or cash flow into a business value. Calculated as discount rate minus long-term growth rate. Used in the capitalization of earnings method.
Cash Flow
The net amount of cash being transferred into and out of a business. Free cash flow is often used in DCF valuations and represents cash available to all stakeholders after operating expenses and capital expenditures.
Control Premium
Additional value attributed to a controlling interest in a business. Control allows the holder to direct management, set strategy, and make key decisions, which typically commands a higher price per share than minority interests.
D - F
Discounted Cash Flow (DCF)
A valuation method that estimates value based on projected future cash flows discounted back to present value using a discount rate that reflects the risk of the investment. Fundamental income approach method.
Learn MoreDiscount Rate
The rate used to discount future cash flows to present value in a DCF analysis. Reflects the risk and time value of money. Often derived from weighted average cost of capital (WACC) or build-up method.
Due Diligence
Comprehensive investigation and analysis of a business before acquisition, investment, or valuation. Includes financial, legal, operational, and strategic review to identify risks and opportunities.
Learn MoreEBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating performance that excludes the effects of financing and accounting decisions. Common basis for valuation multiples.
Learn MoreEnterprise Value
The total value of a company's operating business, calculated as market value of equity plus total debt minus cash. Represents the theoretical takeover price and is used with operating metrics like EBITDA.
Fair Market Value
The price at which property would change hands between a willing buyer and willing seller when both have reasonable knowledge of relevant facts and neither is under compulsion to buy or sell.
G - I
Goodwill
The intangible value of a business beyond its tangible assets, including customer relationships, brand recognition, employee expertise, and competitive advantages. Often calculated as purchase price minus net tangible assets.
Going Concern
The assumption that a business will continue operating for the foreseeable future. Going concern value is typically higher than liquidation value as it considers the business's ability to generate future earnings.
Income Approach
Business valuation approach that estimates value based on the company's ability to generate future economic benefits. Includes discounted cash flow (DCF) and capitalization of earnings methods.
Internal Rate of Return (IRR)
The discount rate that makes the net present value (NPV) of all cash flows equal to zero. Used to evaluate the attractiveness of investments and in some valuation contexts.
Intangible Assets
Non-physical assets that provide economic value, including patents, trademarks, customer lists, software, brand recognition, and proprietary processes. Can significantly impact business value.
Investment Value
The value of an asset to a particular investor based on individual investment requirements and expectations. May differ from fair market value due to synergies or specific strategic benefits.
M - O
Market Approach
Business valuation approach that determines value by comparing the subject company to similar businesses that have been sold or are publicly traded. Uses market multiples and comparable transactions.
Marketability Discount
Reduction in value applied to reflect the relative lack of marketability of an ownership interest. Private company interests typically trade at a discount to public company equivalents due to limited liquidity.
Multiple
A ratio used in valuation that compares a company's value to a financial metric. Common multiples include Price/Earnings, EV/EBITDA, and Price/Revenue. Applied to subject company metrics to estimate value.
Learn MoreNet Present Value (NPV)
The difference between the present value of cash inflows and outflows over a period of time. Positive NPV indicates that projected earnings exceed the anticipated costs, suggesting a potentially profitable investment.
Normalized Earnings
Earnings adjusted to remove unusual, non-recurring, or non-operating items to better represent the sustainable earning capacity of a business. Critical for accurate valuation analysis.
Owner's Discretionary Earnings
See "Seller's Discretionary Earnings (SDE)." The total financial benefit that one full-time owner-operator derives from the business, including salary, benefits, and discretionary expenses.
P - R
Premise of Value
The fundamental assumption about the most likely set of circumstances under which a business will be valued, such as going concern, liquidation in place, or orderly liquidation.
Purchase Price Allocation
The process of assigning the purchase price of an acquired business to specific assets and liabilities, including identification and valuation of intangible assets for accounting and tax purposes.
Rate of Return
The gain or loss on an investment over a specified period. In valuation, represents the required return that investors demand for accepting the risk associated with an investment.
Replacement Cost
The cost to replace an asset with one of equivalent utility at current prices. Used in asset-based valuations and as a check against other valuation methods.
Risk-Free Rate
The theoretical rate of return of an investment with zero risk, typically represented by U.S. Treasury securities. Used as the foundation for building discount rates in valuation models.
Rule of Thumb
Industry-specific valuation shortcuts or rough estimates based on common ratios or multiples. Useful for preliminary estimates but should not replace thorough valuation analysis.
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Seller's Discretionary Earnings (SDE)
Net income plus owner's salary, owner's benefits, interest, taxes, depreciation, amortization, and other owner's personal expenses. Represents total economic benefit available to an owner-operator.
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The definition of the type of value being determined, such as fair market value, fair value, investment value, or intrinsic value. Different standards may result in different value conclusions.
Synergies
Additional value created when companies combine operations, resulting in enhanced performance that exceeds the sum of separate parts. Can be revenue synergies (cross-selling) or cost synergies (economies of scale).
Terminal Value
The estimated value of a business beyond the explicit forecast period in a DCF analysis. Often calculated using the perpetuity growth method or exit multiple method.
Tangible Assets
Physical assets that have substance and can be touched, including cash, inventory, equipment, real estate, and other property. Distinguished from intangible assets in valuation analysis.
Unlevered Free Cash Flow
Cash flow available to all investors (debt and equity holders) after operating expenses and capital investments but before interest payments. Used in DCF valuations to calculate enterprise value.
V - Z
Valuation Date
The specific date as of which the value opinion applies. Also known as the "as of" date. Value can change over time, so establishing the valuation date is critical for accurate analysis.
Voting Control
The power to direct the management and policies of a company through ownership of voting shares. Control interests typically trade at premiums to minority interests due to their enhanced rights.
Weighted Average Cost of Capital (WACC)
The average rate of return a company must pay to finance its assets, weighted by the proportion of debt and equity financing. Commonly used as the discount rate in DCF valuations.
Working Capital
Current assets minus current liabilities. Represents the capital needed to fund day-to-day operations. Changes in working capital affect cash flow and are considered in valuation analysis.
Yield Capitalization
A valuation method that converts a single period's economic benefit into value by dividing by a capitalization rate. Used when earnings are expected to grow at a constant rate.
Zero Growth Model
A simplified DCF model assuming no growth in cash flows beyond the initial period. Value equals the annual cash flow divided by the discount rate. Also known as the perpetuity model.
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