Glossary of Business Valuation Terms
A
Adjusted Book Value Method – a method within the asset approach whereby all
assets and liabilities (including off-balance sheet, intangible, and contingent)
are adjusted to their fair market values.
Adjusted Net Asset Method – see Adjusted Book Value Method.
Appraisal - see Valuation.
Appraisal Approach - see Valuation Approach.
Appraisal Date - see Valuation Date.
Appraisal Method - see Valuation Method.
Appraisal Procedure - see Valuation Procedure.
Arbitrage Pricing Theory – a multivariate model for estimating the cost of
equity capital, which incorporates several systematic risk factors.
Asset (Asset-Based) Approach - a general way of determining a value indication
of a business, business ownership interest, or security using one or more methods
based on the value of the assets net of liabilities.
B
Beta - a measure of systematic risk of a stock; the tendency of a stock's
price to correlate with changes in a specific index.
Blockage Discount - an amount or percentage deducted from the current market
price of a publicly traded stock to reflect the decrease in the per share value
of a block of stock that is of a size that could not be sold in a reasonable period
of time given normal trading volume.
Book Value – see Net Book Value.
Business - see Business Enterprise.
Business Enterprise - a commercial, industrial, service, or investment entity
(or a combination thereof) pursuing an economic activity.
Business Risk – the degree of uncertainty of realizing expected future returns
of the business resulting from factors other than financial leverage. See Financial
Risk.
Business Valuation - the act or process of determining the value of a business
enterprise or ownership interest therein.
C
Capital Asset Pricing Model (CAPM) - a model in which the cost of capital
for any stock or portfolio of stocks equals a risk-free rate plus a risk premium
that is proportionate to the systematic risk of the stock or portfolio.
Capitalization - a conversion of a single period of economic benefits into
value.
Capitalization Factor - any multiple or divisor used to convert anticipated
economic benefits of a single period into value.
Capitalization of Earnings Method – a method within the income approach whereby
economic benefits for a representative single period are converted to value through
division by a capitalization rate.
Capitalization Rate - any divisor (usually expressed as a percentage) used
to convert anticipated economic benefits of a single period into value.
Capital Structure - the composition of the invested capital of a business
enterprise, the mix of debt and equity financing.
Cash Flow - cash that is generated over a period of time by an asset, group
of assets, or business enterprise. It may be used in a general sense to encompass
various levels of specifically defined cash flows. When the term is used, it should
be supplemented by a qualifier (for example, "discretionary" or "operating") and
a specific definition in the given valuation context.
Common Size Statements – financial statements in which each line is expressed
as a percentage of the total. On the balance sheet, each line item is shown as a
percentage of total assets, and on the income statement, each item is expressed
as a percentage of sales.
Control - the power to direct the management and policies of a business enterprise.
Control Premium - an amount or a percentage by which the pro rata value of
a controlling interest exceeds the pro rata value of a non-controlling interest
in a business enterprise, to reflect the power of control.
Cost Approach - a general way of determining a value indication of an individual
asset by quantifying the amount of money required to replace the future service
capability of that asset.
Cost of Capital - the expected rate of return that the market requires in
order to attract funds to a particular investment.
D
Debt-Free - See Invested Capital.
Discount for Lack of Control - an amount or percentage deducted from the
pro rata share of value of 100% of an equity interest in a business to reflect the
absence of some or all of the powers of control.
Discount for Lack of Marketability - an amount or percentage deducted from
the value of an ownership interest to reflect the relative absence of marketability.
Discount for Lack of Voting Rights – an amount or percentage deducted from
the per share value of a minority interest voting share to reflect the absence of
voting rights.
Discount Rate - a rate of return used to convert a future monetary sum into
present value.
Discounted Cash Flow Method – a method within the income approach whereby
the present value of future expected net cash flows is calculated using a discount
rate.
Discounted Future Earnings Method – a method within the income approach whereby
the present value of future expected economic benefits is calculated using a discount
rate.
E
Economic Benefits - inflows such as revenues, net income, net cash flows,
etc.
Economic Life - the period of time over which property may generate economic
benefits.
Effective Date - see Valuation Date.
Enterprise - see Business Enterprise.
Equity – the owner’s interest in property after deduction of all liabilities.
Equity Net Cash Flows - those cash flows available to pay out to equity holders
(in the form of dividends) after funding operations of the business enterprise,
making necessary capital investments, and increasing or decreasing debt financing.
Equity Risk Premium - a rate of return added to a risk-free rate to reflect
the additional risk of equity instruments over risk free instruments (a component
of the cost of equity capital or equity discount rate).
Excess Earnings - that amount of anticipated economic benefits that exceeds
an appropriate rate of return on the value of a selected asset base (often net tangible
assets) used to generate those anticipated economic benefits.
Excess Earnings Method - a specific way of determining a value indication
of a business, business ownership interest, or security determined as the sum of
a) the value of the assets derived by capitalizing excess earnings and b) the value
of the selected asset base. Also frequently used to value intangible assets. See
Excess Earnings.
F
Fair Market Value - the price, expressed in terms of cash equivalents, at
which property would change hands between a hypothetical willing and able buyer
and a hypothetical willing and able seller, acting at arms length in an open and
unrestricted market, when neither is under compulsion to buy or sell and when both
have reasonable knowledge of the relevant facts.
Fairness Opinion – an opinion as to whether or not the consideration in a
transaction is fair from a financial point of view.
Financial Risk – the degree of uncertainty of realizing expected future returns
of the business resulting from financial leverage. See Business Risk.
Forced Liquidation Value - liquidation value, at which the asset or assets
are sold as quickly as possible, such as at an auction.
Free Cash Flow – See Net Cash Flow.
G
Going Concern - an ongoing operating business enterprise.
Going Concern Value - the value of a business enterprise that is expected
to continue to operate into the future. The intangible elements of Going Concern
Value result from factors such as having a trained work force, an operational plant,
and the necessary licenses, systems, and procedures in place.
Goodwill - that intangible asset arising as a result of name, reputation,
customer loyalty, location, products, and similar factors not separately identified.
Goodwill Value - the value attributable to goodwill.
Guideline Public Company Method – a method within the market approach whereby
market multiples are derived from market prices of stocks of companies that are
engaged in the same or similar lines of business, and that are actively traded on
a free and open market.
I
Income (Income-Based) Approach - a general way of determining a value indication
of a business, business ownership interest, security, or intangible asset using
one or more methods that convert anticipated economic benefits into a present single
amount.
Intangible Assets - non-physical assets such as franchises, trademarks, patents,
copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished
from physical assets) that grant rights and privileges, and have value for the owner.
Internal Rate of Return – a discount rate at which the present value of the
future cash flows of the investment equals the cost of the investment.
Intrinsic Value – the value that an investor considers, on the basis of an
evaluation or available facts, to be the "true" or "real" value that will become
the market value when other investors reach the same conclusion. When the term applies
to options, it is the difference between the exercise price or strike price of an
option and the market value of the underlying security.
Invested Capital - the sum of equity and debt in a business enterprise. Debt
is typically a) all interest bearing debt or b) long-term interest-bearing debt.
When the term is used, it should be supplemented by a specific definition in the
given valuation context.
Invested Capital Net Cash Flows - those cash flows available to pay out to
equity holders (in the form of dividends) and debt investors (in the form of principal
and interest) after funding operations of the business enterprise and making necessary
capital investments.
Investment Risk - the degree of uncertainty as to the realization of expected
returns.
Investment Value - the value to a particular investor based on individual
investment requirements and expectations.
K
Key Person Discount - an amount or percentage deducted from the value of
an ownership interest to reflect the reduction in value resulting from the actual
or potential loss of a key person in a business enterprise.
L
Levered Beta - the beta reflecting a capital structure that includes debt.
Limited Appraisal – the act or process of determining the value of a business,
business ownership interest, security, or intangible asset with limitations in analyses,
procedures, or scope.
Liquidity - the ability to quickly convert property to cash or pay a liability.
Liquidation Value - the net amount that would be realized if the business
is terminated and the assets are sold piecemeal. Liquidation can be either "orderly"
or "forced."
M
Majority Control - the degree of control provided by a majority position.
Majority Interest - an ownership interest greater than 50% of the voting
interest in a business enterprise.
Market (Market-Based) Approach - a general way of determining a value indication
of a business, business ownership interest, security, or intangible asset by using
one or more methods that compare the subject to similar businesses, business ownership
interests, securities, or intangible assets that have been sold.
Market Capitalization of Equity – the share price of a publicly traded stock
multiplied by the number of shares outstanding.
Market Capitalization of Invested Capital – the market capitalization of
equity plus the market value of the debt component of invested capital.
Market Multiple – the market value of a company's stock or invested capital
divided by a company measure (such as economic benefits, number of customers).
Marketability - the ability to quickly convert property to cash at minimal
cost.
Marketability Discount - see Discount for Lack of Marketability
Merger and Acquisition Method – a method within the market approach whereby
pricing multiples are derived from transactions of significant interests in companies
engaged in the same or similar lines of business.
Mid-Year Discounting – a convention used in the Discounted Future Earnings
Method that reflects economic benefits being generated at midyear, approximating
the effect of economic benefits being generated evenly throughout the year.
Minority Discount - a discount for lack of control applicable to a minority
interest.
Minority Interest - an ownership interest less than 50% of the voting interest
in a business enterprise.
Multiple - the inverse of the capitalization rate.
N
Net Book Value - with respect to a business enterprise, the difference between
total assets (net of accumulated depreciation, depletion, and amortization) and
total liabilities as they appear on the balance sheet (synonymous with Shareholder's
Equity). With respect to a specific asset, the capitalized cost less accumulated
amortization or depreciation as it appears on the books of account of the business
enterprise.
Net Cash Flows – when the term is used, it should be supplemented by a qualifier.
See Equity Net Cash Flows and Invested Capital Net Cash Flows.
Net Present Value – the value, as of a specified date, of future cash inflows
less all cash outflows (including the cost of investment) calculated using an appropriate
discount rate.
Net Tangible Asset Value - the value of the business enterprise's tangible
assets (excluding excess assets and non-operating assets) minus the value of its
liabilities.
Non-Operating Assets - assets not necessary to ongoing operations of the
business enterprise.
Normalized Earnings – economic benefits adjusted for nonrecurring, non-economic,
or other unusual items to eliminate anomalies and/or facilitate comparisons.
Normalized Financial Statements – financial statements adjusted for non-operating
assets and liabilities and/or for nonrecurring, non-economic, or other unusual items
to eliminate anomalies and/or facilitate comparisons.
O
Orderly Liquidation Value - liquidation value at which the asset or assets
are sold over a reasonable period of time to maximize proceeds received.
P
Premise of Value - an assumption regarding the most likely set of transactional
circumstances that may be applicable to the subject valuation; e.g. going concern,
liquidation.
Present Value – the value, as of a specified date, of future economic benefits
and/or proceeds from sale, calculated using an appropriate discount rate.
Portfolio Discount - an amount or percentage deducted from the value of a
business enterprise to reflect the fact that it owns dissimilar operations or assets
that do not fit well together.
Price/Earnings Multiple – the price of a share of stock divided by its earnings
per share.
R
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.
Redundant Assets – see Non-Operating Assets.
Report Date – the date conclusions are transmitted to the client.
Replacement Cost New – the current cost of a similar new property having
the nearest equivalent utility to the property being valued.
Reproduction Cost New – the current cost of an identical new property.
Required Rate of Return – the minimum rate of return acceptable by investors
before they will commit money to an investment at a given level of risk.
Residual Value – the value as of the end of the discrete projection period
in a discounted future earnings model.
Return on Equity – the amount, expressed as a percentage, earned on a company’s
common equity for a given period.
Return on Investment – see Return on Invested Capital and Return on
Equity.
Return on Invested Capital – the amount, expressed as a percentage, earned
on a company’s total capital for a given period.
Risk-Free Rate – the rate of return available in the market on an investment
free of default risk.
Risk Premium – a rate of return added to a risk-free rate to reflect risk.
Rule of Thumb – a mathematical formula developed from the relationship between
price and certain variables based on experience, observation, hearsay, or a combination
of these; usually industry specific.
S
Special Interest Purchasers – acquirers who believe they can enjoy post-acquisition
economies of scale, synergies, or strategic advantages by combining the acquired
business interest with their own.
Standard of Value – the identification of the type of value being used in
a specific engagement; e.g. fair market value, fair value, investment value.
Sustaining Capital Reinvestment – the periodic capital outlay required to
maintain operations at existing levels, net of the tax shield available from such
outlays.
Systematic Risk – the risk that is common to all risky securities and cannot
be eliminated through diversification. The measure of systematic risk in stocks
is the beta coefficient.
T
Tangible Assets – physical assets (such as cash, accounts receivable, inventory,
property, plant and equipment, etc.).
Terminal Value. see Residual Value.
Transaction Method - see Merger and Acquisition Method.
U
Unlevered Beta – the beta reflecting a capital structure without debt.
Unsystematic Risk – the risk specific to an individual security that can
be avoided through diversification.
V
Valuation – the act or process of determining the value of a business, business
ownership interest, security, or intangible asset.
Valuation Approach – a general way of determining a value indication of a
business, business ownership interest, security, or intangible asset using one or
more valuation methods.
Valuation Date – the specific point in time as of which the valuator's opinion
of value applies (also referred to as "Effective Date" or "Appraisal Date").
Valuation Method – within approaches, a specific way to determine value.
Valuation Procedure – the act, manner, and technique of performing the steps
of an appraisal method.
Valuation Ratio – a fraction in which a value or price serves as the numerator
and financial, operating, or physical data serves as the denominator.
Value to the Owner – see Investment Value.
Voting Control – de jure control of a business enterprise.
W
Weighted Average Cost of Capital (WACC) – the cost of capital (discount rate)
determined by the weighted average, at market value, of the cost of all financing
sources in the business enterprise's capital structure.
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