Adjusted Book Value
The Book Value (equity) of a company after adjusting the values of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet.
Adjusted Earnings
The earnings of a business after adjustments for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and any other expenses that are not essential for ongoing operations of the business.
Asset Approach
A way of estimating the value of a business ownership interest using one or more Valuation Methods based on the Adjusted Book Value of the company.
Asset Sale
A form of acquisition when a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.
Base Year
The company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management.
Blue Sky
Any intangible portion of a price, above the maximum goodwill, that cannot be reasonably supported through the application of established Valuation Methods.
Book Value
The value, net of depreciation, at which an asset appears on a company’s balance sheet.
Capital Structure
The mix of invested equity and debt financing of a business enterprise.
Capitalization Rate
Any multiple or divisor used to convert a single period (usually a year) of anticipated economic benefits into a present economic value.
Capitalizing Net Income
Determining the value of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (investor’s required ROI).
Cash Flow
(also Discretionary Earnings). Total financial benefit to an owner operating the business. With the Cash Flow, an owner must pay himself a salary, pay his company’s income taxes, pay for any capital improvements (if needed) and set aside funds for unexpected events. Calculated by adding the following expenses back into the net income:
• Interest
• Taxes
• Depreciation
• Amortization
• Owner’s Compensation
• Owner’s Fringe Benefits
One-Time Expenses
Deal Structure
The combination of types of payment by which the purchase of a business is accomplished. It can include cash, promissory notes, stock, consulting agreements, earn out provisions and covenants not to compete. The sale can take the form of an Asset Sale or a Stock Sale.
Discount Rate
A rate of return used to calculate the present value of multiple periods (usually years) of payments.
Discretionary Earnings
See Cash Flow above.
Earn out
The portion of the purchase price that is contingent on the future performance of the business. It is payable to the seller after certain predefined levels of sales or income are achieved in the year(s) after acquisition.
Fair Market Value
The estimated price at which an asset or service would pass from a seller to a buyer, assuming that both buyer and seller are acting rationally, 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. It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.
Fixed Interest Rate
An interest rate that does not fluctuate over the term of the loan.
Going Concern Value
The gross value of a company as an operating business. This value may exceed or be at a discount from the Liquidation Value. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plan and the necessary licenses, systems and procedures in place.
Goodwill
The amount by which the price paid for a company exceeds the company’s Adjusted Book Value of the underlying tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income.
Income (Income Based) Approach
General way of determining the value of a business, business ownership interest, security or intangible asset using one or more methods that calculate the present value of anticipated future income.
Intrinsic Value
An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.
Investment Value
The value to a particular investor based on individual investment requirements and expectations.
Liquidation or Liquidating Value
The estimated value, net of liabilities, of a company based on the market value of its assets.
Market (Market-Based) Approach
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.
Net Book Value
With respect to a business enterprise, the difference between total assets (net of 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.
Present Value
The value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (Discount Rate).
Pro Forma Financial Statements
Hypothetical financial statements. Financial statements as they would appear if some event, such as increased sales or production, had occurred or were to occur. Also used to make projections for future years.
Projection
Prospective financial statements that present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.
Recasting
Financial recasting eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decisions of the current owner and may not represent financing preferences of a new owner. Recasting provides an economic view of the company and allows meaningful comparisons with other investment opportunities.
Residual Value
The estimated market value of an asset at the end of the period being considered.
Return on Investment (ROI)
The rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.
Stock Sale
A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Transaction Value
Total of all consideration passed at any time between the buyer and seller for an ownership interest in a business enterprise and may include but is not limited to all remuneration for tangible and intangible assets such as: furniture, equipment, supplies, inventory, Working Capital, non-competition agreements, customer lists, employment and/or consulting agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, Earn outs and future considerations.
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. There are three overall approaches generally used to value a business: Asset Approach, Income Approach and Market Approach.
Valuation Method
Under a chosen Valuation Approach, there are various specific methods to determine value.
Variable Interest Rate
An interest rate that adjusts periodically to a predefined margin above or below an index rate. A commonly used index is the bank prime rate.
Working Capital
The excess of current assets over current liabilities.
