Business Valuation Glossary

Adjusted Book Value Method:

This method adjusts all assets and liabilities, including off-balance sheet items, to their fair market values, providing a clearer picture of a company’s true worth.

Appraisal:

The process of determining the value of a business, asset, or investment based on various methodologies and factors.

Appraisal Date:

The specific point in time at which the valuation applies, often critical for reflecting changing market conditions.

Arbitrage Pricing Theory:

A model used to estimate the cost of equity capital, incorporating multiple systematic risk factors beyond the market return.

Beta:

A measure of a stock’s systematic risk, indicating its volatility relative to the broader market.

Blockage Discount:

A reduction applied to the market price of a large block of stock to account for the difficulty of selling it quickly without depressing the market.

Business Enterprise:

Any entity, whether commercial, industrial, service-oriented, or investment-focused, engaged in economic activities.

Business Risk:

The degree of uncertainty surrounding a company’s ability to generate expected returns, excluding those arising solely from its financial structure.

Capital Asset Pricing Model (CAPM):

A widely used model that calculates the expected return on equity investments by considering their systematic risk relative to the market.

Control:

The power to influence or direct the management and policies of a business entity, often associated with majority ownership.

Cost Approach:

A valuation method that determines the value of an asset by calculating the cost to replace its service capability.

Discount for Lack of Control:

A deduction from the value of an equity interest to reflect the absence of some or all control powers.

Discount for Lack of Marketability:

A deduction from the value of an ownership interest to reflect its relative lack of marketability.

Discount for Lack of Voting Rights:

A deduction from the per-share value of a holding to account for the absence of voting rights.

Economic Benefits:

Inflows such as revenues, net income, or cash flows generated by an asset or business enterprise over time.

Equity:

The residual interest in an entity’s assets after deducting liabilities, representing the ownership claim on those assets.

Fair Market Value:

The price at which an asset or business would change hands between willing and knowledgeable parties, free from compulsion, in an open and unrestricted market.

Financial Risk:

The uncertainty associated with a company’s financial structure and its impact on expected returns.

Going Concern:

A business entity expected to continue its operations into the foreseeable future, often considered in valuations to reflect ongoing operations.

Going Concern Value:

The worth of a business expected to operate in the future, incorporating intangible aspects like a trained workforce, operational infrastructure, licenses, systems, and procedures.

Goodwill:

An intangible asset representing the excess of the purchase price over the fair value of identifiable assets acquired in a business combination.

Horizontal Analysis:

A method of financial analysis that compares financial data over time to identify trends, changes, or anomalies.

Internal Rate of Return (IRR):

The discount rate at which the net present value of cash flows from an investment equals zero, representing the rate of return on an investment.

Liquidity:

The ease with which an asset or security can be converted into cash without significantly affecting its market price.

Majority Control:

The degree of control provided by a majority ownership position in a business entity, allowing significant influence over decision-making.

Majority Interest:

An ownership interest greater than 50% of the voting rights in a business entity, often associated with control over decision-making.

Market Capitalization:

The total value of a company’s outstanding shares, calculated by multiplying the share price by the number of shares outstanding.

Market Capitalization of Equity:

The total value of a company’s equity is calculated by multiplying the share price by the number of outstanding shares.

Market Capitalization of Invested Capital:

The total value of a company’s invested capital, including equity and debt components, is calculated based on market prices.

Market Multiple:

A ratio used to value a company by comparing its financial metrics, such as earnings or revenue, to those of similar companies in the market.

Marketability:

The ease with which an asset or security can be bought or sold in the market, often influenced by factors such as liquidity and demand.

Marketability Discount:

A reduction in the value of an asset or security to account for its relative lack of marketability compared to similar assets or securities.

Merger and Acquisition Method:

A valuation approach that derives pricing multiples from transactions involving significant interests in companies operating in the same or similar industries.

Net Book Value:

The value of an asset on the balance sheet, calculated as its original cost minus accumulated depreciation, depletion, and amortization.

Net Present Value (NPV):

The difference between the present value of cash inflows and outflows over a specific period, used to assess the profitability of an investment.

Net Tangible Asset Value:

The value of a company’s tangible assets, calculated by subtracting liabilities and intangible assets from total assets.

Normalized Earnings:

Adjusted economic benefits to eliminate anomalies or non-recurring items, providing a more accurate representation of ongoing profitability.

Operating Income:

The profit generated from a company’s core operations, calculated by subtracting operating expenses from gross income.

Orderly Liquidation Value:

The estimated value of an asset or business when sold over a reasonable period, typically to maximize proceeds received.

Portfolio Management:

The process of selecting and managing a group of investments to achieve specific financial objectives.

Premise of Value:

The assumption regarding the circumstances under which an asset or business would be valued, such as a going concern or liquidation scenario.

Report Date:

The date on which valuation conclusions are transmitted to the client or stakeholders.

Residual Value:

The estimated value of an asset at the end of its useful life, often used in discounted cash flow analysis.

Special Purpose Entity:

An entity created for a specific purpose or transaction, often used to isolate financial risk or achieve tax advantages.

Systematic Risk:

The risk inherent to the entire market or market segment, affecting all investments to some degree.

Terminal Value:

The estimated value of an investment at the end of a specific period, often used in discounted cash flow analysis to account for future cash flows beyond the projection period.

Unsystematic Risk:

The risk specific to a particular company or industry, arising from factors such as management decisions or industry conditions.

Valuation:

The process of determining the worth of an asset, business, or investment using various methodologies and factors.

Valuation Approach:

A general method used to determine the value of an asset, business, or investment, often categorized into income, market, and asset-based approaches.

Valuation Date:

The specific point in time for the valuator’s opinion of value (also known as “Effective Date” or “Appraisal Date”).

Valuation Method:

A specific approach to determine value within valuation methodologies.

Valuation Procedure:

The act, manner, and technique of performing the steps of an appraisal method.

Valuation Ratio:

A fraction where a value or price serves as the numerator, typically used for comparative valuation purposes.

Weighted Average Cost of Capital (WACC):

The average rate of return required by investors, calculated by weighting the cost of debt and equity capital based on their respective proportions in the capital structure.

XIRR:

A function in financial analysis used to calculate the internal rate of return for irregular cash flows occurring at specific time intervals.

Yield Curve:

A graphical representation of interest rates for different maturities of bonds, typically showing the relationship between short-term and long-term interest rates.

Zero-Based Budgeting:

A budgeting method requiring all expenses to be justified for each new budget period, starting from a zero baseline.