Glossary
Business Valuation Glossary
A guide to common terms used in business valuations to help you understand the process and the language used in our reports.
Amortisation
The process of gradually writing off the initial cost of an intangible asset over its useful life. Similar to depreciation but applied to intangible assets such as patents, trademarks and goodwill.
Asset-Based Valuation
A method of valuing a business by calculating the net value of all its assets minus its liabilities. This approach is most commonly used for asset-heavy businesses or those being wound down.
Book Value
The net value of a company's assets as recorded on its balance sheet, calculated as total assets minus total liabilities. Book value may differ significantly from market value.
Capital Gains Tax (CGT)
A tax on the profit made when you sell or dispose of an asset that has increased in value. When selling a business, the proceeds above the original cost base are typically subject to CGT.
Capitalisation Rate
A rate of return used to convert a single period income stream into an indication of value. It is calculated by dividing the net operating income by the asset value.
Control Premium
An additional amount that a buyer is willing to pay above the market value of a company to gain a controlling interest.
Comparable Transactions
A valuation method that uses the sale prices of similar businesses to estimate the value of the business being valued. Also known as the market approach or transaction multiples method.
Debt-Free / Cash-Free Basis
A common basis for business sale transactions where the buyer acquires the business free of financial debt and without the benefit of any surplus cash, with the price adjusted accordingly.
Depreciation
The systematic allocation of the cost of a tangible asset over its useful life. Depreciation reduces the book value of an asset and is a non-cash charge on the profit and loss account.
Discounted Cash Flow (DCF)
A valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
Dividend Yield
A financial ratio that shows how much a company pays out in dividends each year relative to its share price. It is expressed as a percentage and used as a measure of return on investment.
EBIT (Earnings Before Interest and Tax)
A measure of a company's profitability that excludes interest and income tax expenses. EBIT is used to assess the operating performance of a business independently of its capital structure.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation. A measure of a company's overall financial performance and is used as an alternative to net income in some circumstances.
EBITDA Multiple
A valuation method that compares a company's enterprise value to its EBITDA. It is used to determine the value of a company relative to its earnings.
Enterprise Value
A measure of a company's total value, often used as a more comprehensive alternative to equity market capitalisation. Enterprise value includes in its calculation the market capitalisation of a company but also short-term and long-term debt as well as any cash on the company's balance sheet.
EOT (Employee Ownership Trust)
A trust that holds shares in a company on behalf of all employees. EOTs were introduced by the government in 2014 to encourage employee ownership and provide a tax-efficient exit route for business owners.
Equity Value
The value of a company attributable to its shareholders, calculated as enterprise value minus net debt. Equity value represents what shareholders would receive if the business were sold.
Exit Strategy
A plan for how a business owner intends to leave or sell their business. Common exit strategies include trade sale, management buyout, employee ownership trust, or passing the business to family members.
FMVA (Financial Modelling & Valuation Analyst)
A professional certification awarded by the Corporate Finance Institute (CFI) that demonstrates competency in financial modelling, valuation, and analysis.
Goodwill
An intangible asset that arises when a buyer acquires an existing business. Goodwill represents the value of a business's brand name, customer base, customer relations, employee relations, and proprietary technology.
ICAEW (Institute of Chartered Accountants in England and Wales)
A professional membership organisation that promotes, develops and supports chartered accountants and students around the world. ICAEW membership is a mark of professional quality and integrity.
Intellectual Property (IP)
Creations of the mind, such as inventions, literary and artistic works, designs, and symbols, names and images used in commerce. IP can form a significant part of a business's value.
Key Man Risk
The risk to a business that arises from its dependence on one or a small number of key individuals. High key man risk can reduce a business's value as it makes the business more vulnerable to disruption.
MBI (Management Buy In)
A transaction where an external management team raises funds to purchase a company and then replaces the existing management team.
MBO (Management Buy Out)
A transaction where a company's management team purchases the assets and operations of the business they manage. An MBO is often financed through a combination of personal investment, bank loans and private equity.
Minority Discount
A reduction in the value of a minority shareholding to reflect the lack of control that a minority shareholder has over the business.
Net Asset Value (NAV)
The value of a company's assets minus its liabilities. NAV is often used as a valuation method for asset-heavy businesses such as property companies.
Net Profit
The amount of money a business retains after all expenses, taxes and interest have been deducted from total revenue. Net profit is the bottom line figure on a profit and loss account.
Normalised Earnings
Earnings that have been adjusted to remove the effects of one-off or unusual items, to give a more accurate picture of the underlying profitability of a business.
P/E Ratio (Price to Earnings Ratio)
A valuation ratio of a company's current share price compared to its per-share earnings. The P/E ratio is used to determine the relative value of a company's shares.
Recurring Revenue
Income that a business can reliably expect to continue in the future, typically from subscriptions, retainers or long-term contracts. High levels of recurring revenue generally increase a business's value.
Revenue Multiple
A valuation method that applies a multiple to a company's annual revenue to arrive at an estimated value. Revenue multiples are commonly used for early-stage or high-growth businesses where profitability is limited.
SDE (Seller's Discretionary Earnings)
A measure of the total financial benefit a single owner-operator derives from a business. SDE adds back the owner's salary, personal expenses and non-cash charges to net profit and is commonly used to value small owner-managed businesses.
SIPP (Self Invested Personal Pension)
A type of personal pension that allows the holder to make their own investment decisions from the full range of investments approved by HMRC.
SJE (Single Joint Expert)
An expert appointed by both parties in legal proceedings, or by the court, to provide an independent opinion on a specific matter. In divorce cases, a Single Joint Expert is often appointed to value a business.
SSAS (Small Self Administered Scheme)
A type of occupational pension scheme that is set up by a company for a small number of members, typically the directors of the company.
Terminal Value
The estimated value of a business beyond the explicit forecast period in a discounted cash flow analysis. Terminal value typically accounts for a significant proportion of the total DCF valuation.
Trade Sale
The sale of a business to another company, typically a competitor, supplier or customer. A trade sale is one of the most common exit routes for business owners and often achieves a higher price than other exit routes.
Universal Multiple
A valuation method that applies a multiple to a measure of earnings or revenue to arrive at a business value. The multiple used is based on comparable transactions in the same sector.
Weighted Average Cost of Capital (WACC)
The average rate of return a company is expected to pay to all its security holders to finance its assets. WACC is used as the discount rate in DCF valuations and reflects the blended cost of equity and debt.
Working Capital
The difference between a company's current assets and current liabilities. Working capital is a measure of a company's short-term financial health and operational efficiency.