Glossary
Valuation terms,
in plain English.
The vocabulary of a valuation report, defined the way we would explain it across a table. Each term links to the guide that goes deeper.
- Add-back
- An adjustment that adds an expense back to reported profit because it would not be incurred on the basis being valued: a one-off legal cost, an owner’s private expense, or above-market rent paid to a related party. Every add-back needs evidence. See EBITDA adjustments.
- Asset-based valuation
- A method that values a business by the market value of its assets less its liabilities. Common for asset-heavy businesses, investment entities and businesses whose earnings do not support goodwill.
- Basis of value
- The definition of value the report adopts, such as market value or fair value under an agreement. Different bases can give different numbers for the same business, so the report must state which one it uses.
- Business value
- The value of the operating business as a whole, before the effect of how it is financed. Often called enterprise value. Distinct from the value of a parcel of shares.
- Capitalisation of earnings
- A method that converts a maintainable earnings figure into a value by applying a multiple (or dividing by a capitalisation rate) that reflects risk and growth. The most common approach for established, profitable small and medium businesses.
- Capitalisation rate
- The return an investor would require from the business, expressed as a percentage. The inverse of a multiple: a 25% capitalisation rate equals a multiple of 4.
- Comparable transactions
- Sales of similar businesses used as evidence for the multiple applied. Useful only when the comparables really are comparable in size, risk, profitability and deal terms.
- Customer concentration
- Reliance on a small number of customers for a large share of revenue. A risk factor that generally lowers the multiple, because losing one relationship would reshape the earnings.
- Discount for lack of control (DLOC)
- A reduction applied when valuing a minority interest that cannot direct the business, its distributions or a sale. Its size depends on the rights attached to the shares and the practical position of the holder. See minority shareholding.
- Discount for lack of marketability (DLOM)
- A reduction applied because shares in a private company cannot be sold quickly or easily. Often considered alongside a discount for lack of control.
- Discounted cash flow (DCF)
- A method that forecasts future cash flows and discounts them to a present value at a rate reflecting their risk. Suited to businesses with credible forecasts, uneven growth or a defined life; sensitive to its assumptions.
- Due diligence
- The investigation a buyer carries out before completing a purchase. A valuation is not due diligence and does not verify every record.
- EBIT
- Earnings before interest and tax. A profit measure used when depreciation and amortisation are a real, recurring cost of staying in business.
- EBITDA
- Earnings before interest, tax, depreciation and amortisation. A common measure of operating cash profit, normally adjusted before a multiple is applied. See SDE versus EBITDA.
- Enterprise value (EV)
- The value of the whole operating business, independent of how it is funded. Equity value is derived from it by adding surplus assets and deducting debt. See enterprise value versus equity value.
- Equity value
- The value of the shares (or units) in the entity that owns the business, after the bridge from enterprise value: add surplus cash and non-operating assets, deduct interest-bearing debt and debt-like items.
- Fair value
- A basis of value that, in many shareholder agreements and accounting standards, means a price that is equitable between the specific parties. It may exclude discounts that market value would include. The document defining it governs.
- Fixed fee
- A fee agreed in writing for a defined scope before work starts. Valuation Group’s standard signed report is $1,495 + GST for suitable matters. See fees.
- Future maintainable earnings (FME)
- The level of earnings the business can reasonably be expected to sustain, judged from the historical record, adjustments and the outlook. The figure a multiple is applied to.
- Going concern
- The assumption that the business will continue operating for the foreseeable future. Most earnings-based valuations assume it; a liquidation or forced-sale basis does not.
- Goodwill
- The value of the business as an operating whole above its identifiable net assets: reputation, relationships, systems and workforce that generate earnings. Not simply added on top of an earnings-based value. See business goodwill.
- Independent expert
- A valuer appointed under an agreement or court process to give an impartial opinion, rather than an adviser acting for one party. Appointment terms and independence must be settled before the engagement begins.
- Key-person dependence
- The degree to which revenue, relationships, licences or know-how depend on one individual, usually the owner. A major driver of transferability and therefore of value.
- Market value
- The price a willing but not anxious buyer would pay a willing but not anxious seller, both informed and acting at arm’s length, at the valuation date. The most common basis for tax and transaction valuations in Australia.
- Minority interest
- A shareholding that does not carry control. Its value depends on the rights attached to it, the agreements in place and the realistic prospects of distributions or a sale, not just on its percentage of the whole.
- Multiple
- The factor applied to maintainable earnings (or revenue) to arrive at a value. It reflects the risk and growth prospects of the business and must be supported by evidence. See valuation multiples.
- Net assets
- Total assets less total liabilities, usually restated from book values to market values for valuation purposes.
- Normalised earnings
- Reported profit adjusted for items that do not reflect the business on the basis being valued: owner remuneration at market rates, one-off items, related-party arrangements and non-operating income. Also called adjusted or maintainable earnings.
- Owner’s remuneration adjustment
- Replacing what the owner actually draws with what it would cost to employ someone to do the owner’s job. It can move earnings up or down and is one of the most common adjustments in small business valuations.
- Pre-money and post-money
- Terms used in start-up investment: the value of the company before new capital is invested, and after. Relevant to early-stage valuations, rarely to established businesses.
- Purpose
- Why the valuation is required: a sale, a shareholder exit, a family law matter, a restructure. The purpose shapes the basis of value, the scope, the report format and who may rely on it.
- Retrospective (historical) valuation
- A valuation as at an earlier date, using the information that was known or reasonably knowable at that date. Common for tax events, disputes and estates. See why the valuation date matters.
- Rule of thumb
- An industry shorthand such as "one times revenue" or "a multiple of fees". Useful as a sense check, dangerous as a conclusion, because it ignores the specific earnings, risks and assets of the business.
- Scope
- The written definition of what is being valued, for whom, at what date, on what basis, using what information and with what limitations. Agreed before work begins and repeated in the report.
- Seller’s discretionary earnings (SDE)
- Profit before one full-time owner’s remuneration, interest, tax, depreciation and discretionary items. Used for small owner-operated businesses; not interchangeable with EBITDA.
- Signed valuation report
- A written opinion of value, signed by the valuer responsible, that states its purpose, basis, date, evidence, method, assumptions, limitations and permitted use. Distinct from an estimate or appraisal.
- Surplus assets
- Assets the business does not need to generate its earnings, such as excess cash, investments or property held outside operations. Added to enterprise value in the bridge to equity value.
- Valuation date
- The date at which value is assessed. Only information known or reasonably knowable at that date is used, even if the report is written later.
- Weighted average cost of capital (WACC)
- The blended return required by debt and equity providers, used as the discount rate in a discounted cash flow valuation.
- Working capital
- The stock, receivables and operating liabilities needed to run the business day to day. A valuation normally assumes a normal level is included; excess or deficit is adjusted in the bridge. See working capital.
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