Business valuation glossary

An expense added back to reported profit when normalising earnings because a buyer would not incur it: for example an owner's personal costs paid by the business, or a genuinely one-off legal bill. Each add-back needs evidence.

See: What counts as a non-recurring expense in a business valuation; Earnings normalisation worksheet

The price a seller advertises. It shows what the seller hoped to receive, not what a buyer paid, so it is weaker evidence of value than a completed sale.

See: How much weight completed sales, asking prices and valuation opinions carry

A sale of the business's assets (goodwill, plant, stock, contracts) rather than the shares in the company that owns them. The buyer generally does not take on the company's history or liabilities unless agreed.

See: The business, the shares or the units: what is being valued?

The number applied to maintainable earnings to estimate value under the capitalised earnings method. It reflects risk and growth, and must match the earnings definition it is applied to (EBITDA, EBIT or owner earnings).

See: Capitalised earnings sensitivity table; Valuation methods reference guide

One divided by the capitalisation multiple: the earnings yield the multiple implies on that earnings measure. A multiple of 4 implies 25 per cent. It is not the same as a discount rate: in broad terms it equals the required return less expected long-term growth.

See: Capitalised earnings sensitivity table

A valuation method that multiplies the earnings a business can sustain by a capitalisation multiple. It suits established, profitable businesses with reasonably stable earnings.

See: Valuation methods reference guide; Which year's profit should a business valuation use?

A sale that actually settled, with a known price and terms. The strongest form of market evidence when the business, terms and earnings definition are comparable.

See: How much weight completed sales, asking prices and valuation opinions carry

Reliance on a small number of customers for a large share of revenue. It raises the risk that earnings fall if one relationship ends.

See: How relying on a few large customers affects business value

Obligations that are not formal borrowings but reduce what shareholders receive, such as overdue tax, unfunded employee entitlements, or deposits received for work not yet done. Which items count depends on the facts and on any transaction agreement.

See: How cash, debt and debt-like items change what the shares are worth; Enterprise value to equity value calculator

Part of a sale price paid after completion, either fixed or contingent. A headline price with deferred or contingent amounts is not directly comparable with an all-cash price.

See: How much weight completed sales, asking prices and valuation opinions carry

The rate of return used to convert future cash flows into a present value in a discounted cash flow valuation. Higher risk means a higher rate and a lower value.

See: Valuation methods reference guide

A method that forecasts future cash flows and discounts them to today at a rate reflecting risk. It suits businesses whose future differs from their past, but is sensitive to its assumptions.

See: Valuation methods reference guide; How to value a business with negative or volatile earnings

The buyer's investigation of a business before committing: financials, contracts, staff, premises, licences and risks.

See: Preparing for a buyer's due diligence

Earnings before interest and tax. EBITDA less depreciation and amortisation, which brings the cost of using up equipment into the earnings figure.

See: SDE and EBITDA: what is the difference?

Earnings before interest, tax, depreciation and amortisation. A common measure of operating earnings, usually after a market salary for the owner's roles once normalised.

See: SDE and EBITDA: what is the difference?; How to normalise a working owner's salary in a business valuation

The value of the operating business, before allocating it between lenders and shareholders, on a stated basis for cash, debt and working capital.

See: Business value and share value are different questions; Enterprise value to equity value calculator

The value attributable to all shareholders together: enterprise value adjusted for surplus cash, debt, debt-like items and other balance sheet items.

See: Business value and share value are different questions; How cash, debt and debt-like items change what the shares are worth

A business expected to keep operating. Earnings-based methods assume a going concern; if it is not one, a realisation basis may be more relevant.

See: When the assets, not the earnings, set a business's value

The part of a business's value not explained by its identifiable net assets: in a valuation, usually the residual of enterprise value over those assets. It can be nil.

See: What goodwill is and how a valuation works it out

Exactly what is valued: the business assets, all the shares, a particular parcel of shares, or units in a trust. It must be settled before the valuation starts.

See: The business, the shares or the units: what is being valued?

The level of earnings a business can reasonably be expected to sustain, after normalisation. Choosing it (one year, an average, a weighted average or a forecast) is a judgement.

See: Which year's profit should a business valuation use?

In Australia, commonly described as the price a willing but not anxious buyer would pay a willing but not anxious seller, usually assumed to be informed and dealing at arm's length. The concept is usually traced to Spencer v Commonwealth (1907) 5 CLR 418.

See: How much weight completed sales, asking prices and valuation opinions carry

A shareholding that does not carry control. Its value is not automatically its percentage of total equity value: rights, agreements and purpose matter.

See: Is a 25% shareholding worth 25% of the company?

Assets less liabilities, at book value or at assessed market values. On a going-concern basis it can act as a cross-check or reference point for an asset-heavy business; orderly realisation is the lower floor if the business stops trading.

See: When the assets, not the earnings, set a business's value; Valuation methods reference guide

Interest-bearing debt less surplus cash. Some analyses also include debt-like items; the definition should always be stated.

See: How cash, debt and debt-like items change what the shares are worth

Assets the business does not need to earn its profits, such as an investment property or surplus vehicles. They are valued separately and added to enterprise value.

See: How cash, debt and debt-like items change what the shares are worth

An income or expense that will not happen again in the ordinary course. Items that recur under different names each year are not non-recurring.

See: What counts as a non-recurring expense in a business valuation

The level of stock, debtors and creditors a business needs to operate at its current scale. Enterprise value usually assumes this level is delivered with the business.

See: How cash, debt and debt-like items change what the shares are worth; Is stock included in a business valuation or added on top?

Adjusting reported profit so that it shows what the business earns for an owner who pays market rates: market salary for the owner's roles, market rent, and no personal or one-off items.

See: How to normalise a working owner's salary in a business valuation; Earnings normalisation worksheet

The amount likely to be recovered by selling the assets over a reasonable period and paying the liabilities, after costs. Relevant when a business is not viable as a going concern.

See: When the assets, not the earnings, set a business's value; Valuation methods reference guide

Seller's discretionary earnings: profit before tax, the owner's own salary and benefits, interest, depreciation and one-off items, usually for one full-time working owner. Used for small owner-operated businesses; never compare an SDE multiple with an EBITDA multiple.

See: SDE and EBITDA: what is the difference?

Value that depends on a particular person's skills, reputation or relationships and would not transfer to a buyer without them.

See: What goodwill is and how a valuation works it out

A holding's percentage multiplied by total equity value. A starting point for some purposes, not automatically the market value of that holding.

See: Is a 25% shareholding worth 25% of the company?; Enterprise value to equity value calculator

A dealing between the business and its owners or their associates, such as rent paid to the owner's property trust. Valuations normalise these to market terms.

See: Adjusting profit when the business rents from the owner

Value expressed as a multiple of turnover. It ignores profitability and cost structure, so on its own it does not establish what a business is worth. Some books of recurring revenue, such as rent rolls and accounting fee bases, are customarily priced on a revenue multiple, but retention and profitability still drive the price.

See: Why turnover alone does not tell you what a business is worth

A shortcut such as "x times profit" for a type of business. Useful as a rough cross-check at most; it hides differences in earnings definitions, terms and risk.

See: How much weight completed sales, asking prices and valuation opinions carry

Showing how a value changes when a key assumption (the multiple, the discount rate, the earnings) changes. It shows how much weight a single number is carrying.

See: Capitalised earnings sensitivity table

A sale of the shares in the company that owns the business. The company, with its assets, contracts, history and liabilities, stays intact under new ownership.

See: The business, the shares or the units: what is being valued?

Cash the business does not need to operate, after allowing for the working capital it requires. Only surplus cash is added to enterprise value.

See: How cash, debt and debt-like items change what the shares are worth; Enterprise value to equity value calculator

In a DCF, the value of all cash flows beyond the explicit forecast period. It is often a large share of the total, which is why its assumptions deserve scrutiny.

See: Valuation methods reference guide

The date at which value is assessed. Only information known or reasonably knowable at that date should be used.

See: Preparing a client's financials for a valuation: an accountant's guide

A valuer's conclusion of value. It is evidence of a professional view, not of a sale, and should never be reported as a transaction.

See: How much weight completed sales, asking prices and valuation opinions carry

An average of several years' earnings that gives more weight to recent years, for example weights of 1, 2 and 3 for the oldest to newest of three years.

See: Which year's profit should a business valuation use?; Earnings normalisation worksheet

Current operating assets less current operating liabilities: mainly stock and debtors less trade creditors and accruals.

See: How cash, debt and debt-like items change what the shares are worth