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Abstract
A written history
of the title to a parcel of real estate as recorded in a land registry office.
Accrued
Interest The
interest earned on a bond since the last interest payment was made.
Administrator A person appointed by the Court to manage the estate of a
deceased person who did not by will appoint an executor.
Adverse
Possession When
an individual, not the owner, takes actual possession of the property, hostile
to, and without the consent of the owner.
Agent One
who legally represents a person or company in business transactions.
Agreement
of
Agreement
to Lease A
contract by which one party agrees to rent real estate to another party for a
rental or other compensation.
Adjusted
Book Value Method A method within the asset approach whereby all
assets and liabilities (including off-balance sheet, intangible, and
contingent) are adjusted to their fair market values.
All-in
Cost Total cost, including the interest rate on
the debenture, discount, commissions, reserve fees, and issuing expenses.
Amortization
of a Mortgage Arrangement
for the paying off of a mortgage by installments or periodic payments to a
sinking fund.
Appurtenances
All the rights that go with the property
although not within the limits of the deed.
Assessed
Value or Assessment Valuation placed on property by a
municipality for taxation purposes.
Asset
(Asset-Based) Approach A general way of determining a value indication of a business,
business ownership interest, or security using one or more methods based on the
value of the assets net of liabilities
Asset
Bankers
Acceptance A short-term credit investment created by a
non-financial firm and guaranteed by a bank.
BAs are very similar to T-bills.
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. A double base year is
used when the company is within a few months of the end of its fiscal year, or
has completed its fiscal year but does not yet have financial statements for
that year.
Basis
Point In the bond market, the smallest
measure used for quoting yields; one basis point is 0.01 percent (1/100 of 1
percent). Basis points are also used for
interest rates; an interest rate of 5 percent is 50 basis points higher than an
interest rate of 4.5 percent.
Beta A measure of systematic risk of a
stock; the tendency of a stock’s price to correlate with changes in a specific
index.
Blended
Payments Total principal and interest payments remain
the same over the term of the loan, however the principal portion of the
payment increases and the interest portion decreases.
Blockage
Discount An
amount or percentage deducted from the current market price of a publicly
traded stock to reflect the decrease in the per share value of a block of stock
that is of a size that could not be sold in a reasonable period of time given
normal trading volume.
Book
Value The value
at which an asset is carried on a company’s balance sheet. See Recast Book
Value.
Business Broker An intermediary that is dedicated to serving clients and customers who desire to sell or acquire businesses. A business broker is committed to providing professional services in a knowledgeable ethical and timely fashion. Typically, a Business Broker provides information and business advice to sellers and buyers, maintains communications between the parties and coordinates the negotiations and closing processes to complete desire transactions.
Business
Business
Risk The degree
of uncertainty of realizing expected future returns of the business resulting
from factors other than financial leverage.
Business
Valuation The act
or process of determining the value of a business enterprise or ownership
interest therein.
Capital
Asset Pricing Model (CAPM) A model
in which the cost of capital for any stock or portfolio of stocks equals a
risk-free rate plus a risk premium that is proportionate to the systematic risk
of the stock or portfolio.
Capitalization A conversion of a single period
of economic benefits into value.
Capitalization
Factor Any
multiple or divisor used to convert anticipated economic benefits of a single
period into value.
Capitalization
of Earnings Method
A method within the income approach whereby economic benefits for a
representative single period are converted to value through division by a
capitalization rate.
Capitalization
Rate Any divisor
(usually expressed as a percentage) used to convert anticipated economic
benefits of a single period into value.
Capital
Structure The
composition of the invested capital of a business enterprise, the mix of debt
and equity financing.
Cash
Flow The excess
of sources of cash over uses of cash.
Cash
Flow Statement An analysis of all the changes that affect the
cash account during an accounting period. These changes may be shown as either
sources or uses of cash.
Chattels
Moveable possessions, personal property
(generally items that may be removed without injury to the freehold estate).
Cloud
on Title Any
encumbrance or claim that affects title to real property.
Commission
Remuneration paid
to an agent on sale or lease of property, usually as a percentage of the amount
involved.
Common
Size Statements Financial statements in which each line is
expressed as a percentage of the total.
On the balance sheet, each line item is shown as a percentage of total
assets, and on the income statement, each item is expressed as a percentage of
sales.
Control
The power to direct the management and policies of a business
enterprise.
Control
Premium An amount or a percentage by which the pro
rata value of a controlling interest exceeds the pro rata value of a
non-controlling interest in a business enterprise, to reflect the power of
control.
Consideration Compensation, payment.
Contract
An agreement between two or more parties upon lawful consideration, to
do or refrain from doing some act (if affecting real estate, it must be in
writing).
Cost
Approach A general way of determining a
value indication of an individual asset by quantifying the amount of money
required to replace the future service capability of that asset.
Cost
of Capital The expected rate of return that the market
requires in order to attract funds to a particular investment.
Deal
Structure The form by which the purchase of a business
is accomplished. It could include cash, notes, stock, consulting agreements,
earn-out provisions, and covenants not to compete. The sale could take the form
of an asset sale or a stock sale. See those definitions.
Debenture
A debt obligation backed strictly by the borrower’s integrity, e.g. an
unsecured bond.
Deed A written instrument that has been signed, sealed and delivered.
Deposit
Payment of money or other valuable consideration as pledge for
fulfillment of contract.
Depreciation
- Amount by which property over a period of
time has decreased in value.
Discount The amount by which the
selling price of a debenture is below its par value. A bond that is sold at 99.50 has a discount
of 50 basis points.
Discount
for Lack of Control
Discount
for Lack of Marketability
Discount
for Lack of Voting Rights
Discount
Rate A rate of
return used to convert a future monetary sum into present value
Discounted
Cash Flow Method
Discounted
Future Earnings Method
Earnings
Multiple Divide
the returns on investment expectations of a buyer into 100. This multiple will
change from business by classification to individual businesses.
Earn-out
The portion of the purchase price that is contingent on future
performance. It is payable to the sellers only when certain predefined levels
of sales or income are achieved in the years after acquisition.
Easement
A right to some use of adjoining land or buildings, for example, a right
of way or a right to light.
EBITDA The earnings of a business
enterprise prior to deducting interest, taxes, depreciation and amortization
(and other non-cash charges).
EBITDAR The earnings of a business
enterprise prior to deducting interest, taxes, depreciation and amortization
(and other non-cash charges) and rental/lease on capital equipment.
Economic
Benefits Inflows such as revenues, net income, net
cash flows, etc.
Economic
Life The period of time over which property may generate
economic benefits.
Encumbrance Outstanding claim or lien recorded against property or any
legal right to the use of the property by another person who is not the owner.
Equity The difference between the market value of the property and the mortgages, liens, etc., against the property.
Equity
Net Cash Flows
Those cash flows available to pay out
to equity holders (in the form of dividends) after funding operations of the
business enterprise, making necessary capital investments, and increasing or
decreasing debt financing.
Equity
Risk Premium A rate of return added to a risk-free rate to
reflect the additional risk of equity instruments over risk free instruments (a
component of the cost of equity capital or equity discount rate).
Executor Person appointed by testator to
carry out the provisions of the testator’s will.
Exclusive
Listing The giving of the sole right to sell the
described property according to the terms of the agency agreement.
Excess
Earnings The
amount of anticipated economic benefits that exceeds an appropriate rate of
return on the value of a selected asset base (often net tangible assets) used
to generate those anticipated economic benefits.
Excess
Earnings Method A
specific way of determining a value indication of a business, business
ownership interest, or security determined as the sum of a) the value of the
assets derived by capitalizing excess earnings and b) the value of the selected
asset base. Also frequently used to
value intangible assets.
Fair
Market Value The price at which a business passes from a
willing seller to a willing buyer. It is assumed that both buyer and seller are
rational and have a reasonable knowledge of relevant facts.
Fairness
Opinion An opinion as to whether or not the
consideration in a transaction is fair from a financial point of view.
Fee
Simple The highest estate or absolute
right in real property.
Financial
Risk The degree of uncertainty of realizing
expected future returns of the business resulting from financial leverage.
Fixed
Interest Rate An interest rate that does not fluctuate with
general market conditions.
Fixtures
Permanent improvements to property that may not be removed at the
expiration of the term of the lease or tenure.
Forced
Liquidation Value Liquidation value, at which the asset or
assets are sold as quickly as possible, such as at an auction.
Free
Cash Flow Cash available for distribution after taxes
but before the effects of financing. Calculated as net income plus depreciation
less expenditures required for working capital and capital items adjusted to
remove effects of financing.
Going
Concern An ongoing operating business enterprise
Going
Concern Value The
value of a business enterprise that is expected to continue to operate into the
future. The intangible elements of Going
Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses,
systems, and procedures in place
Goodwill
The amount by which the price paid for a company exceeds the company’s
estimated net worth.
Goodwill
Value The value attributable to goodwill.
Grantee
The person who receives the legal transfer of property from another.
Grantor
The person who conveys or legally assigns property to another.
Gross
Proceeds The amount received after all costs and fees
have been paid. If a municipal unit
wants $100,000 for capital financing, they can request that the proceeds equal
$100,000. The unit will borrow $100,000
plus fees and charges.
Guideline
Public Company Method A method
within the market approach whereby market multiples are derived from market
prices of stocks of companies that are engaged in the same or similar lines of
business, and that are actively traded on a free and open market.
Hypothecate
To pledge as
security without delivery of title or possession.
Income
(Income-Based) Approach A general way of determining a value
indication of a business, business ownership interest, security, or intangible
asset using one or more methods that convert anticipated economic benefits into
a present single amount.
Intangible
Assets Non-physical assets such as
franchises, trademarks, patents, copyrights, goodwill, equities, mineral
rights, securities and contracts (as distinguished from physical assets) that
grant rights and privileges, and have value for the owner.
Internal
Rate of Return A discount rate at which the present value
of the future cash flows of the investment equals the cost of the investment.
Intrinsic
Value The value that an investor considers, on the
basis of an evaluation or available facts, to be the “true” or “real” value
that will become the market value when other investors reach the same
conclusion. When the term applies to
options, it is the difference between the exercise price or strike price of an
option and the market value of the underlying security.
Invested
Capital The sum of equity and debt in a
business enterprise. Debt is typically a) all interest bearing debt or b)
long-term interest-bearing debt. When
the term is used, it should be supplemented by a specific definition in the
given valuation context.
Invested
Capital Net Cash Flows Those cash flows available to
pay out to equity holders (in the form of dividends) and debt investors (in the
form of principal and interest) after funding operations of the business
enterprise and making necessary capital investments.
Investment
Risk The degree of uncertainty as to the
realization of expected returns
Investment
Value The value to a particular investor (or group
of investors) based on individual investment requirements and expectations
Joint
Tenancy Ownership of land by two or more persons whereby, on the death
of one, the survivor or survivors take the whole estate.
Judgment
The decision of the Court.
Key
Person Discount An amount or percentage deducted from the
value of an ownership interest to reflect the reduction in value resulting from
the actual or potential loss of a key person in a business enterprise.
Landlord
The person from whom another holds tenancy.
Lease Contract
between landlord (lessor) and tenant (lessee) for the occupation or use of the
landlord’s property by the tenant for a specified time and for a specified
consideration (rental).
Lessee
Tenant under a lease.
Lessor The person who
grants use of property under lease to a tenant.
Levered
Beta The beta reflecting a capital structure that
includes debt.
LIBOR
–
Lien
A right of encumbrance affecting any property.
Liquidity
The ability to quickly convert property to cash or pay a liability.
Liquidating
Value The value of a company based on the market
value of its assets, net of liabilities.
Lis
Pendens (legal phrase, Latin.) Notice of the
commencement of a Court action recorded on the title of the property in the
land registry office (also referred to as a certificate of pending litigation).
Majority
Control The degree of control provided by a majority
position.
Majority
Interest An ownership interest greater than 50% of
the voting interest in a business enterprise.
Market
(Market-Based) Approach A 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.
Market
Capitalization of Equity The share price of a publicly
traded stock multiplied by the number of shares outstanding.
Market
Capitalization of Invested Capital The market
capitalization of equity plus the market value of the debt component of
invested capital.
Market
Multiple The
market value of a company’s stock or invested capital divided by a company
measure (such as economic benefits, number of customers).
Marketability
The ability to quickly convert property to cash at minimal cost.
Mechanic’s
Lien A claim filed in the land registry office by
an individual, or company, for labour or material, or both, supplied for the
improvement of the property (also referred to as a construction lien or
repairer’s lien).
Merger
and Acquisition Method
A method
within the market approach whereby pricing multiples are derived from
transactions of significant interests in companies engaged in the same or
similar lines of business.
Mid-Year
Discounting A convention used in the Discounted Future
Earnings Method that reflects economic benefits being generated at midyear,
approximating the effect of economic benefits being generated evenly throughout
the year.
Minority
Discount A discount for lack of control applicable to
a minority interest.
Minority
Interest An ownership interest less than 50% of the
voting interest in a business enterprise.
Mortgage
A conveyance of property to a creditor as security for payment of a debt
with a right of redemption at a specified date.
Mortgagee
The one to whom property is conveyed as security for the payment of a
debt; the lender or creditor.
Mortgagor
The one who makes the mortgage; the borrower or debtor.
Multiple
The inverse of the capitalization rate.
NBIT Net Before Income taxes
Net
Book Value With respect to a business enterprise, the
difference between total assets (net of accumulated 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.
Net
Cash Flow Cash available for distribution after taxes
and after the effects of financing. Calculated as net income plus depreciation
less expenditures required for working capital and capital items.
Net
Present Value The value, as of a specified date, of future
cash inflows less all cash outflows (including the cost of investment)
calculated using an appropriate discount rate.
NIAT
Net Income After Tax
Net
Tangible Asset Value The value of the business enterprise’s
tangible assets (excluding excess assets and non-operating assets) minus the
value of its liabilities.
Non-Operating
Assets Assets not
necessary to ongoing operations of the business enterprise.
Normalized
Earnings Economic benefits adjusted for nonrecurring,
noneconomic, or other unusual items to eliminate anomalies and/or facilitate
comparisons.
Normalized
Financial Statements Financial
statements adjusted for nonoperating assets and liabilities and/or for
non-recurring, non-economic, or other unusual items to eliminate anomalies
and/or facilitate comparisons.
Option A right given by the owner of property to another (for
valuable consideration) to buy certain property within a limited time at an agreed
price.
Orderly
Liquidation Value Liquidation value at which the asset or
assets are sold over a reasonable period of time to maximize proceeds received.
Personal
Property All property, except land and the
improvements thereon.
Portfolio
Discount An amount or percentage deducted from the
value of a business enterprise to reflect the fact that it owns dissimilar
operations or assets that do not fit well together.
Power
of Attorney Delegated written authority to a
person to legally act on behalf of another.
Premise
of Value An assumption regarding the most likely set
of transactional circumstances that may be applicable to the subject valuation;
e.g. going concern, liquidation.
Present
Value The value today of a future payment, or
stream of payments, discounted at some appropriate compound interest (discount)
rate.
Price/Earnings
Multiple The price of a share of stock divided by its
earnings per share.
Principal
The person or company who employs the agent; Re: money – constitutes the
original sum invested or loaned.
Pro
Forma Statements Statements that are used to illustrate the
likely expectation of a series of events in a set period of time, i.e.: if we
have completed ten months of a calendar year, and if we need to do the Phase One
Business Analysis based on the completed year.
Pro
Forma Balance Sheets
In privately held companies,
there are often redundant assets and under utilized assets that need to be
removed from the company prior to the sale of the business. A Pro Forma Balance
Sheet is used to illustrate the likely balance sheet of the company, at the
time of sale.
Projected
Statements Hypothetical statements. Financial statements
as they would appear if some event, such as increased sales or production, were
to occur.
Quit
Claim Deed A general release of all claims or
rights to a parcel of land.
Rate
of Return An amount of income (loss) and/or
change in value realized or anticipated on an investment, expressed as a
percentage of that investment.
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 decision 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.
Recast
Book Value The value of a balance sheet item (asset,
liability or equity) after recasting adjustments have been made.
Report
Date The date conclusions are transmitted to the
client.
Replacement
Cost New The current cost of a similar new property
having the nearest equivalent utility to the property being valued.
Reproduction
Cost New The current cost of an identical new
property.
Required
Rate of Return The minimum rate of return acceptable by
investors before they will commit money to an investment at a given level of
risk.
Residual
Value The value
as of the end of the discrete projection period in a discounted future earnings
model.
Return
on Equity The amount, expressed as a percentage,
earned on a company’s common equity for a given period.
Return
on Investment (ROI) The rate of return at which the sum of the
discounted future cash flows for the pro forma years plus the discounted
residual value equals the initial cash outlay.
Risk-Free
Rate The rate of return available in the market on
an investment free of default risk.
Risk
Premium A rate of return added to a risk-free rate to
reflect risk.
Rule
of Thumb A mathematical formula developed from the
relationship between price and certain variables based on experience,
observation, hearsay, or a combination of these; usually industry specific.
SDCF-
Shareholders’ Discretionary Cash Flow The earnings of a business enterprise prior to deducting
the following items: income taxes, non-recurring income and expenses,
non-operating income and expenses, depreciation and amortization, interest
expense or income, and total owners’ compensation.
Serial
Debenture A set of debentures issued at the same time
but having different maturity dates.
Share
Special
Interest Purchasers Acquirers who believe they can enjoy
post-acquisition economies of scale, synergies, or strategic advantages by
combining the acquired business interest with their own.
Spread The price an issuer pays above a benchmark fixed income
yield to borrow money. Spread is
affected by market conditions, credit rating of the issuer, and term to
maturity.
Standard
of Value The identification of the type of value
being used in a specific engagement; e.g. fair market value, fair value,
investment value.
Survey
The accurate mathematical measurements of land and buildings thereon,
made with the aid of instruments.
Sustaining
Capital Reinvestment The period capital outlay required to
maintain operations at existing levels, net of the tax shield available from
such outlays.
Systematic
Risk The risk that is common to all risky
securities and cannot be eliminated through diversification. The measure of systematic risk in stocks is
the beta coefficient.
Tangible
Assets Physical assets (such as cash, account
receivable, inventory, property, plant and equipment, etc).
Tenant
One who occupies land or tenement under a landlord.
Tenants-in-Common Ownership of land by two or more persons;
unlike joint tenancy in that interest of deceased does not pass to the
survivor, but is treated as an asset of the deceased’s estate.
Transaction
Value The 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 not limited to, all remuneration for tangible
and intangible assets such as furniture, equipment, supplies, inventory,
accounts receivables, working capital, non- competition agreements, employment
and/or consultation agreements, licenses, customer lists, franchise fees,
assumed liabilities, stock options, stock or stock redemptions, real estate,
leases, royalties, earn-outs and future considerations.
Unlevered
Beta The beta reflecting a capital structure
without debt.
Unsystematic
Risk The risk specific to an individual security
that can be avoided through diversification.
Valuation
The act or process of determining the value of a business, business
ownership interest, security, or intangible asset.
Valuation
Approach One of many ways of determining a value
indication of a business, business ownership interest, security, or intangible
asset using one or more valuation methods.
Valuation
Date The specific point in time as of which the
valuator’s opinion of value applies (also referred to as “Effective Date” or
“Appraisal Date”).
Valuation
Method Within approaches, a specific way to
determine value.
Valuation
Procedure The act, manner, and technique of performing
the steps of an appraisal method.
Valuation
Ratio A fraction in which a value or price serves
as the numerator and financial, operating, or physical data serves as the
denominator.
Variable
Interest Rate An interest
rate that moves at a pre-defined level above or below an index rate. A
commonly used index is the bank prime rate.
Voting
Control De jure control of a business enterprise.
Weighted
Average Cost of Capital (WACC) The cost of
capital (discount
Yield
The annual rate of return on an investment, expressed as a percentage.
Yield
to Maturity The rate of return if a bond is bought at
its current market price and held until maturity. The calculation for YTM is based on the
coupon rate, length of time to maturity, and market price.
