Glossary of Terms

A

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

Adjusted Net Asset Method: See adjusted book value method

Arbitrage Pricing Theory: a multivariate model for estimating the cost of equity capital, which incorporates several systemic risk factors

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.

B

Beta: a measure of systemic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index

Blockage Discount: an amount or percentage deducted from the current market price of a publically 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: see net book value

Business: see business enterprise

Business Enterprise: a commercial, industrial, service or investment entity (or a combination thereof) pursuing an economic activity

Business Risk: the degree of uncertainty of realizing expected future returns of the business resulting from factors other than financial leverage. See Financial Risk.

Business Valuation: the act or process of determining the value of a business enterprise or ownership interest therein

C

Capital Asset Pricing Model (CAPM): a model in which the cost of capital for any stock portfolio of stocks equals a risk free rate plus a risk premium that is proportionate to the systemic 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: cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, “discretionary” or “operating”) and 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

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

D

Debt-free: we discourage the use of this term. See Invested Capital.

Discount for Lack of Control: an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control

Discount for Lack of Marketability: an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability

Discount for lack of Voting Rights: an amount or percentage deducted from the per share value of a minority interest voting share to reflect the absence of voting rights

Discount Rate: a rate of return used to convert a future monetary sum into present value

Discounted Cash Flow Method: a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate

Discounted Future Earnings Method: a method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate

E

Earn-out: A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals

EBIT: earnings before interest and taxes

EBITDA: earnings before interest, taxes, depreciation and amortization

Economic Benefits: inflows such as revenues, net income, net cash flows, etc.

Economic Depreciation: a measure of the decrease in value of an asset over a specific period of time.

Economic Life: the period of time over which property may generate economic benefits

Effective Date: see Valuation Date.

Enterprise: see business enterprise.

Enterprise Value: a measure of a company’s value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents

Equity: the owner’s interest in property after deduction of all liabilities

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)

EV: see enterprise value.

Excess Earnings: the amount of anticipated economic benefits that exceed 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 hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts

F

Fair Market Value: the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when the both have reasonable knowledge of the relevant facts

Fairness Opinion: an opinion as to whether or not the consideration in a transaction is fair from a financial point of view

Financial Risk: the degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. See Business Risk.

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: we discourage the use of this term. See Net Cash Flow.

G

Going Concern: an ongoing operating business enterprise

Going Concern Value: the value of a business enterprise that is expected to continue to operation into the future the intangible elements of going concern value results from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place

Goodwill: that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified

Goodwill Value: the value attributable to goodwill

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

I

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

Invest 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 based on individual investment requirements and expectations

K

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

L

Levered Beta: the beta reflecting a capital structure that includes debt

Limited Valuation: the act or process of determining the value of a business, business ownership interest, security, or intangible asset with limitations in analysis, procedures, and scope

Liquidity: the ability to quickly convert property to cash or pay a liability

Liquidation Value: the net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced”

M

M&A: merger and acquisitions

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 interest, securities or intangible assets that have been sold.

Market Capitalization of Equity: the share price of 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 of 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

Marketability Discount: see Discount for Lack of Marketability

Market Value Invested Capital (MVIC): Also known as the selling price, the MVIC is the total consideration paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer.

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 reflect 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

Multiple: the inverse of the capitalization rate

N

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 Flows: when the term is used, it should be supplemented by a qualifier. See Equity Net Cash Flows and Invested Capital Net Cash Flows

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

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 non-recurring, non-economic, or other unusual items to eliminate anomalies and/or facilitate comparisons

Normalized Financial Statements: financial statements adjusted for non-operating assets and liabilities and/or for nonrecurring, non-economic or other unusual items to eliminate anomalies and/or facilitate comparisons

O

Orderly Liquidation Value: liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received

P

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, as of a specified date, of future economic benefits and/or proceeds from sale, calculated using an appropriate discount rate

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

Price/Earnings Multiple: the price of a share of stock divided by its earnings per share

Proforma Balance Sheet: In business, pro forma financial statements are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity.

R

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

Redundant Assets: see Non-Operating Assets

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: see Return on Invested Capital and Return on Equity

Return on Invested Capital: the amount, expressed as a percentage, earned on a company’s total capital for a given period

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

Rolling Average: an average commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles

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

S

SDCF: see Shareholder’s Discretionary Cash Flow

Shareholder’s Discretionary Cash Flow:  Shareholder value is a function of the amount and timing of discretionary cash flows to the (common) shareholders of a company

Special Interest Purchases: acquirers who believe that they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with their own

Standard of Value: the identification of the type of value being used in a specific engagement; e.g., fair market value, fair value, Fair Market Value

Sustaining Capital Reinvestment: the periodic 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 systemic risk in stocks is the beta coefficient

T

Tangible Assets: physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, etc.)

Terminal Value: the terminal value of a security is the present value at a future point in time of all future cash flows growing at an assumed constant rate (growth rate). It is most often used in multi-stage discounted cash flow analysis, and allows for the limitation of cash flow projections to a several-year period. Also see Residual Value

Transaction Method: see Merger and Acquisition Method

U

Unlevered Beta: the beta reflecting a capital structure without debt

Unsystemic Risk: the risk specific to an individual security that can be avoided through diversification

V

Valuation: the act or process of determining the value of a business, business ownership interest, security or intangible asset

Valuation Approach: a general way 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 appliers (also referred to ask “effective date” or “valuation date”)

Valuation Method: within approaches, a specific way to determine value

Valuation Procedure: the act, manner, and technique of performing the steps of a valuation 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

Voting Control: de jure control of a business enterprise

W

Weighted Average Cost of Capital (WACC): the cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure