Business valuation glossary

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Add-back Earnings

An adjustment that restates reported profit as the profit a new owner would earn — an above-market owner salary, related-party rent, personal expenses run through the business, or a genuine one-off cost. Every add-back should be listed and justified individually, never lumped into a total.

Amortisation Accounting

The systematic write-down of an intangible asset over its useful life. Added back to profit when calculating EBITDA because it is a non-cash accounting entry rather than a cash cost.

Arm’s length Standard

A transaction between unrelated parties each acting in their own interest. Related-party rent, wages or supply arrangements are restated to arm’s length terms before earnings are capitalised.

Berkus method Startups

An early-stage valuation method that assigns a capped dollar value to each of five qualitative risk factors — idea, prototype, management, relationships and rollout — for pre-revenue companies where no earnings exist to capitalise.

Capitalisation rate Income method

The rate applied to future maintainable earnings to convert them into a value. It is the inverse of the multiple: a capitalisation rate of 25 per cent is the same as a 4.0× multiple.

Capital gains tax (CGT) cost base Tax

The amount subtracted from sale proceeds to work out a capital gain. Valuation fees incurred in acquiring or disposing of a capital asset usually form part of the cost base rather than being immediately deductible.

Comparable transaction Market method

A completed sale of a similar business used as evidence of value. Australian private-company deal data is thin and terms are rarely disclosed, which is why comparables are usually a cross-check rather than a primary method.

Control premium Discounts

The additional amount a buyer pays per share for a stake that carries control — the ability to set strategy, direct dividends, hire and fire, and force a sale. The mirror image of a minority discount.

Discounted cash flow (DCF) Income method

A method that forecasts free cash flows over three to five years, adds a terminal value, and discounts the total to present value at a risk-adjusted rate. Used where past earnings are a poor guide to the future.

Discount for lack of marketability (DLOM) Discounts

A reduction reflecting that a private company shareholding cannot be sold quickly or cheaply the way a listed share can. Commonly applied to minority holdings in private companies.

Due diligence Transactions

The buyer’s verification of the seller’s claims before completion. A valuation is not due diligence, but a well-documented valuation makes due diligence faster and gives the seller far less to renegotiate.

EBIT Earnings

Earnings before interest and tax. Used where depreciation is a genuine economic cost of maintaining the asset base, as in capital-intensive businesses.

EBITDA Earnings

Earnings before interest, tax, depreciation and amortisation. The most common earnings measure in SME valuation because it strips out financing and accounting choices, allowing businesses to be compared on operating performance.

Enterprise value Value

The value of the business operations as a whole, independent of how they are financed. Equity value is enterprise value less debt plus surplus cash.

Equity value Value

What the shareholders own — enterprise value less interest-bearing debt, plus surplus cash and non-operating assets. The number that actually lands in a seller’s hands before tax.

Expert determination Disputes

A binding valuation prepared by an independent expert appointed by both parties, usually under a shareholders’ or buy–sell agreement. The deed sets the standard of value and whether discounts apply.

Fair market value Standard

The price a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller would agree, both acting at arm’s length and neither under compulsion.

Fair value Standard

A standard of value used in accounting standards and some shareholder agreements. It is not identical to market value and often excludes minority discounts — which is why the deed must be read before the valuation starts.

Free cash flow Income method

Cash generated by the business after tax and after the capital expenditure and working capital needed to sustain it. The input a discounted cash flow valuation actually discounts.

Future maintainable earnings (FME) Earnings

The level of earnings a new owner could reasonably expect to sustain — reported profit, normalised for add-backs and weighted across several years. FME multiplied by a capitalisation multiple is the most common SME valuation calculation in Australia.

Going concern Premise

The assumption that the business will continue trading for the foreseeable future. The alternative premise, orderly liquidation, almost always produces a lower value.

Goodwill Value

The residual between the value of the business as a going concern and the fair value of its identifiable net tangible assets. It is derived, not assumed — and it splits into transferable goodwill, which a buyer gets, and personal goodwill, which walks out with the owner.

Intangible asset Assets

A non-physical asset with value — brand, intellectual property, software, customer contracts, licences and registrations. Identifiable intangibles can be valued separately; unidentifiable value sits in goodwill.

Loss and damages quantification Disputes

Forensic calculation of economic loss suffered because of a breach, tort or business interruption, typically by comparing actual results to a counterfactual scenario. Distinct from valuation but built on the same earnings analysis.

Market approach Method

Valuing a business by reference to what similar businesses have sold for, expressed as revenue or EBITDA multiples and adjusted for size, liquidity, control and sector.

Market value Standard

The estimated amount an asset should exchange for on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing, with both parties acting knowledgeably and without compulsion.

Minority discount Discounts

A reduction applied to a non-controlling parcel of shares because it cannot direct dividends, salaries or a sale. Whether it applies depends on the purpose of the valuation and the wording of the shareholders’ agreement.

Net tangible assets (NTA) Assets

Total tangible assets less total liabilities, excluding intangibles and goodwill. In an earnings-based valuation the NTA is deducted from total value to isolate goodwill.

Normalisation Earnings

The process of adjusting reported financial statements so they reflect the underlying economics of the business rather than the owner’s tax and remuneration choices. The first substantive step in almost every valuation.

Orderly liquidation value Premise

What the assets would realise if sold individually over a reasonable marketing period rather than as a trading business. Relevant when a business is not viable as a going concern.

Personal goodwill Value

The portion of goodwill attributable to the owner personally — their relationships, reputation, licence or skill. It generally cannot be sold, which is why heavily owner-dependent businesses attract lower multiples.

Premise of value Standard

The assumed circumstances of the hypothetical transaction: going concern, orderly liquidation or forced sale. Changing the premise changes the answer more than almost any other single assumption.

Related-party transaction Earnings

A dealing between the business and an entity or person connected to the owner — rent paid to a family trust, wages to a spouse, loans to a director. Restated to market terms during normalisation.

Rule of thumb multiple Market method

Sector shorthand such as a multiple of weekly takings or per-unit price. Useful as a sanity check, never sufficient on its own for tax, finance or court purposes.

Scorecard method Startups

An early-stage method that values a pre-revenue company against the average valuation of comparable funded startups, weighted for management, market size, product, competition and other factors.

Shadow expert Disputes

A valuer engaged by one party to review, test and if necessary challenge a single expert’s report, without themselves being the court-appointed expert. Their work is usually privileged.

Single expert Disputes

A valuer appointed jointly by the parties or by the court to provide the expert evidence in a matter. The single expert owes an overriding duty to the court, not to either party.

Standard of value Standard

The definition of value being applied — market value, fair value, equitable value or investment value. It is set by the purpose of the valuation and the governing document, and it must be stated in the report.

Surplus assets Assets

Assets held by the business that are not required to generate its operating earnings — excess cash, an investment property, a boat. Valued separately and added to the operating value rather than capitalised.

Sustainable earnings Earnings

Another term for future maintainable earnings: the earnings level a new owner could hold, excluding one-offs and windfalls.

Terminal value Income method

The value attributed to all cash flows beyond the explicit forecast period in a discounted cash flow model. In most SME DCFs it accounts for more than half the total value, which is why the assumptions behind it are tested hardest.

Valuation date Standard

The specific date at which value is assessed. Court and tax valuations are usually required at a prescribed date, which may be years in the past, and later information can only be used if it was knowable at that date.

Venture capital method Startups

An early-stage method that works backwards from an expected exit value and a target investor return to derive a present pre-money valuation.

WACC Income method

Weighted average cost of capital — the blended required return of debt and equity holders, used as the discount rate in a discounted cash flow valuation.

Working capital Earnings

The debtors, stock and creditors a business needs to trade at its normal level. Deals commonly complete on a normalised working capital target, and a business handed over below that level effectively transfers less value.

Work in progress (WIP) Earnings

Work performed but not yet invoiced. Critical in construction and professional services, where WIP treatment can move reported profit substantially and is the first thing a valuer tests.

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