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.

Asset-Based Approach

A general way of determining a value indication of a business, like business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.

Average Revenue Per Unit (ARPU)

A measure of the revenue generated per user or unit. This measure allows for the analysis of a company’s revenue generation and growth at the per unit level, which can identify which products are high or low revenue-generators.

Binomial Tree

A graphical representation of possible intrinsic values that an option may take at different nodes or time periods. The value of the option depends on the underlying stock or bond, and the value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node.

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.

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.

Business Valuation

The act or process of determining the value of a business enterprise or ownership interest therein.

Discount Rate

A rate of return used to convert a monetary sum, payment or receivable in the future into present value.

Dividend

The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding.

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

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 a specific definition in the given valuation context.

Coefficient of Variation

A statistical measure of the dispersion of data points in a data series around the mean. It is calculated as follows: Coefficient of Variation = Standard Deviation /Expected Return. The coefficient of variation represents the ratio of the standard deviation to the mean, and it is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other.

Company Specific Risk

The portion of total risk specific to an individual asset that can be avoided through diversification.

Compound Annual Growth Rate (CAGR)

The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered. This can be written as follows: CAGR = [(Ending Value /Beginning Value) ^ (1 / # of years)] – 1.

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.

Discount (Transaction Month)

The percentage difference between the offer price (the price the restricted stock was purchase for) and the transaction month high-low average. A negative number means that the restricted stock sold in the private placement sold at a premium to the transaction month high-low average for the month.

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 Liquidity

An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of liquidity.

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.

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.

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: = Annual Dividends Per Share /Price Per Share.

EBIT

Earnings before interest and taxes.

EBITDA

Earnings before interest, taxes, depreciation, and amortization.

Equity

The owners interest in property after deduction of all liabilities.

ESOP

Employee Stock Option Plan. A plan established by a company whereby a certain number of shares is reserved for issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.

Fair Market Value

The price at which an asset or service 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.

Free Cash Flow

Cash available for distribution after taxes but before the effects of financing.

GAAP

Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

GDR

Global Depository Receipts. It is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares.

Going Concern

An operating business enterprise.

Going Concern Value

The value of a company as an operating business to another company or individual. The excess of going-concern value over asset value, or liquidating value, is the value of the business as distinct from the value of its assets. Going-concern value in excess of asset value is treated as an intangible asset and referred to as goodwill.

Goodwill or Intangible Value

The amount by which the consideration paid exceeds the fair market value of the companys operating assets.

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.

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).

Excess Earnings

That 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 Value

The value of the shares immediately before the effectuation of the corporate action to which the shareholder objects using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status except, if appropriate

Fairness Opinion

An opinion as to whether or not the consideration in a transaction is fair from a financial point of view.

FASA (Fellow of the American Society of Appraisers)

American Society of Appraisers designation.

FCBI (Fellow Certified Business Intermediary)

International Business Brokers Association designation.

FCBV (Fellow of the Canadian Institute of Chartered Business Valuators)

Canadian Institute of Chartered Business Valuators designation.

FIBA (Fellow of the Institute of Business Appraisers)

Institute of Business Appraisers designation.

Financial Risk

The degree of uncertainty of realizing expected future returns of the business resulting from financial leverage.

Forced Liquidation Value

Liquidation value, at which the asset or assets are sold as quickly as possible, such as at an auction.

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.

Identifiable intangible assets

Intangible assets other than goodwill. Patents, copyrights, and licences are examples.

Income Approach

A general way of determining value of a business, business ownership interest or security using one or more methods wherein a value is determined based on anticipated benefits.

IRR

Internal Rate of Return. IRR is a rate at which the present value of a series of investments is equal to the present value of the returns on those investments.

Intangible Assets

The intangible assets will usually consist of goodwill and going concern value, certain types of intangible property that generally relate to the workforce, information base, know-how, customers, suppliers, or systems in place producing cash flow, proprietary rights (such as; patents, copyrights, trademarks, or trade names), covenant not to compete or similar items.

Issued Shares

The amount of common shares that a corporation has sold (issued).

Holding Period

To prevent a seller from purchasing unregistered securities with a view to resale, Rule 144 requires a holding period of some length of time. After the initial holding period, unregistered securities could be sold only by complying with certain "dribble out," or volume limit provisions of the Rule.

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 based on individual investment requirements and expectations. {NOTE: in Canada, the term used is "Value to the Owner"}.

Liquidation Value

The value of a company assuming the assets of the company are sold piecemeal (not as part of an ongoing business enterprise) with-appropriate time for exposure to the marketplace.

Market Approach

A general way of determining a value indication of a business, business ownership or security using one or more methods that compare the subject to similar businesses, business ownership interests or securities that have been sold.

Market Multiple

A factor that can be applied to the subject companys financial, operating or physical data to generate an indication of value. The market multiple is derived from observed transactions in the marketplace where the value can be divided by the comparable companies financial, operating or physical data to generate the market multiple.

Market Capitalization

Market capitalization represents the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share.

Net Assets

Total assets less total liabilities.

Net Financing Cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the assets cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Net income

The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.

NPV

Net present value. A firm or projects net contribution to wealth. This is the present value of current and future income streams, minus initial investment.

Non-Operating Assets

Assets shown on the companys balance sheet that are not used in the operation of the business. That is, "extra" assets that are not necessary to generate the revenue and cash flow stream being valued.

Normalized Earnings

The actual earnings of a company after all unusual expenses and non-recurring income have been removed from the figure.

Normal Working Capital

The amount of working capital needed by the company to sustain operations throughout the year. Calculated as the average of current assets (which include a normal amount of necessary cash) minus current liabilities on a monthly basis over the most recent twelve months.

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.

Levered Beta

The beta reflecting a capital structure that includes debt

Limited Appraisal

The act or process of determining the value of a business, business ownership interest, security, or intangible asset with limitations in analyses, procedures, or scope.

Liquidity

The ability to quickly convert property to cash or pay a liability.

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 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 Value of Invested Capital (MVIC)

Also known as the selling price, the MVIC is defined by Pratt’s Stats® as 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. The MVIC price includes the non- compete value and the assumption of interest-bearing liabilities and excludes (1) the real estate value and (2) any earn outs (because they have not yet been earned, and they may not be earned) and (3) the employment/consulting agreement values.

Marketability

The ability to quickly convert property to cash at minimal cost.

MCBA (Master Certified Business Appraiser)

Institute of Business Appraisers designation.

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.

Multiple

The inverse of the capitalization rate.

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 Profit Margin

The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage – that shows how much of each dollar earned by the company is translated into profits. Net profit margins can generally be calculated as: Net Profit Margin = Net Profit / Revenue; where Net Profit = Revenue – COGS – Operating Expenses – Interest and Taxes.

Normalized Financial Statements

Financial statements adjusted for non operating assets and liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.

North American Industry Classification System (NAICS)

Used by business and government to classify and measure economic activity in Canada, Mexico and the United States. It has largely replaced the older Standard Industrial Classification (SIC) system; however, certain government departments and agencies, such as the U.S. Securities and Exchange Commission (SEC), still use the SIC codes.

Preference shares

Shares of a firm that encompass preferential rights over ordinary common shares, such as the first right to dividends and any capital payments.

Preferred Stock

A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle.

Present Value

The value today of a future payment, or stream of payments, discounted at a risk-adjusted rate of return.

Recast Financial Statements

Since most small businesses are run in a way that will minimize income taxes, the financial statements do not usually reflect the true value the business creates for its owner. For example, an owner who pays himself and several of his family members above market-rate salaries would recast his financial statements to reflect the profits the business would show with if market-rate salaries were paid.

Orderly Liquidation Value

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

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.

Price/Earnings Multiple

The price of a share of stock divided by its earnings per share.

Private Placement

Raising of capital via private rather than public placement. The result is the sale of securities to a relatively small number of investors. Investors involved in private placements are usually large banks, mutual funds, insurance companies, and pension funds.

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.

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.

Registration Rights Agreement

Even though the resale limitations under Rule 144 have been reduced somewhat over the years, investors still often look for the issuer in a private placement transaction to provide them with a possible liquidity event prior to the end of the holding period. Consequently, investors often require, and issuers often grant, some form of a registration rights agreement to be signed, either as part of the stock purchase agreement or as a separate side agreement thereto. These registration rights provisions typically require the company to do one of two things: (1) register the shares or a portion of the shares within some specified time-frame, at either the company’s or the investor’s expense ("demand registrations"); or, (2) include the shares or a portion of the shares in any future public offerings that the company makes, if any ("piggyback registrations").

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.

Restricted Stock

Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award. Under the securities laws, these conditions are either registration with the U.S. Securities and Exchange Commission (SEC), or fitting into one of the securities exemptions for resale, such as Rule 144.

Return on Equity

The amount, expressed as a percentage, earned on a company’s common equity for a given period.

Return on Invested Capital

The amount, expressed as a percentage, earned on a company’s total capital for a given period.

Revenue

The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.

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 144

Promulgated by the SEC under the 1933 Act, Rule 144 permits, under limited circumstances, the sale of restricted and controlled securities without registration. In addition to restrictions on the minimum length of time for which such securities must be held and the maximum volume permitted to be sold, the issuer must agree to the sale. If certain requirements are met, Form 144 must be filed with the SEC. Often, the issuer requires that a legal opinion be given indicating that the resale complies with the rule.

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.

Seed Money

The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Sweat Equity

Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or as a consideration for providing know-how or a similar value to the company. In other words, Ownership of shares in a company resulting from work rather than investment of capital--usually founders receive "sweat equity".

Tangible Assets

Tangible assets that may be included in the sale of a business usually consist of accounts receivable, inventory, leasehold improvements, furniture and fixtures, equipment, land and building.

Terminal Value

The value of an investment at the end of a period, taking into account a specified rate of interest.

Valuation Approach

A general way of determining value using one or more specific valuation methods.

Value

The amount at which a business enterprise 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.

Size Premium

Size premium is the additional remuneration due to the higher risk and therefore, the higher cost of capital, associated with the smaller size of the company and of the lower trading volume.

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.

Standard Industrial Classification (SIC)

A United States government system for classifying industries by a four-digit code

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.

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 systematic risk in stocks is the beta coefficient.

Total Asset Turnover

This is a measure of how well assets are being used to produce revenue. The total asset turnover ratio is calculated as: Total Asset Turnover = Net Sales / Total Assets.

Total Cost of Equity (TCOE)

Total Cost of Equity (TCOE) = Risk-free rate + Total Beta*Equity risk premium. This equation was developed by Professor Damodaran at NYU

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 Method

With in approaches, a specific way to determine value.

Valuation Ratio

A fraction in which a value or price serves as the numerator and financial, operating, or physical data serves as the denominator.

Vesting Period

In options, the remaining time period during which the option cannot be Exercised Voting Control – de jure control of a business enterprise.

Working Capital

The excess of current assets over current liabilities.

Warrant

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.

Write-off

The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.

Z-Score

A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy. A z-score of 0 is equal to a 50% probability of bankruptcy.