Adjusted
Book Value
The Book
Value (equity) of a company after adjusting the values of assets
and liabilities to reflect estimated market values rather than
depreciated tax values and removing non-operating assets and liabilities
from the balance sheet.
Adjusted Earnings:
The earnings
of a business after adjustments for one-time or extraordinary expenses,
excess owner compensation, discretionary expenses and any other
expenses that are not essential for the successful ongoing operation
of the business.
Asset Approach:
A way of estimating
the value of a business ownership interest using one or more Valuation
Methods based on the Adjusted Book Value of the company.
Asset Sale
A
form of acquisition whereby a selling entity agrees to sell all
or certain assets and liabilities of a company to a purchaser.
The corporate entity is not transferred.
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.
Blue Sky
Any intangible portion of a price,
above the maximum Good will, that cannot be reasonably supported
through the application of established Valuation Methods.
Book Value
The value, net
of depreciation, at which an asset appears on a company’s
balance sheet.
Capital Structure
The mix of
invested equity and debt financing of a business enterprise.
Capitalization Rate
Any multiple
or divisor used to convert a single period (usually a year) of
anticipated economic benefits into a present economic value.
Capitalizing Net Income
Determining the value
of a company by dividing one year of Adjusted Earnings by the Capitalization
Rate (investor's required ROI).
Cash Flow
(also Discretionary
Earnings). Total financial benefit to an owner working in the business
enterprise. With the Cash Flow, an owner must pay himself a salary,
pay his company's income taxes, pay for any capital improvements
(if needed) and set aside funds for unexpected events. Calculated
by adding the following expenses back into the net income:
- Interest
- Taxes
- Depreciation
- Amortization
- Owner’s Compensation
- Owner’s Fringe Benefits
- One-Time Expenses
Deal Structure
The combination
of types of payment by which the purchase of a business is accomplished.
It can include cash, promissory notes, stock, consulting agreements,
earnout provisions and covenants not to compete. The sale can take
the form of an Asset Sale or a Stock Sale.
Discount Rate
A rate of return
used to calculate the present value of multiple periods (usually
years) of payments.
Discretionary Earnings
See Cash Flow above.
Earn out.
The portion of the purchase price
that is contingent on the future performance of the business. It
is payable to the seller after certain predefined levels of sales
or income are achieved in the year(s) after acquisition.
Fair Market Value
The estimated
price at which an asset or service would pass from a willing seller
to a willing buyer, assuming that both buyer and seller are acting
rationally, at arms 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. It is also presumed
that the price is not affected by special or creative financing
or sales concessions granted by anyone associated with the sale.
Fixed Interest Rate
An interest rate that does
not fluctuate over the term of the loan.
Going Concern Value
The
gross value of a company as an operating business.
This value may
exceed or be at a discount from the Liquidation Value. The intangible
elements of Going Concern Value result from factors such as having
a trained work force, an operational plan and the necessary licenses,
systems and procedures in place.
Goodwill
The amount by which
the price paid for a company exceeds the company’s Adjusted
Book Value of the underlying tangible assets and liabilities. Goodwill
is a result of name, reputation, customer loyalty, location, products
and net income.
Income (Income
Based) Approach
General
way of determining the value of a business, business ownership
interest, security or intangible asset using one or more methods
that calculate the present value of anticipated future income.
Intrinsic Value
An analytical judgment of value
based on the perceived characteristics inherent in the investment
as distinguished from the current market price.
Investment Value
The value to a particular
investor based on individual investment requirements and expectations.
Liquidation or Liquidating Value
The
estimated value, net of liabilities, of a company based on the
market value of its assets.
Market (Market-Based) Approach
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.
Net Book Value
With respect
to a business enterprise, the difference between total assets (net
of 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.
Present Value
The value today
of a future payment, or stream of payments, discounted at some
appropriate compound interest rate (Discount Rate).
Pro Forma Financial Statements
Hypothetical
financial statements. Financial statements as they would appear
if some event, such as increased sales or production, had occurred
or were to occur. Also used to make projections for future years.
Projection
Prospective financial statements
that present an entity’s expected financial position, results
of operation and changes in financial position, based upon one
or more hypothetical assumptions.
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 decisions 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.
Residual Value
The estimated
market value of an asset at the end of the period being considered.
Return on Investment (ROI)
The
rate of return at which the sum of the discounted future earnings
plus the discounted future Residual Value equals the initial cash
outlay.
Stock Sale
A
form of acquisition whereby all or a portion of the stock in a
corporation is sold to the purchaser.
Transaction Value
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 is not limited to all remuneration for tangible and intangible
assets such as: furniture, equipment, supplies, inventory, Working
Capital, non-competition agreements, customer lists, employment
and/or consulting agreements, franchise fees, assumed liabilities,
stock options or redemptions, real estate, leases, royalties, Earn
outs and future considerations.
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. There are three overall approaches generally used to value
a business: Asset Approach, Income Approach and Market Approach.
Valuation Method
Under a chosen
Valuation Approach, there are various specific methods to determine
value.
Variable Interest Rate
An interest rate that
adjusts periodically to a predefined margin above or below an index
rate. A commonly used index is the bank prime rate.
Working Capital
The excess
of current assets over current liabilities.
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