This glossary defines the 78 business valuation terms owners run into most, from add-backs and SDE to multiples and working capital, in plain English. Use it to follow conversations with buyers, lenders, brokers, and appraisers without guessing.
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Business valuation comes with its own language. Add-backs, multiples, normalized earnings, working capital pegs. If you've ever nodded along in a meeting with your accountant, banker or a potential buyer without being sure what a term meant, this glossary is for you.
Below are 78 of the terms small business owners run into most, defined in plain English. Bookmark it, share it with your team, and come back whenever a new one shows up.
Jump to: A · B · C · D · E · F · G · I · K · L · M · N · O · P · Q · R · S · T · V · W
A
Add-backs
Expenses added back to profit because a new owner wouldn't have them, such as personal vehicle costs, one-time legal fees or above-market owner pay. Documented add-backs increase SDE and EBITDA. See our list of 40 common add-backs.
Adjusted EBITDA
EBITDA after add-backs and normalizing adjustments. It's the version of EBITDA most often used to value a business.
Adjusted net asset value
The fair market value of a company's assets minus its liabilities, using current market values instead of book values.
Asset approach
One of the three main approaches to valuation. It values a business based on what it owns minus what it owes.
Asset sale
A transaction where the buyer purchases the company's assets rather than its shares. Most small business sales are structured this way.
B
Book value
The value of assets as recorded on the balance sheet, usually original cost minus depreciation. Often very different from market value.
Business valuation
The process of estimating what a business is worth, using one or more accepted methods.
Buy-sell agreement
A contract between business owners that sets out what happens to an owner's share if they die, become disabled, leave or want to sell, and usually how the share will be valued.
C
Capitalization of earnings
An income-approach method that divides one year of expected normalized earnings by a capitalization rate to estimate value.
Capitalization rate (cap rate)
The rate used to convert a single year of earnings into a value. It equals the required rate of return minus the expected long-term growth rate. A higher cap rate means a lower value.
Capital expenditures (CapEx)
Money spent on long-term assets such as equipment, vehicles or buildings. Buyers look closely at upcoming CapEx needs.
Cash flow
The actual cash generated by the business over a period. Profit and cash flow aren't the same thing, and many valuations focus on cash flow.
Cash-free, debt-free
A common deal assumption where the seller keeps the cash and pays off the debt before the business changes hands.
Comparable transactions
Sales of similar businesses used as reference points to value a company. Also called comps.
Customer concentration
How much of revenue comes from a small number of customers. High concentration is a risk and usually lowers value.
D
Deal structure
How the price is paid, for example cash at closing, seller financing, an earn-out or stock in the buyer's company.
Depreciation
An accounting expense that spreads the cost of an asset over its useful life. It's a non-cash expense, which is why it's added back in EBITDA and SDE.
Discount for lack of control (DLOC)
A reduction applied to a minority ownership stake, because a minority owner can't direct the business.
Discount for lack of marketability (DLOM)
A reduction applied because shares in a private company can't be sold quickly and easily like public stock.
Discount rate
The rate of return used to convert future cash flows into today's value. Riskier businesses get higher discount rates.
Discounted cash flow (DCF)
An income-approach method that projects future cash flows and discounts them back to today's value.
Due diligence
The investigation a buyer, lender or investor does to verify a business's financials, contracts, operations and risks.
E
Earn-out
Part of the purchase price paid later, only if the business hits agreed targets after the sale.
EBIT
Earnings before interest and taxes. Similar to operating profit.
EBITDA
Earnings before interest, taxes, depreciation and amortization. A common measure of operating profit used to value larger small businesses and lower middle market companies.
EBITDA multiple
The number EBITDA is multiplied by to estimate value. It reflects industry, size, growth and risk.
Enterprise value
The value of the whole operating business to everyone who funds it, lenders and owners alike. Subtract debt and add cash to get equity value.
Equity value
Enterprise value minus debt plus cash. What the owners' shares are actually worth.
ESOP (employee stock ownership plan)
A retirement plan that lets employees own part or all of the company. A common succession path for owners who want to reward their team.
Exit planning
Preparing a business and its owner for a future transition, whether to family, employees or an outside buyer.
F
Fair market value
The price a willing buyer and a willing seller would agree on, both knowing the relevant facts and neither forced to act. The standard used for most tax-related valuations.
Financial buyer
A buyer, such as a private equity firm or individual investor, focused mainly on the business's cash flow and return on investment.
Fixed assets
Long-term physical assets such as equipment, vehicles, furniture and buildings.
Free cash flow
Cash generated by the business after operating expenses and capital expenditures. What's actually available to owners and lenders.
G
Goodwill
The value of a business above its identifiable assets: reputation, customer relationships, team, systems and brand.
Gross margin
Revenue minus the direct cost of delivering the product or service, divided by revenue. A key indicator of pricing power.
Growth rate
How fast revenue or earnings are increasing. Steady, provable growth raises value.
I
Income approach
One of the three main approaches to valuation. It values a business based on the income or cash flow it's expected to produce.
Intangible assets
Non-physical assets such as trademarks, customer lists, software, licenses and goodwill.
Investment value
The value of a business to a specific buyer, based on their own plans and synergies. It can be higher than fair market value.
K
Key person risk
The risk that losing one person, often the owner, would hurt the business. One of the biggest drags on small business value.
Key person insurance
Life or disability insurance the business owns on a critical person, to give it cash if that person is lost.
L
Letter of intent (LOI)
A mostly non-binding document that sets out the main terms of a proposed deal before due diligence and final contracts.
Liquidation value
What a business's assets would bring if sold off individually, often quickly. Usually the lowest measure of value.
Live Value
Our term for a valuation that's tracked continuously instead of measured once, so an owner can see how each change in the business affects what it's worth.
M
Market approach
One of the three main approaches to valuation. It values a business based on what similar businesses have sold for.
Minority interest
An ownership stake of less than 50 percent, without control of the business.
Multiple
The number a profit measure (SDE, EBITDA) or revenue is multiplied by to estimate value.
N
Net income
Profit after all expenses, interest and taxes. The bottom line.
Net working capital
Current assets (receivables, inventory) minus current liabilities (payables). The money tied up in running the business day to day.
Non-compete agreement
A promise by a seller not to compete with the business for a set period and area after the sale.
Normalized earnings
Profit adjusted to remove one-time, unusual and owner-specific items, showing what the business earns under normal conditions.
Normalizing adjustments
The specific changes made to get to normalized earnings, such as adjusting owner pay to market rate or removing a one-time lawsuit.
O
Operating profit
Profit from core operations before interest and taxes.
Owner dependence
How much the business relies on the owner's personal relationships, skills and decisions. High owner dependence lowers value. Here are 25 ways to reduce it.
Owner's compensation
Everything the owner takes from the business: salary, bonuses, benefits and perks. Important in calculating SDE.
P
Private equity
Investment firms that buy ownership stakes in private companies, often to grow them and sell them later.
Purchase price allocation
How the total price is divided among asset categories for tax purposes. It affects taxes for both buyer and seller.
Q
Quality of earnings (QoE)
An in-depth review, usually by an accounting firm, that tests whether reported earnings are accurate and sustainable.
R
Recapitalization
Changing the mix of debt and equity in a company, often to let an owner take money out while keeping a stake.
Recast financial statements
Financial statements rewritten with add-backs and normalizing adjustments to show true earning power.
Recurring revenue
Revenue that repeats predictably, such as contracts, subscriptions and maintenance agreements. It usually raises value.
Rule of thumb
An industry shortcut for value, such as a multiple of revenue. Useful as a sanity check, not as a valuation.
S
SBA loan
A loan partially guaranteed by the U.S. Small Business Administration. A common way to finance the purchase of a small business.
SDE (seller's discretionary earnings)
Pre-tax profit plus one owner's compensation, interest, depreciation, amortization and add-backs. The standard profit measure for valuing smaller owner-operated businesses.
SDE multiple
The number SDE is multiplied by to estimate value.
Seller financing
When the seller lets the buyer pay part of the price over time, like a loan. Also called a seller note.
Stock sale
A transaction where the buyer purchases the owner's shares, taking over the whole legal entity.
Strategic buyer
A buyer, usually a company in the same or a related industry, that expects extra benefits from combining with the business.
Succession plan
A plan for who will own and lead the business when the current owner steps back. See our 50-step succession planning checklist.
Synergies
Savings or extra revenue a buyer expects from combining two businesses.
T
Tangible assets
Physical assets you can touch, such as equipment, inventory and real estate.
Terminal value
In a DCF, the value of the business beyond the projection period. Often a large share of the total.
Transferability
How easily a business can be handed to a new owner without losing customers, staff or contracts.
V
Valuation date
The specific date a valuation applies to. Values change over time, so the date matters.
Valuation range
Most valuations produce a range, not a single number, reflecting different methods and assumptions.
W
Weighted average cost of capital (WACC)
The blended rate of return required by a company's lenders and owners. Often used as the discount rate in a DCF.
Working capital peg
The normal level of working capital the buyer and seller agree should stay in the business at closing. The price is adjusted up or down if it's different.
Put the words to work
Knowing the vocabulary is step one. Step two is knowing your own valuation and what moves it. For the methods behind these terms, read our guide on how to value a small business.
More revenue. More profit.
More time back. A higher valuation is what all three add up to.
Frequently asked questions
What does SDE mean in business valuation?
SDE stands for seller's discretionary earnings. It is profit plus the owner's salary, benefits, and other add-backs for one owner-operator.
What is a valuation multiple?
A multiple is how many years of earnings a buyer is willing to pay. It rises when earnings look safe and transferable.
What is the difference between enterprise value and equity value?
Enterprise value is the value of the whole business. Equity value is what is left for owners after debt is subtracted and cash is added.
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