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.
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.
(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:
- Owners Compensation
- Owners Fringe Benefits
- One-Time Expenses
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.
A rate of return used to calculate the present value of multiple periods (usually years) of payments.
See Cash Flow above.
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.
The amount by which the price paid for a company exceeds the companys 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.
An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.
The value to a particular investor based on individual investment requirements and expectations.
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 Shareholders 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.
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.
Prospective financial statements that present an entitys expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.
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.
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.
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 notlimited 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, Earnouts and future considerations.
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.
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.