Business valuation glossary: every term on this site, in one line

Every term below appears somewhere on this site or in a valuation report you might be handed. One sentence each. Where there is a longer answer, the term links to it.

If you only read three, read EBITDA, multiple and discount rate. Almost everything else is built out of those.

#A

Add-back. A cost taken out of the accounts to show what the business would earn under a new owner, most commonly the owner's own salary or a personal expense run through the company.

Adjusted EBITDA. EBITDA after add-backs and one-off costs have been removed. The figure a multiple is usually applied to, and the figure a buyer will argue about line by line.

Amortisation. The same idea as depreciation, applied to things you cannot touch: software, goodwill, an acquired customer list.

ARR multiple. A price expressed as a multiple of annual recurring revenue rather than of profit. Used for subscription businesses, where the revenue is contracted and repeats.

Asset-based valuation. Valuing a business as the sum of what it owns minus what it owes. The floor under most valuations, and the answer for businesses that earn less than their assets are worth.

#B

Build-up method. The standard way of setting a discount rate for a private business: start with the return on a government bond, then add a percentage for each extra risk the buyer takes on. Explained in the number in the middle that nobody can source.

Break-even volume. How much of your sales volume you can lose after a price rise before you are worse off than before. Almost always more than owners expect.

#C

Cash-free, debt-free. The normal basis for a private sale. You keep the cash, you settle the debt out of the proceeds, and the buyer gets the trading business. See enterprise value versus equity value.

Cash conversion cycle. The number of days between paying your supplier and being paid by your customer. Every one of those days is money you have to fund yourself.

Cash runway. How many months the business can keep operating on the cash it has, at the rate it is currently consuming it.

Company-specific risk premium. A percentage added to the discount rate for risks specific to one business: owner dependence, one large customer, thin management. The profession's own guidance says there is no data source for it.

Contribution margin. Revenue minus the costs that only exist because you made the sale. What each unit contributes towards covering your fixed costs.

Cost to serve. The cost of having a particular customer, beyond the cost of the goods they buy. Ranking customers by revenue and by cost to serve produces two different lists.

Customer concentration. How much of your revenue sits with your largest customers. The direction of its effect on value is well evidenced; the size of it is not.

#D

DCF, discounted cash flow. A valuation built by forecasting the cash the business will produce and converting it to today's money using a discount rate. The most transparent method and the most sensitive to its assumptions.

Depreciation. The accounting cost of your equipment wearing out, spread over its useful life. Not a payment, which is why it is added back in EBITDA.

Discount rate. The annual return a buyer wants for taking on the risk of owning your business. The higher it is, the less your future profits are worth today.

Due diligence. The period after an offer when a buyer checks that the business is what you said it was. Where most deals lose value, and a few lose their buyer.

#E

Earn-out. Part of the price paid later, conditional on the business hitting agreed figures. What a buyer proposes when they cannot price a risk: instead of discounting it, they hand it back to you.

EBITDA. Earnings before interest, tax, depreciation and amortisation. Profit before the effects of how the business is financed, where it is taxed and how its assets are written down.

Enterprise value. The value of the business itself, independent of how it is financed. The number a multiple produces, and not the number that arrives in your bank account.

Equity value. What the shares are worth, and what you actually receive: enterprise value plus the cash, minus the debt.

Escrow. Part of the price parked with a third party at completion rather than paid to you, released once both sides agree the final numbers. Common for the working capital adjustment.

#G

Goodwill. The gap between what a buyer paid and what the identifiable assets were worth. In the accounts it is a line; in reality it is the reason anyone paid more than the equipment is worth.

Growth rate. How fast revenue or profit is increasing. Buyers pay for growth, but they pay for demonstrated growth rather than forecast growth.

#K

Key person discount. A reduction in value because the business depends on one individual. Widely quoted at ten to twenty-five percent, and we could not find a study behind any of those figures.

#M

Marketability discount. A reduction applied because a private business cannot be sold quickly. Published estimates run from zero to fifty percent depending on method, which is the whole problem.

Multiple. The number your earnings are multiplied by to get a value. Not a fact about your business but a summary of what buyers paid for other businesses, collected by people with an interest in the answer.

#N

Net working capital. Stock plus money customers owe you, minus money you owe suppliers. The cash tied up in simply operating. See whether it affects your valuation.

Normalisation. Adjusting the accounts to show what the business genuinely earns: removing one-offs, correcting the owner's salary to a market rate, stripping out anything a new owner would not repeat.

#O

Owner dependence. How much of the business stops working when you do. The one significant valuation factor almost entirely within your control, and the slowest to change.

#P

Peg. The target level of working capital agreed in a sale contract, usually a trailing twelve-month average. Deliver less than the peg and you refund the difference. Where the real money is, more than in the adjustment itself.

Private company discount. See marketability discount. The two terms are used interchangeably and rest on different literatures, which is part of why the number varies so widely.

#R

Recurring revenue. Revenue you can reasonably expect next year without selling it again. Contracted revenue and habitual revenue are not the same thing, and buyers price them differently.

Revenue multiple. A price expressed as a multiple of turnover rather than profit. Useful only where margins across a sector are similar, which is rarer than its popularity suggests.

#S

SDE, seller's discretionary earnings. EBITDA plus the owner's salary and personal benefits. A bigger number than EBITDA, which is why SDE multiples look smaller for the same business. Smaller businesses are usually priced on SDE.

Size premium. The observation that larger businesses sell for higher multiples of the same earnings. The most reliably replicated finding in the field, and less actionable than it sounds.

Strategic buyer. A buyer already operating in your market, who can put your revenue through their overheads. Usually pays more than a financial buyer, and usually asks harder questions. See what buyers look for.

#T

Terminal value. In a DCF, the value of everything beyond the forecast period. Often more than half the total, which is why the assumption behind it deserves as much attention as the forecast.

Trade buyer. The same thing as a strategic buyer, in British usage.

#W

Working capital adjustment. The true-up after completion that moves the price by the difference between the working capital delivered and the peg. Across more than a thousand deals it is worth about one percent.

#A note on this page

Definitions here are deliberately short and occasionally opinionated. Where a term is contested, or where the number attached to it has no source, the entry says so and links to the article that goes through the evidence. That is more useful than a neutral definition of a term the industry itself cannot agree on.