This Glossary of Terms was developed by numerous sources including, but not limited to, representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Valuers, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, Private Equity Firms, Barron’s, Investopedia, Divestopedia, and merger & acquisition advisors.

Updated February 2018. View the list below or download the PDF.

Acquisition: One company taking over controlling interest in another company.

Add-On Acquisition: a strategic acquisition fit for an existing platform/portfolio company.

Adjusted Book Value: The value that results after one or more asset(s) or liability amounts are added, deleted, or changed from their respective financial statement amounts.

Appraisal: See Valuation.

Appraisal Approach: See Valuation Approach.

Appraisal Date: See Valuation Date.

Appraisal Method: See Valuation Method.

Appraisal Procedure: See Valuation Procedure.

Asset (Asset-Based) Approach: A general way of determining a value indication of a business, business ownership interest, or security by using one or more methods based on the value of the assets of that business net of liabilities.

Benefit Stream: Any level of income, cash flow, or earnings generated by an asset, group of assets, or business enterprise. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.

Beta: A measure of systematic risk of a security; the tendency of a security’s returns to correlate with swings in the broad market.

Blockage Discount: An amount or percentage deducted from the current market price of a publicly traded security to reflect the decrease in the per share value of a block of those securities that is of a size that could not be sold in a reasonable period of time given normal trading volume.

Book: see Confidential Business Review (CBR)

Business: See Business Enterprise.

Business Broker: An individual (or company) that solicits and represents business owners that are considering selling their business and acts as an M&A advisor between sellers (business owners) and buyers. Related uses or terms – (business) M&A advisor, investment banker

Business Enterprise: A commercial, industrial, service, or investment entity, or a combination thereof, pursuing an economic activity.

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

Capital Asset Pricing Model (CAPM): A model in which the cost of capital for any security or portfolio of securities equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the security or portfolio.

Capitalization: A conversion of a single period stream of benefits into value.

Capitalization Factor: Any multiple or divisor used to convert anticipated benefits into value.

Capitalization Rate: Any divisor (usually expressed as a percentage) used to convert anticipated benefits 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 definition of exactly what it means in the given valuation context.

CM&AP: Certified Mergers & Acquisitions Program: The program is an adaptation of the educational/certification programs associated with the unique Coles College M&A Academy, which is dedicated to enhancing and sustaining the ability of M&A services professionals to lead organizations through successful business acquisitions and divestitures. In addition to qualifying participants for a certificate from the Coles College M&A Academy, the program qualifies participants for both CPE and CLE continuing education credits.

Committed Equity Capital: Equity investment funds readily available to an investor to make investments according to a pre-defined investment strategy. Related uses or terms – capital under management, capital available for investment

Confidential Business Review (“CBR”): A CBR sometimes called “the book”, pitchbook, or a Confidential Information Memorandum (CIM), is drafted by an M&A advisory firm or investment banker for a sell-side engagement to market a business to prospective buyers. See also Confidential Information Memorandum (CIM)

Confidential Information Memorandum (“CIM”) See Confidential Business Review

Control: The power to direct the management and policies of a business enterprise.

Control Premium: An amount (expressed in either dollar or percentage form) by which the pro rata value (calculated, in proportion value) of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise, that reflects the power of control.

Cost Approach: A general way of estimating a value indication of an individual asset by quantifying the amount of money that would be required to replace the future service capability of that asset.

Cost of Capital: The expected rate of return (discount rate) that the market requires in order to attract funds to a particular investment.

Discount: A reduction in value or the act of reducing value.

Discount for Lack of Control: An amount or percentage deducted from the pro rata share of value of one hundred percent (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 Marketability: An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.

Discount Rate: A rate of return (cost of capital) used to convert a monetary sum, payable or receivable in the future, into present value.

Divestiture: Large public or private parent corporations selling off non-core business units.

Due Diligence: A process where a buyer inspects a potential investment. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.

Earn-Out: A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals. An earn-out is a mutually beneficial tool to getting a deal done if it is structured appropriately. It maximizes the selling price for the Seller and it matches the Company’s future earnings with the payments made to the Seller. An earn-out should not provide a financial “burden” on the Company, but should be structured as a sharing of the wealth. An earn-out becomes easier for a Seller to accept as he/she gets more comfortable with the Buyer. Trust must be established between the parties with face‐to‐face time.

EBITDA: A financial term that is a rough proxy for free cash flow. Formally defined as Earnings before Interest and Taxes plus Depreciation and Amortization.

Economic Life: The period of time over which property may generate economic benefits.

Effective Date: See Valuation Date.

Enterprise: See Business Enterprise.

Enterprise Value: Enterprise value (EV) is a financial metric representing the entire value of a company after taking into account both holders of debt and equity. EV is calculated as the company’s market capitalization plus debt, minus cash.

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 reflecting increases or decreases in debt financing.

Equity Risk Premium: A rate of return in addition to a risk-free rate to compensate for investing in equity instruments because they have a higher degree of probable risk than risk free instruments (a component of the cost of equity capital or equity discount rate).

Excess Earnings: That amount of anticipated benefits that exceeds a fair rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated 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 the value of the assets obtained by capitalizing excess earnings and the value of the selected asset base. Also frequently used to value intangible assets. See Excess Earnings.

Exit Plan: A strategy, planned or unplanned, to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for the time when that business owner is no longer involved in the operations of the company. Examples of unplanned exits include death, divorce, incapacity, disability, management disputes, influx of competition, technological obsolescence, loss of a major customer, or other unforeseen economic events.

Fair Market Value (“FMV”): The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s 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. {NOTE: In Canada, the term “price” should be replaced with the term “highest price”.}

Family Succession: In family successions or retirement transitions, ownership transfers from passive owners to active family members or outside shareholders. Facilitators are particularly sensitive to estate planning issues, family business dynamics, and the need for discretion and trust to make these transactions seamless and successful.

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

Free Cash Flow: The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits and negative adjustments for capital expenditures. Formally defined as Operating cash flow (Net Income plus depreciation and amortization plus taxes plus interest) minus capital expenditures and dividends.

Going Concern: An ongoing operating business enterprise.

Going Concern Value: The value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place.

Goodwill: That intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.

Goodwill Value: The value attributable to goodwill.

Growth Capital: An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership.

Income (Income-Based) Approach: A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated benefits into a present single amount.

Intangible Assets: Nonphysical assets (such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts as distinguished from physical assets) that grant rights, privileges, and have economic benefits for the owner.

M&A advisor: A merger and acquisition (“M&A”) advisor who assists buyers and sellers of privately held small businesses throughout the business transfer transaction process. An agency relationship typically exists between the M&A advisor and either the buyer or the seller. The M&A advisor offers transaction advisory services such as estimating the value of the business; advertising it for sale with or without disclosing its identity; managing the initial buyer/seller interviews, discussions, and negotiations; facilitating the progress of the due diligence investigation and generally assisting with the business sale. M&A advisors require specific skills – number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling hours. On Main Street, an M&A advisor is often referred to as a (business) broker. See also Investment Banker.

Invested Capital: The sum of equity and debt in a business enterprise. Debt is typically long term liabilities or the sum of short term interest bearing debt and long term liabilities. When the term is used, it should be supplemented by a definition of exactly what it means 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 Banker: An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank’s division that is involved with these activities. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers. Investment bankers require specific skills – number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling hours.

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.”}

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.

Letter of Intent (LOI): A formal, written document indicating the terms a buyer is offering a seller in a proposed acquisition or investment. Although not a contract, it is a document stating a serious intent, online casino by both parties, to carry out the proposed acquisition.

Leveraged Buyout (LBO): The acquisition of a business utilizing equity or investment capital and third-party debt financing. Typically includes a change of control or change of ownership.

Levered Beta: The beta reflecting a capital structure that includes debt.

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

Liquidation Value: The net amount that can be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced”.

Lower Middle Market (“LMM”): Lower middle market is the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with annual revenues in the range of $5 million to $50 million are grouped under the lower middle market category. M&AMI Merger & Acquisition Master M&A advisor (M&AMI) certification is a designation that distinguishes its holders as seasoned M&A advisor professionals who have a solid educational background, proven accomplishments in completing deals and a strong passion for the M&A Source and M&A work. The M&AMI designation requires both educational credits and successful completion of multiple middle-market transactions.

Mergers & Acquisition Advisor vs. Main Street Business Broker: M&A Advisors service owners of Lower Middle-Market companies – deals that involve complex business transactions with sophisticated buyers, often including intricate deal structuring, and challenging valuation and finance arrangements. M&A Advisors, often work on national transactions, which may involve intricate business merging, or sale, spanning multiple locations and typically confidentially present the acquisition opportunity to a small select group of targeted buyers.  Main Street Business Brokers are often defined as Brokers that typically sell businesses for less than $1,000,000. These companies [i.e. dry cleaners, hair salons, restaurants, gas stations, convenience stores, franchises, or small service businesses] are usually purchased by individuals who want the independence of running their own company and want to replace their salary with the income of the business.

Majority Control: The degree of control provided by a majority position.

Majority Interest: An ownership interest greater than fifty percent (50%) of the voting interest in a business enterprise.

Management Buy-in: Financing an outside manager or management team to acquire a target company. In a management buy-in (MBI), an external management team partners with a company with a management void. This could be a private company, a stand-alone company, or an orphaned division of a larger company. Again, managers retain operational control while holding significant equity.

Management Buy-out: A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund/group (PEG). Management buy-outs (MBOs) are generally pursued by management teams that have little or no ownership in a business and want to obtain more ownership, but lack the financial resources to buy the company from the current owners. In these circumstances, a PEG can provide the financing necessary to facilitate the purchase of the business. The PEG also gives the management team a large equity stake to cement their commitment to continue running the business and pursue growth opportunities. Related uses or terms – MBO (Management Buy Out).

Market (Market-Based) Approach: A 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.

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

Marketability Discount: See Discount for Lack of Marketability.

Merger: The combination of two or more companies, either through (1) a pooling of interests in which the accounts are combined, (2) a purchase where the amount paid over and above the acquired company’s book value is carried on the books of the purchaser as goodwill, or (3) a consolidation in which a new company is formed to acquire the net assets of the combining companies.

Minority Discount: A discount for lack of control applicable to a minority interest.

Minority Interest: An ownership interest less than fifty percent (50%) of the voting interest in a business enterprise.

Most Probable Selling Price: That price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to seller and probable buyer.

Net Book Value: With respect to a business enterprise, the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities of a business enterprise as they appear on the balance sheet (synonymous with Shareholder’s Equity); with respect to an intangible asset, the capitalized cost of an intangible asset less accumulated amortization as it appears on the accounting books of the business enterprise.

Net Cash Flow: A form of cash flow. When the term is used, it should be supplemented by a qualifier (for example, “Equity” or “Invested Capital”) and a definition of exactly what it means in the given valuation context.

Net Tangible Asset Value: The value of the business enterprise’s tangible assets (excluding excess assets and non-operating assets) minus the value of its liabilities. {NOTE: In Canada, tangible assets also include identifiable intangible assets.}

Non-operating Assets: Assets not necessary to ongoing operations of the business enterprise. {NOTE: In Canada, the term used is “Redundant Assets.”}

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

Platform Company: A platform company is a company that a Private equity group (PEG) views—when investing through acquisition in a new industry or market space—as a starting point for follow-on acquisitions in the same area.

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.

Principle of Substitution: A buyer will pay no more than that which he/she would have to pay to purchase an equally desirable substitute.

Private Equity: An investment in non-public securities of, typically, private companies. Also an investment asset class typically reserved for large institutional investors such as pension funds and endowments as well as high net worth individuals. Includes investments in privately-held companies ranging from start-up companies to well-established and profitable companies to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, growth capital and distressed investments.

Private Equity Fund: An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of available equity capital.

Private Equity Group (“PEG”)    See Private Equity and Private Equity Fund

Portfolio Discount: An amount or percentage that may be deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that may not fit well together.

Portfolio Company: A company acquired and owned by a private equity fund.

Quality of Earnings: The quality of earnings refers to the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies.


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.

Ratio Analysis ratio analysis is a quantitative analysis of information contained in a company’s financial statements, used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.

Recapitalization: A financing transaction that allow owners to harvest some of the value they have created in their companies while retaining a large ownership stake in the business going forward.

Redundant Assets: {NOTE: In Canada, see “Non-operating Assets.”}

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.

Residual Value: The prospective value as of the end of the discrete projection period in a discounted benefit streams model.

Risk Free Rate: The rate of return available in the market on an investment free of default risk.

Risk Premium: A rate of return in addition to a risk free rate to compensate the investor for accepting risk.

Roll up: A Rollup (also “Roll-up” or “Roll up”) is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged. The principal aim of a rollup is to reduce costs through economies of scale.

Rule of Thumb: A mathematical relationship between or among variables based on experience, observation, hearsay, or a combination of these, usually applicable to a specific industry.

Search Fund: An individual or group of individuals seeking to identify an acquisition candidate that the individual or group can acquire and subsequently manage. Typically, search funds do not have dedicated capital to acquire a business but, rather, have informal pledges from potential investors. Related uses or terms – fund-less sponsor

Special Interest Purchasers: Acquirers who believe they can enjoy post-acquisition economies of scale, synergy, or strategic advantages by combining the acquired business interest with their own.

Standard of Value: The identification of the type of value being utilized 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. When using the capital asset pricing model, systematic risk is measured by beta.

Teaser An anonymous document circulated to potential buyers of a specific business is for sale. The document, often prepared by an advisor, details information that is designed to entice potential buyers

Terminal Value: See Residual Value.

Unlevered Beta: The beta reflecting a capital structure without debt.

The Risk Management Association: Formerly known as Robert Morris Associates.

Unsystematic Risk: The portion of total 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 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.

Valuation Date: The specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).

Valuation Method: Within valuation approaches, a specific way to determine value.

Valuation Procedure: The act, manner, and technique of performing the steps of an appraisal method.

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

Value to the Owner: {NOTE: In Canada, see Investment Value.}

Weighted Average Cost of Capital (WACC): The cost of capital (discount rate) determined by the weighted average at market value of the cost of all financing sources in the business enterprise’s capital structure

Working Capital: Working capital is a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets – Current Liabilities. The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.  Also known as “net working capital”.