Business value glossary
Plain-English definitions of the terms that come up when you ask what a business is worth, from add-backs to working capital.
Earnings terms
Add-back
An expense added back to profit to show what the business really earns for an owner. Typical add-backs are the owner's pay, interest, depreciation and one-off or personal costs. Buyers accept add-backs that are documented and will not recur.
Adjusted EBITDA
EBITDA after removing one-off items and replacing the owner's actual pay with a market salary for the role. It is the earnings figure most buyers of larger private businesses use.
EBITDA
Earnings before interest, tax, depreciation and amortization. A measure of operating profit that ignores how the business is financed and taxed.
Quality of earnings
How reliable and repeatable reported earnings are. A quality of earnings review is the analysis a buyer commissions to test them.
Seller's discretionary earnings (SDE)
The total financial benefit one full-time owner takes from a business: profit before tax plus the owner's pay, interest, depreciation and one-off or personal expenses. Used to price smaller, owner-operated businesses. See SDE vs EBITDA.
Value terms
Enterprise value
The value of the operating business regardless of how it is financed. Roughly, the price for the whole business before deducting debt and adding cash.
Equity value
What the owners would actually receive: enterprise value, less debt, plus cash.
Fair market value
The price at which a business would change hands between a willing buyer and a willing seller, neither being forced to act and both having reasonable knowledge of the facts. It is the standard used for most tax valuations.
Formal valuation
A written opinion of value prepared by a credentialed professional under professional standards, for a purpose where a third party will rely on it. See indicative estimate vs formal valuation.
Goodwill
The part of a business's value that is not tied to physical assets: reputation, customer relationships, systems and workforce.
Indicative estimate
An approximate value range for planning and tracking. It is not a formal valuation and should not be relied on for tax, legal, financing or transaction purposes.
Multiple
The sale price of a business divided by its earnings or revenue. A business that sells for $900,000 with $300,000 of earnings sold for a multiple of 3. See multiples by industry.
Risk terms
Customer concentration
The share of sales that comes from your largest customers. High concentration lowers value because losing one customer would remove a large share of profit.
Owner dependence
How much the business relies on the owner personally for sales, relationships, decisions and know-how. High owner dependence lowers value because the earnings may not survive a change of owner.
Recurring revenue
Revenue that repeats under contracts, subscriptions or service plans without having to be won again each time. It raises value because it makes future earnings more predictable.
Other terms
Benchmark
A comparison of one of your measures, such as margin or growth, against similar businesses.
Due diligence
The buyer's investigation of a business before a deal closes, covering finances, customers, contracts, legal and operations.
Working capital
The cash tied up in day-to-day trading: receivables plus inventory, less payables. Buyers expect a normal level of working capital to be left in the business at sale.