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APPENDIX B

International Glossary of Business

Valuation Terms*

To enhance and sustain the quality of business valuations for the

benefit of the profession and its clientele, the below identified soci-

eties and organizations have adopted the definitions for the terms

included in this glossary.

The performance of business valuation services requires a high

degree of skill and imposes upon the valuation professional a duty to

communicate the valuation process and conclusion in a manner that

is clear and not misleading. This duty is advanced through the use of

terms whose meanings are clearly established and consistently

applied throughout the profession.

If, in the opinion of the business valuation professional, one or

more of these terms needs to be used in a manner which materially

departs from the enclosed definitions, it is recommended that the

term be defined as used within that valuation engagement.

This glossary has been developed to provide guidance to business

valuation practitioners by further memorializing the body of knowl-

edge that constitutes the competent and careful determination of

value and, more particularly, the communication of how that value

was determined.

Departure from this glossary is not intended to provide a basis for

civil liability and should not be presumed to create evidence that any

duty has been breached.

American Institute of Certified Public Accountants

American Society of Appraisers

Canadian Institute of Chartered Business Valuators

National Association of Certified Valuation Analysts

The Institute of Business Appraisers

* Reproduced verbatim from the International Glossary of Business Valuation Terms (the

Glossary), which appears at http://bvfls.aicpa.org/Resources/Business+Valuation/ Tools+and+

Aids/Definitions+and+Terms/International+Glossary+of+Business+Valuation+Terms.htm.

Note that the phrase, “we discourage the use of this term,” that appears herein is also repro-

duced verbatim.

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Adjusted Book Value Method

—

a method within the asset

approach whereby all assets and liabilities (including off-balance

sheet, intangible, and contingent) are adjusted to their fair market

values. {NOTE: In Canada on a going concern basis}

Adjusted Net Asset Method

—

see Adjusted Book Value Method.

Appraisal

—

see Valuation.

Appraisal Approach

—

see Valuation Approach.

Appraisal Date

—

see Valuation Date.

Appraisal Method

—

see Valuation Method.

Appraisal Procedure

—

see Valuation Procedure.

Arbitrage Pricing Theory

—

a multivariate model for estimating the

cost of equity capital, which incorporates several systematic risk fac-

tors.

Asset (Asset-Based) Approach

—

a general way of determining a

value indication of a business, business ownership interest, or secu-

rity using one or more methods based on the value of the assets net

of liabilities.

Beta

—

a measure of systematic risk of a stock; the tendency of a

stock’s price to correlate with changes in a specific index.

Blockage Discount

—

an amount or percentage deducted from the

current market price of a publicly traded stock to reflect the

decrease in the per share value of a block of stock that is of a size that

could not be sold in a reasonable period of time given normal trading

volume.

Book Value

—

see Net Book Value.

Business

—

see Business Enterprise.

Business Enterprise

—

a commercial, industrial, service, or

investment entity (or a combination thereof) pursuing an economic

activity.

Business Risk

—

the degree of uncertainty of realizing expected

future returns of the business resulting from factors other than finan-

cial leverage. See Financial Risk.

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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 stock or portfolio of stocks equals a risk-free rate

plus a risk premium that is proportionate to the systematic risk of the

stock or portfolio.

Capitalization

—

a conversion of a single period of economic benefits

into value.

Capitalization Factor

—

any multiple or divisor used to convert

anticipated economic benefits of a single period into value.

Capitalization of Earnings Method

—

a method within the income

approach whereby economic benefits for a representative single

period are converted to value through division by a capitalization

rate.

Capitalization Rate

—

any divisor (usually expressed as a percentage)

used to convert anticipated economic benefits of a single period into

value.

Capital Structure

—

the composition of the invested capital of a busi-

ness 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 specific definition in

the given valuation context.

Common Size Statements

—

financial statements in which each line

is expressed as a percentage of the total. On the balance sheet, each

line item is shown as a percentage of total assets, and on the income

statement, each item is expressed as a percentage of sales.

Control

—

the power to direct the management and policies of a busi-

ness enterprise.

Control Premium

—

an amount or a percentage by which the pro

rata value of a controlling interest exceeds the pro rata value of a

noncontrolling interest in a business enterprise to reflect the power

of control.

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Cost Approach

—

a general way of determining a value indication of

an individual asset by quantifying the amount of money required to

replace the future service capability of that asset.

Cost of Capital

—

the expected rate of return that the market

requires in order to attract funds to a particular investment.

Debt-Free

—

we discourage the use of this term. See Invested

Capital.

Discount for Lack of Control

—

an amount or percentage deducted

from the pro rata share of value of 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 rela-

tive absence of marketability.

Discount for Lack of Voting Rights

—

an amount or percentage

deducted from the per share value of a minority interest voting share

to reflect the absence of voting rights.

Discount Rate

—

a rate of return used to convert a future monetary

sum into present value.

Discounted Cash Flow Method

—

a method within the income

approach whereby the present value of future expected net cash

flows is calculated using a discount rate.

Discounted Future Earnings Method

—

a method within the

income approach whereby the present value of future expected eco-

nomic benefits is calculated using a discount rate.

Economic Benefits

—

inflows such as revenues, net income, net cash

flows, etc.

Economic Life

—

the period of time over which property may gener-

ate economic benefits.

Effective Date

—

see Valuation Date.

Enterprise

—

see Business Enterprise.

Equity

—

the owner’s interest in property after deduction of all

liabilities.

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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

increasing or decreasing debt financing.

Equity Risk Premium

—

a rate of return added to a risk-free rate to

reflect the additional risk of equity instruments over risk free instru-

ments (a component of the cost of equity capital or equity discount

rate).

Excess Earnings

—

that amount of anticipated economic benefits

that exceeds an appropriate rate of return on the value of a selected

asset base (often net tangible assets) used to generate those antici-

pated economic 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 a) the value of the assets derived by capi-

talizing excess earnings and b) the value of the selected asset base.

Also frequently used to value intangible assets. See Excess

Earnings.

Fair Market Value

—

the price, expressed in terms of cash equiva-

lents, at which property would change hands between a hypothetical

willing and able buyer and a hypothetical willing and able seller, act-

ing 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. {NOTE: In Canada, the term

“price” should be replaced with the term “highest price”.}

Fairness Opinion

—

an opinion as to whether or not the considera-

tion in a transaction is fair from a financial point of view.

Financial Risk

—

the degree of uncertainty of realizing expected

future returns of the business resulting from financial leverage. See

Business Risk.

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

—

we discourage the use of this term. See Net

Cash Flow.

Going Concern

—

an ongoing operating business enterprise.

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Going Concern Value

—

the value of a business enterprise that is

expected to continue to operate into the future. The intangible ele-

ments 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, reputa-

tion, customer loyalty, location, products, and similar factors not sep-

arately identified.

Goodwill Value

—

the value attributable to goodwill.

Guideline Public Company Method

—

a method within the market

approach whereby market multiples are derived from market prices

of stocks of companies that are engaged in the same or similar lines

of business and that are actively traded on a free and open

market.

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 antici-

pated economic benefits into a present single amount.

Intangible Assets

—

nonphysical assets such as franchises, trade-

marks, patents, copyrights, goodwill, equities, mineral rights, securi-

ties, and contracts (as distinguished from physical assets) that grant

rights and privileges and have value for the owner.

Internal Rate of Return

—

a discount rate at which the present

value of the future cash flows of the investment equals the cost of the

investment.

Intrinsic Value

—

the value that an investor considers, on the basis of

an evaluation or available facts, to be the “true” or “real” value that

will become the market value when other investors reach the same

conclusion. When the term applies to options, it is the difference

between the exercise price and strike price of an option and the mar-

ket value of the underlying security.

Invested Capital

—

the sum of equity and debt in a business enter-

prise. Debt is typically (a) all interest-bearing debt or (b) long-term,

interest-bearing debt. When the term is used, it should be supple-

mented by a specific definition in the given valuation context.

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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 Risk

—

the degree of uncertainty as to the realization of

expected returns.

Investment Value

—

the value to a particular investor based on indi-

vidual 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 busi-

ness enterprise.

Levered Beta

—

the beta reflecting a capital structure that includes

debt.

Limited Appraisal

—

the act or process of determining the value of a

business, business ownership interest, security, or intangible asset

with limitations in analyses, procedures, or scope.

Liquidity

—

the ability to quickly convert property to cash or pay a lia-

bility.

Liquidation Value

—

the net amount that would be realized if the

business is terminated and the assets are sold piecemeal. Liquidation

can be either “orderly” or “forced.”

Majority Control

—

the degree of control provided by a majority

position.

Majority Interest

—

an ownership interest greater than 50% of the

voting interest in a business enterprise.

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, securi-

ties, or intangible assets that have been sold.

Market Capitalization of Equity

—

the share price of a publicly

traded stock multiplied by the number of shares outstanding.

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Market Capitalization of Invested Capital

—

the market capital-

ization of equity plus the market value of the debt component of

invested capital.

Market Multiple

—

the market value of a company’s stock or invested

capital divided by a company measure (such as economic benefits,

number of customers).

Marketability

—

the ability to quickly convert property to cash at

minimal cost.

Marketability Discount

—

see Discount for Lack of Marketabil-

ity.

Merger and Acquisition Method

—

a method within the market

approach whereby pricing multiples are derived from transactions of

significant interests in companies engaged in the same or similar

lines of business.

Mid-Year Discounting

—

a convention used in the Discounted

Future Earnings Method that reflects economic benefits being gen-

erated at midyear, approximating the effect of economic benefits

being generated evenly throughout the year.

Minority Discount

—

a discount for lack of control applicable to a

minority interest.

Minority Interest

—

an ownership interest less than 50% of the vot-

ing interest in a business enterprise.

Multiple

—

the inverse of the capitalization rate.

Net Book Value

—

with respect to a business enterprise, the differ-

ence between total assets (net of accumulated depreciation, deple-

tion, and amortization) and total liabilities as they appear on the

balance sheet (synonymous with Shareholder’s 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.

Net Cash Flows

—

when the term is used, it should be supplemented

by a qualifier. See Equity Net Cash Flows and Invested Capital

Net Cash Flows.

Net Present Value

—

the value, as of a specified date, of future cash

inflows less all cash outflows (including the cost of investment) calcu-

lated using an appropriate discount rate.

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Net Tangible Asset Value

—

the value of the business enterprise’s

tangible assets (excluding excess assets and nonoperating assets)

minus the value of its liabilities.

Nonoperating Assets

—

assets not necessary to ongoing operations of

the business enterprise. {NOTE: in Canada, the term used is

“Redundant Assets”.}

Normalized Earnings

—

economic benefits adjusted for nonrecur-

ring, noneconomic, or other unusual items to eliminate anomalies

and/or facilitate comparisons.

Normalized Financial Statements

—

financial statements adjusted

for nonoperating assets and liabilities and/or for nonrecurring,

noneconomic, or other unusual items to eliminate anomalies and/or

facilitate comparisons.

Orderly Liquidation Value

—

liquidation value at which the asset or

assets are sold over a reasonable period of time to maximize pro-

ceeds received.

Premise of Value

—

an assumption regarding the most likely set of

transactional circumstances that may be applicable to the subject val-

uation; for example, going concern, liquidation.

Present Value

—

the value, as of a specified date, of future economic

benefits and/or proceeds from sale, calculated using an appropriate

discount rate.

Portfolio Discount

—

an amount or percentage deducted from the

value of a business enterprise to reflect the fact that it owns dissimi-

lar operations or assets that do not fit well together.

Price/Earnings Multiple

—

the price of a share of stock divided by

its earnings per share.

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.

Redundant Assets

—

see Nonoperating 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.

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Reproduction Cost New

—

the current cost of an identical new

property.

Required Rate of Return

—

the minimum rate of return acceptable

by investors before they will commit money to an investment at a

given level of risk.

Residual Value

—

the value as of the end of the discrete projection

period in a discounted future earnings model.

Return on Equity

—

the amount, expressed as a percentage, earned

on a company’s common equity for a given period.

Return on Investment

—

See Return on Invested Capital and

Return on Equity.

Return on Invested Capital

—

the amount, expressed as a percent-

age, earned on a company’s total capital for a given period.

Risk-Free Rate

—

the rate of return available in the market on an

investment free of default risk.

Risk Premium

—

a rate of return added to a risk-free rate to reflect

risk.

Rule of Thumb

—

a mathematical formula developed from the rela-

tionship between price and certain variables based on experience,

observation, hearsay, or a combination of these; usually industry

specific.

Special Interest Purchasers

—

acquirers who believe they can enjoy

post-acquisition economies of scale, synergies, or strategic advan-

tages by combining the acquired business interest with their own.

Standard of Value

—

the identification of the type of value being uti-

lized in a specific engagement; for example, 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. The measure of sys-

tematic risk in stocks is the beta coefficient.

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Tangible Assets

—

physical assets (such as cash, accounts receivable,

inventory, property, plant and equipment, etc.).

Terminal Value

—

See Residual Value.

Transaction Method

—

See Merger and Acquisition Method.

Unlevered Beta

—

the beta reflecting a capital structure without

debt.

Unsystematic Risk

—

the 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 indica-

tion 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 approaches, a specific way to determine

value.

Valuation Procedure

—

the act, manner, and technique of perform-

ing 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

—

see Investment Value.

Voting Control

—

de jure control of a business enterprise.

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.

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