International Glossary of Business Valuation Terms
The Reference Glossary in Business Valuation
Business valuation relies on precise and consistent terminology. At Gato Consulting, our work is governed by the International Glossary of Business Valuation Terms, which is the most widely accepted reference in the United States.
Originally adopted in 2001, this glossary is the result of a joint effort by the world’s leading professional organizations, including the National Association of Certified Valuators and Analysts (NACVA), the American Institute of Certified Public Accountants (AICPA), and the American Society of Appraisers (ASA). By adhering to these standardized definitions, we ensure that every report we produce speaks the universal language of global financial authorities.
The definitions below are from the International Glossary of Business Valuation Terms. In some cases, they are followed by some insights and videos that are entirely of the responsibility of Gato Consulting and are meant to provide context and detail on the terms being discussed. Please see also the complete set of short valuation videos (90 seconds or less).
A
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.
Gato Consulting Insight: Why its needed, how it’s used, and what gets adjusted in the Adjusted Net Asset Value Method (ANAV)?
The Adjusted Net Asset Value (ANAV) Method is an asset‑based valuation approach that determines the value of a business by adjusting all assets and liabilities on the balance sheet to their true Economic Value (some people refer to Fair Market Value here, but that may not always be the case, and, for intance, marketability discouns are not applied at this level), and then subtracting adjusted liabilities from adjusted assets. Unlike income‑ or market‑based approaches, ANAV does not rely on projected earnings. Instead, it answers a more fundamental question: What is this business worth based on what it owns and what it owes, at today’s market values?
This method is most commonly used for asset‑intensive businesses, holding or investment companies, real‑estate‑heavy entities, and businesses with weak, volatile, or negative earnings, where income‑based methods may not be reliable.
The ANAV Method is necessary because book value, even under GAAP, rarely reflects economic reality. Accounting records are based on historical cost and accounting conventions, not market value. As a result, they often understate or overstate the true value of assets and liabilities. Typical adjustments include revaluing real estate, machinery, and equipment to appraised market values; adjusting inventory for obsolescence; making a mark-to-market of cash equivalents, foreign exchange receivables, and some hedging financial instruments; normalizing accounts receivable for collectability; identifying unrecorded or internally developed intangible assets; separating non‑operating or excess assets (such as surplus cash); recognizing contingent or off‑balance‑sheet liabilities (e.g., litigation exposure or environmental obligations); and valuing Intangible Assets that might not be appropriately reflected in the Balance Sheet.
See Intangible Assets for more about them and how to value them.
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 factors.
Asset (Asset-Based) Approach
A general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.
Gato Consulting Insight: Main Methods within the Asset Approach and a Hybrid Method.
The Excess Earnings Method is a hybrid approach that combines the Asset Approach with the Income Approach. See Excess Earnings.
B
Beta
A measure of systematic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index.
Gato Consulting Insight: More about what Beta is, how it is derived and how Beta is applied.
Beta as the “Volatility Multiplier”
In business valuation, Beta (β) is a numerical measure of “systematic risk”—the sensitivity of a company’s returns relative to the overall market, the S&P 500 being the typical reference for the market. It is important to clarify the scale: 1.0 is the market average (the benchmark), not zero.
β > 1.0 (High Sensitivity): If a company has a Beta of 1.5, it is 50% more volatile than the market. If the S&P 500 rises 10%, this company is expected to rise 15%. Conversely, if the market drops, this company will likely drop further. This is common in tech startups or luxury goods.
β < 1.0 (Defensive): A Beta of 0.5 means the company is only half as volatile as the market. These “defensive” businesses—like utilities or grocery chains—tend to hold their value better during market downturns.
β = 0 (The Theoretical Base): A Beta of zero represents a “risk-free” asset (like a U.S. Treasury Bond) that has no correlation with stock market swings.
How is Beta derived?
Beta is calculated using a statistical process called Linear Regression. It measures the covariance of a stock’s returns against the market’s returns over a specific period.
The Time Horizon: The most common standard in professional valuation is using a 5-year look-back period with monthly data points. This provides enough data to smooth out short-term “noise” while remaining relevant to current market conditions.
The Formula:
β = Covariance (re, rm) / Variance (rm)(Where re is the return of the specific stock and rm is the return of the market.)
How Gato Consulting determines the Reference Beta for a Company being valued
Since private companies aren’t traded on a stock exchange, they don’t have a “ticker symbol” to track. To determine your Beta, Gato Consulting performs a “Peer Group Analysis.” We identify a set of publicly traded companies – also known as Guideline Public Companies – that match your industry and risk profile. However, we cannot use their Betas directly because their debt levels (leverage) are different from yours.
To solve this, we use the Hamada Formula to “unlever” and “re-lever” the risk:
Unlevering (Removing Debt Risk): We strip away the financial leverage of the public peers to find the Asset Beta (βa)—the pure business risk.
βa = βl / {1 + [(1 – t) x (D/E)]}(Where βl is the Levered Beta, t is the effective tax rate, D is the total Debt of the Guideline Public Company, and E is its Equity.)
Re-levering (Applying Your Structure): Once we establish a reference unlevered Beta among the Guideline Public Companies we use for a reference (βr), we then reapply your company’s specific debt-to-equity ratio to that figure to arrive at your custom Levered Beta (βc) for your company.
βc = βr x {1 + [(1 – t) x (D/E)]}Why it matters: This process ensures your valuation is mathematically anchored to real-world industry peers. In New York courts, simply choosing an arbitrary Beta is a frequent reason for reports to be discredited. Using this process provides a defensible, data-driven foundation that withstands the highest levels of scrutiny.
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 financial leverage. See Financial Risk.
Business Valuation
The act or process of determining the value of a business enterprise or ownership interest therein.
C
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.
Gato Consulting Insight: The Capital Asset Pricing Model (CAPM) and Modified the Modified CAPM – when to apply each.
The Capital Asset Pricing Model should be applied to publicly traded Companies only.
The Modified CAPM adds a Size Premium and a Company-Specific Risk Premium (CSRP) to the CAPM, and it is typically applicable to private companies.
The video above provides more details on the CAPM and on the Modified CAPM.
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.
Gato Consulting Insight: A simple way to think about a Capitalization Rate and the difference between a Capitalization Rate and a Discount Rate.
Let’s say one is capitalizing $2 million in earnings at a 5% capitalization rate. That would result in a $40 million valuation ( $2 million / 5%). The inverse of 5% is 20 (1 / 5%). If one multiplies $2 million by 20, one also gets $40 million. A Capitalization Rate is the inverse of a Multiple. Besides this being mathematically correct, it is a simple way to calculate value. Further, and although this is not mathematically precise, a multiple of 20 is often equated to an investor needing 20 years to recover her or his investment at the required Discount Rate.
What is the difference between a discount Rate and a Capitalization Rate?
Mathematically: Discount Rate – Sustainable Growth Rate = Capitalization Rate.
The Sustainable Growth Rate should typically be between 2% and 3%. The video above explains the difference between the discount Rate and the Capitalization Rate and why the sustainable Growth Rate should typically be between 2% and 3%.
Capital Structure
The composition of the invested capital of a business enterprise, the mix of debt and equity financing.
Control
The power to direct the management and policies of a business 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 non-controlling interest in a business enterprise, to reflect the power of control.
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.
D
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.
Gato Consulting Insight: Should one always apply a DLOC for a minority interest? And how does one select a DLOC?
Should one always apply a DLOC for a minority interest?
Typically, yes, but there are some cases where they may not be applied. For instance, while a 50% interest is usually still considered a minority interest, most courts don’t accept DLOC for a spouse’s share of a company in Divorce.
Also, if one is using the Guideline Public Companies method and relying on multiples calculated from publicly traded securities, these are considered to be minority interest (volumes transacted in the stock market are of minority size), so a DLOC does not apply
How does one select a DLOC?
Valuators typically start by selecting reference points from databases of transactions of companies seeking Control in other companies. Then an inference is made: if a 25% Control premium was paid for Control, then there is a 20% discount for lack of control [(DLOC% = Control Premium % / (Control Premium % + 1) ]. The video above explains how to find references for DLOC.
This video describes the criteria that help you move from the ranges identified to selecting the final DLOC for your subject company. In my opinion, these are:
- How likely is a minority interest to achieve control (Control Feasibility)
- Existing minority rights’ protections.
- Size of the Interest.
Discount for Lack of Marketability
An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
Gato Consulting Insight: Should one always apply a DLOM? And how does one select a DLOM?
Should one always apply a DLOM?
No. For instance, if you are using the Guideline Public Companies method and relying on multiples calculated from publicly traded securities, these are liquid and marketable, that is, immediately convertible to cash, so a DLOM does not apply.
If you are using the Transactions Method and gathering multiples from the transactions of Private Companies, it becomes less clear whether or not a DLOM applies because typically the databases where the information comes from do not mention whether or not the company was prepared for sale, how long it was in the market, or if it sold under a bid process to maximize its price. The Valuator’s experience comes into play here to determine how much, if any, DLOM applies.
How does one select a DLOM?
Valuators typically start by selecting reference points from Restricted Stock Studies, Option Pricing Models, and databases of illiquid transactions. These typically give the valuator reference points: a range, a mean, and a median. The video above and the video after that explain how to find references for DLOM.
A famous tax court case – T.C. Memo 1995-255, Mandelbaum v Commissioner – established 9 factors known today as the Mandelbaum Factors. It is by weighing each one of these factors that a valuator determines whether, within the range, he or she should select the DLOM for the particular Subject Interest being valued. The nine Mandelaum factors are:
- Financial statement analysis.
- Company’s dividend policy.
- Nature of the company, its history, its position in the industry and its economic outlook.
- Company’s management.
- Amount of control in transferred shares.
- Restrictions on transferability of stock.
- Holding period for the stock.
- Company’s redemption policy.
- Costs associated with making a public offering.
Please note that the “Amount of Control in transferred shares” is a control factor; when calculating the Discount for Lack of Control (DLOC) separately, one should not duplicate consideration of this factor.
This video provides more details on the Mandelbaum factors.
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.
- If you are using Cash Flows to Invested Capital: WACC. The result will be the Business Enterprise Value (BEV).
- If you are using Cash Flows to Equity: the Cost of Equity. The result will be the value of Equity.
The video above explains how to apply the Discounted Cash Flows Method.
See Capital Asset Pricing Model (CAPM) to see how to determine the Cost of Equity.
Discounted Future Earnings Method
A method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate.
E
Economic Benefits
Inflows such as revenues, net income, net cash flows, etc.
Economic Life
The period of time over which property may generate economic benefits.
Effective Date
See Valuation Date.
Enterprise
See Business Enterprise.
Equity
The owner’s interest in property after deduction of all liabilities.
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 instruments (a component of the cost of equity capital or equity discount rate).
Goodwill Value
The value attributable to goodwill.
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 anticipated economic benefits.
Gato Consulting Insight: The IRS as an important enforcer of Fair Market Value. Did you know that all Valuations with the IRS as an audience must be conducted under FMV?
The Excess Earnings Method is still used, namely in Divorce and Marital Dissolution in certain California jurisdictions.
However, there is a significant amount of criticism of this method, namely on the rates to be applied. Even Revenue Ruling 68-609, which addresses the Excess Earnings Method to determine Goodwill, says:
The ‘formula’ approach may be used in determining the fair market value of intangible assets of a business only if there is no better basis available for making the determination.
The video above explains how to apply the Excess Earnings Method. It also shows “better ways”.
F
Fair Market Value
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 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”}
Gato Consulting Insight: The IRS as an important enforcer of Fair Market Value. Did you know that all Valuations with the IRS as an audience must be conducted under FMV?
Revenue Ruling 59-60 is a seminal piece of regulation in the Business Appraisal World. Among other things, it defined FMV as:
Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.
The International Glossary of Business Valuation Terms’ definition is a condensation of this definition.
The Fair Market Value thus became the Standard of Value to be used for any Valuations with the IRS as the audience, particularly Gift Taxes (IRS Form 709), Estate Taxes (IRS Form 706), and Charitable Contributions (IRS Form 8283).
Fairness Opinion
An opinion as to whether or not the consideration 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 Flows
G
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.
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.
I
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 economic benefits into a present single amount.
Intangible Assets
Non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner.
Gato Consulting Insight: How to Value Intangible Assets?
Depending on the type of Assets, there are several ways to value intangible Assets. The video above details different methods for valuing intangible assets. The main ones are:
- Multi-Period Excess Earnings Method (MPEEM)
- Relief from Royalty Method
- Market approaches
- Replacement Cost
- Excess Earnings Method or Cost Basis for Goodwill
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.
Gato Consulting Insight: Don’t try to calculate the Internal Rate of Return (IRR) – use Excel.
The mathematical formula for IRR is a polynomial and must be solved by trial and error. Sometimes it is possible, when it’s simple, for example:
- Imagine an investment of $100 yielding $110 one year later; you can simply divide $110 by $100, subtract 1, and get to 10%.
- An investment of $100 yielding $116 two years later has a 4% IRR [(116/100)^(1/2)-1].
However, for longer Cash Flow streams, especially those that may include negative Cash Flows in the middle, the iterative trial-and-error process becomes very difficult.In these cases, the best thing is to use Excel’s IRR formula. Just line the Cash Flows in the same row and apply the formula!
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 or strike price of an option and the market value of the underlying security.
Invested Capital
The sum of equity and debt in a business enterprise. Debt is typically a) all interest bearing debt or b) long-term interest-bearing debt. When the term is used, it should be supplemented by a specific definition 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.
Gato Consulting Insight: Equity Value, Business Enterprise Value, and the right level of Cash Flows and Discount Rates for it.
Technically,
- Equity Value = Business Enterprise Value + Excess Cash – Total Debt.
- Capitalization Rate = Discount Rate – Sustainable Growth Rate
If one is using the Income Approach to establish Value, the right stream of Cash Flows is:
- To determine Business Enterprise Value: Cash Flows to Invested Capital (usually EBITDA – Income Taxes – Investment in Working Capital – Investment in Capital Expenditures).
- To Determine Equity: Cash Flows to Invested Capital – Debt Service (this leaves you with the Cash Flows available to Shareholders).
The video above explains how to calculate these Cash Flows.The right Discount Rates are:
- To determine Business Enterprise Value: WACC (Weighted Average Cost of Capital).
- To Determine Equity: Cost of Equity (typically calculated using the Capital Asset Pricing Model for Public Companies and the Modified CAPM for Private Companies).
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”}.
Gato Consulting Insight: “Investment Value” as the Stand of Value for Valuations for Special Interest Purchasers
While Fair Market Value considers a hypothetical buyer, Investment Value considers a particular acquirer, technically, Special Interest Purchasers. In these cases, a Valuation will consider post-acquisition economies of scale, synergies, or strategic advantages that result from combining the acquired business interest with the acquiring company’s.
K
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.
L
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 liability.
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.”
M
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, securities, 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.
Market Capitalization of Invested Capital
The market capitalization 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).
Gato Consulting Insight: A practical example of a Market Multiple
Let’s say a company with $10 million in sales and $2 million in EBITDA is being sold for $12 million. That means the company is being sold at a 1.2x revenue multiple and a 6.0x EBITDA multiple.
Marketability
The ability to quickly convert property to cash at minimal cost.
Marketability Discount
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 generated at midyear, approximating the effect of economic benefits being generated evenly throughout the year.
Gato Consulting Insight: Applying the Mid-Year Discounting
The classic formula for discounting a Cash Flow from year n is by multiplying it by 1 / (1+r)^n, where r is the discount rate, and ^ stands for “to the power of”. This formula, however, assumes that Cash Flows are only available at the end of the year. In most closely held companies, owners can make draws or distributions throughout the year, so a better assumption is to use a formula that treats Cash Flows distributed in the middle of the year as a proxy for an even distribution of Cash Flow over the year. If we want to discount Cash Flows from the middle of year n, we can multiply them by 1 / (1+r)^(n-0.5).
Minority Discount
A discount for lack of control applicable to a minority interest.
Gato Consulting Insight: How to Determine the Discount for Lack of Control
In determining DLOC for a Real Estate Company, Partnership Profiles provides the data and methods to do so. For most other closely-held companies, two techniques prevail: Mergerstat, and the Market Participants Acquisition Premium (MPAP). The video above shows details on both Mergerstat and MPAP. And it’s followed by another video that describes the criteria that help to go from the ranges provided by Mergerstat and MPAP techniques to selecting the final DLOC for your subject company. In my opinion, these are:
- How likely is a minority interest to achieve control (Control Feasibility)
- Existing minority rights’ protections.
- Size of the Interest.
Minority Interest
An ownership interest less than 50% of the voting interest in a business enterprise.
Multiple
The inverse of the capitalization rate.
Gato Consulting Insight: How is a Multiple the inverse of a Capitalization Rate?
A Multiple of m is equivalent to a capitalization rate of 1 / m. Let’s say you are capitalizing earnings of $2 million using a 5% rate. That would result in $40 million ( $2 million / 5%). The inverse of 5% is 20 (1 / 5%). If you multiply $2 million by 20, you obtain the same $40 million.
N
Net Book Value
With respect to a business enterprise, the difference between total assets (net of accumulated depreciation, depletion, 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) calculated using an appropriate discount rate.
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.
Non-Operating 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 nonrecurring, 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.
O
Orderly Liquidation Value
Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.
P
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.
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 dissimilar 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.
R
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 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.
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.
Gato Consulting Insight: How do you calculate the Residual Value or Terminal Value?
There are three main ways to calculate Terminal Value.
The Gordon Growth Method: A Single Period Capitalization based on the last projected period.
The Market Method: A Multiple applied to Revenue or Earnings of the last projected period.
The H-Metod: (H for Half-life) A formula to calculate Terminal Value when the last projected period still reflects high growth rates.
The video above provides details on three techniques for arriving at the Terminal Value.
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 percentage, 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.
Gato Consulting Insight: What are the most common risk-free rates used?
The most common risk-free rates used in the U.S. are the 10-Year Treasury Note, the 20-Year, or the 30-Year Treasury Bonds. NACVA course materials explicitly reference the 20‑year Treasury bond yield as a standard risk‑free input.
If you are valuing an investment expected to last a certain period, say 5 years, should you use a specific treasury bond? Theoretically, yes!
Risk Premium
A rate of return added to a risk-free rate to reflect risk.
Rule of Thumb
A mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.
S
Special Interest Purchasers
Acquirers who believe they can enjoy post-acquisition economies of scale, synergies, 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.
Gato Consulting Insight: Did you know that Fair Value was never defined (unlike Fair Market Value and Investment Value)? So, what is Fair Value? And how does Fair Value apply in NY Divorce and Marital Dissolution?
What NACVA has to say about Fair Value
NACVA’s key point is that “Fair Value” is not one single standard with one universal definition. Instead, it is a label used in multiple contexts, and the meaning changes depending on the purpose of the valuation. NACVA highlights three major “families” of Fair Value usage: (i) statutory fair value in dissenting shareholder rights cases (with definitions tied to corporate law), (ii) financial reporting fair value under FASB/GAAP (a market‑participant measurement concept), and (iii) marital dissolution “fair value” (which varies by jurisdiction).NACVA also emphasizes that, even in the statutory dissenters’ rights context, there is no single consensus on interpretation across jurisdictions, and published precedents do not equate statutory fair value to fair market value. It further notes that under the Model Business Corporation Act formulation, fair value is conceptually determined without discounting for lack of marketability or minority status (again, as a jurisdiction‑specific construct). In other words, “Fair Value” is best understood as a purpose‑ and jurisdiction‑defined standard, not a universal valuation term like Fair Market Value.
Because these definitions do not harmonize, NACVA states that the reason you “will not find “Fair Value” defined in the International Glossary of Business Valuation Terms (IGBVT)” is because the “differences are irreconciliable”.
How Fair Value Applies in New York Divorce and Marital DissolutionIn New York divorce and matrimonial matters, Fair Value is typically used and can be understood as Fair Market Value with important departures driven by New York’s equitable distribution framework. The valuation objective is not “what a hypothetical buyer would pay in an open market sale,” but rather the allocation of marital asset value between spouses. That shift in purpose affects method selection, discount application, and how courts treat assumptions that appear speculative or litigation‑driven.The main departures from Fair Market Value that commonly arise in New York Fair Value divorce and marital dissolution valuations are:
- DCF skepticism where projections diverge materially from historical performance or reflect decisions not implemented by the valuation date; courts may prefer capitalization of normalized earnings when the business is stable;
- DLOC is generally not applied in the marital context when the ownership represents the economic interest of the marital unit (particularly where the interest effectively reflects control or the whole enterprise);
- DLOM is fact‑specific in New York—accepted in some cases and rejected or limited in others depending on the facts, including the relationship between goodwill and marketability;
- Goodwill requires careful treatment to separate transferable business value from personal earning capacity and to avoid impermissible “double counting” (your paper cites New York’s emphasis on guarding against duplication of the same income stream for both distributive awards and support); and
- Tax consequences may be considered pragmatically where realization is reasonably likely, rather than applied mechanically.
For more on Divorce in NY, please consult our specific page on it.
Sustaining Capital Reinvestment
The periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays.
Syetematic Risk
The risk that is common to all risky securities and cannot be eliminated through diversification. The measure of systematic risk in stocks is the beta coefficient.
T
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.
U
Unlevered Beta
The beta reflecting a capital structure without debt.
Unsystematic Risk
The portion of total risk specific to an individual security that can be avoided through diversification.
V
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.
Gato Consulting Insight: The Three Main Approaches are:
The video above provides an overview of these three Approaches.
Valuation Date
The specific point in time as of which the valuator’s conclusion of value applies (also referred to as “Effective Date” or “Appraisal Date”).
Valuation Method
Within approaches, a specific way to determine value.
Gato Consulting Insight: Approaches versus Methods
As the definition says, Methods are applied within Approaches. Here are some examples of Methods for each Approach.
Income Approach: The Capitalization of Earnings Method and the Discounted Cash Flow Method.
Market Approach: The Guideline Public Companies Method, the Merger & Acquisitions (or Transactions) Method, and the Specific Company Transaction Method (when companies define their own rules and formulas for selling and buying shares).
Asset Approach: The Book Value Method and the Adjusted Net Asset Value Method
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.
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.
Gato Consulting Insight: The importance of the WACC
The Weighted Average Cost of Capital (WACC) represents the minimum rate of return a business must earn on its operations to satisfy all of its capital providers, including both equity owners and lenders. In valuation, WACC is most commonly used as the discount rate when converting expected future cash flows into a present value, particularly under the Income Approach (such as Discounted Cash Flow analysis). Conceptually, WACC reflects the idea that capital is not free: investors and lenders each require compensation for the risk they assume, and WACC blends those required returns based on how the business is financed.
WACC is “weighted” because it reflects the capital structure of the business—that is, the relative proportions of equity and debt financing. Equity typically carries a higher required return because it is riskier and subordinate to debt, while debt has a lower cost adjusted for its tax deductibility. A properly developed WACC ensures that projected cash flows are evaluated against a return threshold that is consistent with the business’s risk profile, industry conditions, and financing mix. If a business cannot reasonably be expected to earn returns at or above its WACC, it is effectively destroying economic value, even if it shows accounting profits.
The video above explains how the cost of debt and the cost of equity combine to calculate the WACC.