Business valuation glossary
The terms that appear in a valuation report, explained in plain English, with what each means for a trade business.
Add-backs
Add-backs are expenses in the accounts that a new owner would not have to pay, such as private costs, one-off items or the owner’s salary, which are added back to reported profit when rebuilding the earnings a buyer could expect to keep.
Common examples are private use of vehicles and phones, family members on the payroll and one-off legal or repair costs. Each add-back needs evidence, and the owner’s pay is replaced with a market cost for the work.
Asset-based valuation
An asset-based valuation values a business at the market value of its assets less its liabilities, instead of at what it earns. It is the main method where earnings do not justify the assets held, and a floor under the value for most other businesses.
It matters most for plant-heavy trades such as earthmoving and civil contracting, where a large fleet can be worth more than the earnings it produces.
Business goodwill
Business goodwill is the part of goodwill that belongs to the business itself, such as its brand, systems, team, contracts and recurring customers, and so would stay with a new owner.
Recurring maintenance agreements, a trained team and a business name customers recognise build business goodwill. An owner who holds every relationship does not.
Capitalisation multiple
A capitalisation multiple is the number by which maintainable earnings are multiplied to give a value. It is the inverse of a capitalisation rate, so a multiple of 4.0 matches a rate of 25 per cent, and it reflects the risk and expected growth of the earnings.
The multiple must match the earnings measure it was built on, EBIT or EBITDA. Multiples advertised for other businesses or other sizes rarely transfer to a particular trade business.
Capitalisation of maintainable earnings
Capitalisation of maintainable earnings is the most common way to value an owner-operated business: work out the earnings the business can sustain, choose a multiple or rate that reflects the risk in them, and multiply.
It is the usual starting method for a trade business, with net tangible assets acting as a floor and other methods used as cross-checks.
Cash-free debt-free
Cash-free debt-free is a way of pricing a sale in which the seller keeps the cash and pays out the interest-bearing debt, and the buyer takes the business with a normal level of working capital. The price is then in effect an enterprise value, adjusted at completion for the actual cash, debt and working capital.
In a trade sale it raises practical questions about vehicle and equipment finance, retentions, work in progress and what counts as a normal level of working capital. Those are questions for the parties’ lawyers and accountants.
Comparable transactions
Comparable transactions are sales of similar businesses, used as evidence of what buyers pay. For small private trade businesses that evidence is often limited, incomplete or not public, so it is usually a cross-check and not the main method.
Advertised asking prices are not completed sales, and they rarely show the earnings or terms behind them.
Customer concentration
Customer concentration is the share of a business’s revenue or profit that comes from a small number of customers. The higher the share, the more the business depends on keeping them, and the lower its value tends to be for the same profit.
It is common where a subcontractor relies on one or two builders or head contractors. Contract terms, tenure and who holds each relationship all matter.
Discount for lack of control
A discount for lack of control reduces the value of a minority shareholding, because its holder cannot decide dividends, pay, strategy or a sale. Whether it applies depends on the interest being valued and the purpose of the valuation.
It comes up when a co-owner of a trade company is bought out or a minority share is transferred. A valuer states whether control is assumed and why, so the approach can be tested.
Earn-out
An earn-out is part of a sale price that is paid later, and only if the business reaches agreed results, such as revenue or gross profit, after completion.
It is used to bridge a gap on price when a buyer doubts that earnings will hold once the owner leaves. The measure, the period and the seller’s rights are questions for the parties’ lawyers.
EBIT
EBIT is earnings before interest and tax: profit after depreciation but before financing costs and income tax.
EBIT suits plant-heavy trade businesses, because depreciation stands in for the cost of replacing the vans and equipment a buyer will eventually have to buy.
EBITDA
EBITDA is earnings before interest, tax, depreciation and amortisation. It measures operating profit before the cost of finance and before the non-cash charge for using up assets.
It is often quoted for trade businesses, but it flatters one that spends heavily on vehicles and plant. A multiple has to be matched to the measure it was built on.
Enterprise value
Enterprise value is the value of the operating business, whatever way it is funded. An earnings-based method produces it first, and equity value is found by adjusting for debt, cash, surplus assets and working capital.
Equipment sits inside the enterprise value and the finance on it comes off afterwards, so two similar businesses can have very different equity values depending on their debt.
Equity value
Equity value is the value that belongs to the owners after debt and other adjustments: enterprise value, less interest-bearing debt, plus surplus assets and cash not needed to run the business, adjusted for working capital.
In a shareholder transfer, a share of the equity value is what is bought or sold, so equipment finance and loans to or from the owners matter.
Fair market value
Fair market value is the price a willing but not anxious buyer and seller would agree for a business or asset, each acting knowledgeably and neither forced to deal. In Australia the term is often used interchangeably with market value, and some tax, legal and contractual settings define it for their own purposes.
Check which definition your purpose uses. Whether a valuation meets a tax or legal requirement is a question for your accountant, tax adviser or lawyer.
Going concern
A going concern is a business expected to keep operating for the foreseeable future, as opposed to one being wound up. Most valuations assume it, which is why earnings usually lead and asset sale prices do not.
A trade business that is winding down, or whose earnings do not justify its assets, may be valued on what its assets would realise instead.
Goodwill
Goodwill is the value of a business above its net tangible assets: the reputation, customer relationships, repeat work and systems that let it keep earning.
In trades the question is how much of it stays when the owner leaves. Goodwill can be nil where the earnings after a market wage for the owner do not support a value above the assets.
Historical valuation date
A historical valuation date is a past date at which a business is valued, using only what was known or knowable at that date, for example for a restructure or an estate event that has already happened.
It needs records from the time, such as the accounts, contracts and fleet as they stood then. An additional historical date is from $495 + GST where the engagement permits it.
Independent valuation
An independent valuation is a reasoned, written opinion of value, prepared for a stated purpose and date by a valuer with no stake in the outcome, with the method and assumptions set out so that others can test them.
It differs from a broker appraisal, which estimates the likely sale price and is often free. An accountant, co-owner or lawyer will usually want the documented version.
Maintainable earnings
Maintainable earnings are the profit a business can reasonably be expected to keep earning, after normalisation. They are the figure a multiple is applied to, and they are not simply last year’s profit or a plain average.
For a trade business they are struck after a market wage for the owner’s work, and after removing one-off jobs and cost cuts that cannot last.
Market value
Market value is the price at which a business or asset would change hands between a willing but not anxious buyer and seller, each acting knowledgeably, at a stated date. It is a hypothetical price, not an asking price and not what one particular buyer might pay.
It matters where a tax rule, contract or shareholder agreement calls for a market value. Which definition applies to your matter is a question for your adviser.
Net debt
Net debt is interest-bearing debt less the cash that is not needed to run the business. It is the amount taken off enterprise value to reach equity value.
It includes equipment and vehicle finance and loans, and where relevant loans to or from the owner. Other debt-like items, such as overdue tax or unpaid employee entitlements, may need separate treatment and are a matter for your accountant.
Net tangible assets
Net tangible assets are the market value of a business’s tangible assets, such as vehicles, plant, tools and stock, less its liabilities. They are usually a floor under the value of a going concern.
They are measured at market value, not at the written-down value in the accounts, so the age and condition of the fleet and plant matter.
Normalisation
Normalisation is the adjustment of reported profit to the earnings a new owner could expect to keep, by removing private costs, one-off items and related-party distortions and replacing the owner’s pay with a market cost.
It works in both directions: an unsupported add-back overstates value, and an overlooked cost understates it.
Owner dependency
Owner dependency is the extent to which a business’s earnings rely on the owner personally, through their work, relationships, licence or knowledge. The more they do, the less of the business a buyer can expect to keep.
The usual case is an owner who quotes, supervises, works on the tools and holds the only licence.
Personal goodwill
Personal goodwill is the part of goodwill that depends on the owner as a person, such as their skill, name, personal relationships and licence, and it tends to leave with them. A buyer pays for it only to the extent it can be transferred.
It is common where customers ask for the owner by name. Who owns personal goodwill, and how it is treated for tax, are questions for your tax adviser and lawyer.
Plant and equipment
Plant and equipment are the machinery, tools, vehicles and fittings a business uses to earn income. They are valued at market value, and where earnings are the main method they sit inside the value of the business, with the finance on them deducted afterwards.
Excavators, trucks, vans, tools and testing equipment are typical. Age, condition and replacement cycles affect value, and finance owing on them is a liability.
Recurring revenue
Recurring revenue is income that repeats without having to be won again from scratch, such as maintenance agreements, scheduled service visits and regular contract work. It lowers risk, and so tends to support a higher value for the same profit.
Contracted work, habitual repeat work and regulated work behave differently. Written terms, renewal dates and retention rates are what make it count.
Retentions
Retentions are part of a contract payment held back until a defects period ends. For a trade business they can be an asset, where customers hold back money owed to it, and a liability, where it holds back money owed to subcontractors.
They are common in construction subcontracting. In a valuation or a sale, the amount, the timing and who carries the defect obligations on completed work all need to be established.
Revenue multiple
A revenue multiple expresses value as a multiple of turnover. It is a rule of thumb, because two businesses with the same turnover can earn very different profits.
It cannot see margins, owner wages, customer concentration or fleet condition, so it is a cross-check at most.
Seller’s discretionary earnings
Seller’s discretionary earnings are the profit of an owner-operated business before the owner’s pay and benefits, interest, tax, depreciation and private costs, roughly what one working owner can take out. It is a measure used in small business broking and is not the same as normalised earnings.
Because it adds back the owner’s whole wage, it overstates what a buyer keeps if they must replace the owner. A valuer deducts a market wage for the owner’s work.
Surplus assets
Surplus assets are assets that do not contribute to a business’s earnings, such as spare land, idle plant or excess cash. They are added to the value of the operating business at market value.
Typical examples are a second yard, old equipment kept but no longer used, or a property the business owns but does not need.
Valuation date
The valuation date is the date at which a business is valued. A valuation uses what was known or knowable at that date, so a current date, a past date and a future transaction date are different engagements.
Seasonal trades and project-driven businesses can look very different on different dates, so the date matters. For a value at a financial year end such as 30 June, the accounts at that date are central.
Valuation range
A valuation range is the span of values a valuer considers reasonable, with a conclusion within or alongside it. It reflects that valuation is judgement applied to estimates, not an exact measurement.
The range tends to widen where earnings are volatile, rely on the owner or are concentrated in a few customers.
Vendor finance
Vendor finance is where the seller lends part of the price to the buyer, who repays it over time. The seller becomes a creditor of the business they used to own.
It is often discussed where the buyer is a manager or employee who cannot fund the whole price. Security and what happens on default are questions for your lawyer.
Work in progress
Work in progress is the value of jobs started but not finished or invoiced at a given date. It carries costs still to be incurred and revenue still to be received, and how it is treated affects both a valuation and the price at completion.
It is significant in project trades, where progress claims, deposits and part-complete jobs vary through the year.
Working capital
Working capital is the money tied up in running a business day to day: debtors, stock and work in progress, less creditors and similar short-term obligations. A normal level is needed to operate, and a surplus or shortfall against it is adjusted in the value or the price.
The normal level is judged from how the business runs across the year, not from the balance on a single day.
Start with a short intake. We confirm the fee and scope in writing.
An Independent Business Valuation is $1,995 + GST, with a draft before the report is finalised. Typical turnaround is 3 to 7 business days once all required information has been received.