Terms
Definition
Assets: Business assets adjusted to reflect fair market value, or the liquidation value of the business, as opposed to the depreciated value for income purposes.
Adjusted Earnings: Refers to earnings before interest, tax, depreciation and amortization (aka EBITDA) plus seller’s compensation and bonus payments.
Capitalization Rate: This rate quantifies the rate of return required by an investor to take on the risk of operating the business. The riskier the business, the higher rate of return required. For the purposes of this calculator, the capitalization rate is determined by subtracting long term growth from the discount rate.
Discount Rate : This rate reflects the expected rate of return from another investment opportunity with a comparable level of risk. For the purposes of this calculator, a build up method for determining discount rate has been utilized. The build up method takes the current risk free rate (i.e. long-term return on treasury bonds) and adds to it a large cap premium and small cap premium obtained from a third party source. Finally, an industry and company risk premium is added to the above to obtain the discount rate.This calculator uses a default industry and company risk premium that does not take into consideration a specific industry or company profile.
Earnings: Earnings refers to earnings before interest, tax, depreciation and amortization (aka EBITDA). EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
Goodwill: Refers to intangible assets that relate to a company’s business practices which increase the value of the business but can be difficult to quantify. Examples of goodwill include brand recognition, customer loyalty, and employee happiness.
Liabilities: Liabilities of business.
Long Term Growth: Growth rate for the business, expressed as a percentage, used to project growth on a long-term horizon. This rate should be more conservative than the projected growth of earnings rate used.
Projected Growth of Earnings: Growth rate for business earnings, expressed as a percentage, used to project future earnings for five years based on current and/or historical earnings.
Rate of Return on Capital Assets: This rate represents the earnings produced by corporate assets, which may include stocks, bonds, real estate, and other assets or accounting methods.
Owner's Comp & Bonus: Seller's compensation and bonus income.
Terminal value: The present value of future earnings (beyond the projection period) based on a stable growth rate.