Business valuation terms, explained in plain English.

A business valuation glossary defines the technical terms used in valuation reports — earnings measures such as EBITDA and FME, methodologies such as capitalisation of maintainable earnings and DCF, discounts such as DLOM and DLOC, and standards such as IVS 104 and APES 225. This glossary defines more than 80 of them in plain English for Australian owners and advisers, each definition citable at its own anchor URL.

When you need this glossary — and why the words matter

Valuation language decides real money. Confuse enterprise value with equity value and a deal can be mispriced by the entire debt balance; quote an SDE multiple as if it were an EBITDA multiple and a small business can be overpriced by a full owner's salary, capitalised. This glossary exists for the moments where those distinctions bite: reading a valuation report before you sign anything, negotiating a sale or buy-in, briefing a lawyer for a shareholder or family law matter, or responding to ATO questions about a tax-purpose valuation. Each term below carries its own anchor URL (for example, /resources/business-valuation-glossary#dlom), so a single definition can be linked, quoted or cited on its own — Prismi's own service and insight pages link technical terms back to the definitions here, and other sites and AI engines are welcome to do the same with attribution. Definitions are grouped by theme: earnings, methodology, standards, discounts, and the tax and deal contexts where the numbers get used.

Earnings terms: the numbers that set the price

• ·EBITDA — Earnings before interest, tax, depreciation and amortisation. The most widely used earnings measure in Australian private business valuation because it approximates operating cash generation before financing structure and accounting policy choices. Most quoted business sale multiples are multiples of normalised EBITDA.
• ·EBIT — Earnings before interest and tax. Preferred over EBITDA for asset-heavy businesses where depreciation represents a genuine, recurring cost of maintaining the asset base — ignoring it would overstate maintainable earnings.
• ·NPAT — Net profit after tax. Used as the earnings base where the valuation is performed at the equity level and capitalised by a price-to-earnings style multiple rather than an enterprise multiple.
• ·Future maintainable earnings (FME) — The level of earnings a business can sustainably be expected to generate in future, judged from normalised historical results, current trading and reasonable forecasts. FME is the earnings base capitalised under the capitalisation of maintainable earnings methodology.
• ·Normalisation — The process of adjusting reported profit to reflect the earnings a hypothetical purchaser would actually receive: removing one-off items, restating owner remuneration to market, and re-pricing related-party transactions to arm's length terms. Normalised earnings, not reported earnings, are what a valuation capitalises.
• ·Add-back — A single normalisation adjustment that adds a discretionary, personal or non-recurring expense back to profit. Every add-back should be evidenced — invoices, ledger entries, board minutes — because unsupported add-backs are the first thing a sceptical reviewer strips out.
• ·Owner's remuneration adjustment — Replacing the amount owners actually draw with the market cost of employing someone to do their job. Owners who underpay themselves overstate maintainable earnings; owners who overpay themselves understate them. One of the largest and most contested normalisations in SME valuation.
• ·Related-party adjustment — Restating transactions with related entities — rent paid to a family property trust, management fees, intercompany charges — to the price an arm's length counterparty would pay.
• ·One-off (non-recurring) items — Revenue or expenses that will not repeat: an insurance recovery, a legal settlement, storm damage, a one-off government grant. Removed during normalisation because a purchaser prices repeatable earnings, not history's accidents.
• ·Seller's discretionary earnings (SDE) — EBITDA plus one full working owner's total remuneration. Used for small owner-operated businesses where the buyer will replace the owner's labour. Multiples quoted on SDE are not comparable with EBITDA multiples — mixing the two bases is a common and expensive error.
• ·Working capital — Debtors plus stock less creditors: the cash a business needs tied up in day-to-day trading. A valuation generally assumes a normal level of working capital passes with the business; surpluses or deficits adjust the price.
• ·Net debt — Interest-bearing borrowings less cash and cash equivalents. The bridge between enterprise value and equity value: enterprise value minus net debt equals equity value.
• ·Capital expenditure (capex) — Spending on assets that last beyond a year. Valuers distinguish maintenance capex (required to sustain current earnings) from growth capex (funding expansion) — maintainable earnings must absorb maintenance capex one way or another.
• ·Recurring revenue — Revenue that is contracted or highly repeatable — subscriptions, retainers, service agreements. Higher recurring revenue supports a higher multiple because it lowers the risk that earnings evaporate on transfer of ownership.
• ·Customer concentration — The proportion of revenue attributable to the largest customers. Heavy concentration is one of the strongest downward pressures on an SME multiple, because the loss of one relationship can remove a large share of earnings.
• ·Run-rate earnings — Current trading annualised, for example the latest quarter multiplied by four. Useful as supporting evidence of trajectory; treated cautiously as a primary earnings base because it can capture seasonality or a temporary spike.
• ·Quality of earnings — An assessment of how reliable, repeatable and cleanly recorded reported earnings are. A due diligence quality of earnings review tests the same questions a valuer's normalisation stage asks.

Methodology terms: how the number is calculated

• ·Capitalisation of maintainable earnings (CME) — The dominant methodology for profitable Australian private businesses. Future maintainable earnings are capitalised by a market-derived multiple to produce enterprise value. The judgment sits in two places: the maintainable earnings figure and the multiple selected.
• ·Capitalisation rate (cap rate) — The rate of return that converts maintainable earnings into value. It is the reciprocal of the earnings multiple: a 25 per cent capitalisation rate is a multiple of four. Higher risk means a higher cap rate and a lower value.
• ·Earnings multiple — The number applied to maintainable earnings to derive value, drawn from comparable transaction and market evidence and adjusted for entity-specific risk factors — size, customer concentration, key person dependence, growth prospects.
• ·Discounted cash flow (DCF) — An income-based methodology that forecasts future cash flows and discounts each year back to present value at a risk-adjusted discount rate. Most defensible where reliable forecasts exist; weakest where forecasts are speculative.
• ·Discount rate — The annual rate of return used to convert future cash flows into today's dollars, reflecting the time value of money and the riskiness of the cash flows. Small changes in the discount rate move a DCF conclusion materially, which is why the rate's build-up must be documented.
• ·Weighted average cost of capital (WACC) — The blended cost of a business's debt and equity funding, weighted by proportion. Used as the discount rate when valuing the enterprise cash flows available to all capital providers.
• ·Capital asset pricing model (CAPM) — The standard framework for building a cost of equity from a risk-free rate, an equity market risk premium and a beta reflecting systematic risk. For private companies it is usually extended with size and specific risk premia.
• ·Specific risk premium (alpha) — An addition to the discount rate for risks particular to the entity that market-wide data does not capture — customer concentration, key person dependence, litigation exposure. It must be reasoned, because it is the most judgmental input in a rate build-up.
• ·Terminal value — The value of all cash flows beyond the explicit forecast period in a DCF, usually calculated by capitalising a steady-state cash flow at the discount rate less long-term growth. It commonly represents the majority of a DCF conclusion, so its assumptions deserve the most scrutiny.
• ·Net asset value (adjusted NAV) — Assets restated to market value less liabilities at face value. The primary methodology for asset-heavy entities and holding structures, and a floor test everywhere else: where earnings-based value falls below adjusted NAV, NAV is usually the more supportable conclusion.
• ·Comparable transactions method — Valuing a business by reference to prices actually paid for similar businesses. Persuasive where the comparables are genuinely similar and recent; limited in the Australian SME market, where most sale prices are never publicly disclosed.
• ·Guideline public company method — Deriving multiples from listed companies in the same sector, then adjusting downward for size, liquidity and depth of management. Rarely a primary SME methodology, but a useful ceiling cross-check.
• ·Industry rule of thumb — A shorthand pricing convention within an industry — cents per dollar of recurring fees, dollars per customer file, a customary revenue multiple. Legitimate as a cross-check; unsupportable as a primary methodology, because it ignores the specific entity's earnings, risk and terms.
• ·Approaches to value — The three families recognised by the International Valuation Standards: the income approach (value from expected returns), the market approach (value from comparable evidence) and the cost approach (value from asset replacement or realisation). Every methodology is a member of one of these families.
• ·Cross-check — A secondary methodology applied to test the primary conclusion. A conclusion that survives cross-checking against an independent method is materially more supportable than a single calculation standing alone.
• ·Sensitivity analysis — Testing how the concluded value moves when key assumptions change — the multiple, the discount rate, the treatment of a contested add-back. It exposes which assumptions carry the conclusion and defines the width of the supportable range.
• ·Sum-of-the-parts — Valuing distinct business units or asset classes separately and aggregating the results, used where a single blended methodology would obscure very different risk profiles within one entity.

Standards, basis and premise: the rules the value is measured under

• ·Market value — The estimated amount an asset should exchange for on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, where each party acts knowledgeably, prudently and without compulsion. This is the IVS 104 basis the ATO's market valuation guidance expects for tax-purpose valuations.
• ·Fair value — A basis whose meaning depends on context. In financial reporting it is an exit price under the accounting standards; in shareholder disputes and buy-sell contexts it is often construed as value without minority discounts, so a minority holder receives a pro-rata share. It is not automatically the same as market value — the governing instrument or statute controls.
• ·Fair market value — A label used in older Australian authorities and in North American practice; in substance it aligns with market value. Where a deed or agreement uses the term, the definition written in the document governs over the label.
• ·Willing but not anxious — The Australian formulation of market value from Spencer v Commonwealth (1907): a hypothetical sale between a willing but not anxious vendor and a willing but not anxious purchaser, each aware of all relevant facts. Still the foundation of Australian valuation law.
• ·Basis of value — The definition of value being measured — market value, fair value, investment value. The basis is fixed by the purpose of the valuation before any calculation starts, because different bases produce legitimately different numbers for the same asset.
• ·Premise of value — The assumed circumstances of the hypothetical transaction: going concern, orderly liquidation or forced sale. The same assets can carry very different values under different premises, so the report must state which premise it adopts.
• ·Going concern — The premise that the business continues operating as currently constituted. Most trading business valuations are prepared on this premise; it is what allows goodwill and earnings-based methodologies to apply.
• ·Liquidation value — The value realisable if the business ceases and its assets are sold. An orderly liquidation allows reasonable time to market each asset; a forced sale does not, and prices are accordingly lower.
• ·Valuation date — The single date at which value is assessed. Only information known or reasonably knowable at that date may be used — hindsight is excluded, even where later events would have changed the answer.
• ·Retrospective valuation — A valuation prepared now as at a historical date, common in CGT, family law and dispute matters. Discipline is required to use only evidence available at the historical date; contemporaneous records make or break the file.
• ·Special value — Value to a particular buyer with attributes no other market participant shares — a neighbouring competitor, a strategic acquirer. Excluded from market value, which assumes a hypothetical purchaser rather than a special one.
• ·Synergistic value — The additional value created by combining two specific businesses. Like special value, it belongs to a particular combination rather than to the market, and is excluded from a market value conclusion.
• ·Highest and best use — The use of an asset that maximises its value, provided that use is physically possible, legally permissible and financially feasible. Most relevant for property and for entities whose assets are worth more redeployed than as currently used.
• ·Hypothetical purchaser — The knowledgeable, prudent, arm's length buyer the market value construct assumes. The valuer prices what this purchaser would pay, not what any particular interested party might pay.
• ·IVS 104 — The chapter of the International Valuation Standards that defines bases of value, including the market value definition adopted in the ATO's market valuation guidance. Citing and applying IVS 104 anchors an Australian tax-purpose valuation to a recognised standard.
• ·APES 225 Valuation Services — The professional standard governing valuation services provided by members of the Australian professional accounting bodies. It defines the types of engagement, the independence requirements and the minimum content of a valuation report.
• ·Valuation engagement (APES 225) — The most comprehensive APES 225 service: the valuer selects and applies the methodologies they consider appropriate and reaches an independent conclusion of value. This is the standard expected for litigation, disputes and higher-stakes tax matters.
• ·Calculation engagement (APES 225) — A limited APES 225 service in which the valuer applies methodologies and assumptions agreed with the client, without the fuller independent opinion a valuation engagement carries. Cheaper and faster, but it carries less weight under review, and the report must state its limitations.
• ·Independence — The requirement that the valuer have no interest in the outcome. Fees contingent on the concluded value, valuing a business the valuer also advises, or accepting a target number from the client all compromise independence — and independence is the first thing a court or the ATO tests.
• ·Working papers (working file) — The file behind the report: the evidence, calculations, methodology decisions and reasoning that support each input. The report states conclusions; the working file proves them — and when a review or dispute arrives years later, it is the file, not the report, that answers the questions.

Discounts, premiums and the equity bridge: why identical shares carry different values

• ·Enterprise value — The value of the whole operating business — its earning capacity and operating assets — independent of how it is financed. Most earnings-based methodologies produce enterprise value first.
• ·Equity value — The value of the ownership interests after the enterprise-to-equity bridge: enterprise value less net debt, plus surplus assets. Equity value is what the shares are worth — and what most tax and legal contexts actually require.
• ·Enterprise-to-equity bridge — The reconciliation from enterprise value to equity value: deduct interest-bearing debt, add cash and surplus assets, and adjust for working capital outside normal levels. Quoting an enterprise multiple as if it valued the shares — skipping the bridge — is among the most common valuation errors.
• ·Surplus assets — Assets the entity owns but does not need to generate its maintainable earnings — excess cash, an investment property, a boat in the company name. Added to value separately, because capitalised earnings do not capture them.
• ·Goodwill — The value of a business above its identifiable net assets: the earning power of reputation, systems, location and customer relationships operating together. In Australian law, goodwill is inseparable from the business that generates it.
• ·Personal goodwill — Earning power attached to an individual — their skill, licence or relationships — rather than to the business itself. Personal goodwill does not transfer to a purchaser, so value that depends on it must be discounted or secured by restraints and transition arrangements.
• ·Identifiable intangible assets — Intangibles that can be separately recognised and valued: brands, patents, licences, customer contracts, software. Distinguished from goodwill, which is the residual that cannot be separately identified.
• ·Levels of value — The recognition that the same share parcel carries different value depending on control and marketability: a controlling interest in a readily marketable company sits at the top; a minority parcel in a private company sits at the bottom, after DLOC and DLOM.
• ·Control premium — The additional amount a buyer pays for control — the power to set strategy, appoint management and direct distributions — over the pro-rata value of a minority parcel.
• ·Minority (non-controlling) interest — A shareholding that cannot control the company's decisions. Its value is usually less than its pro-rata share of full equity value, unless the governing documents or the applicable basis of value provide otherwise.
• ·Discount for lack of control (DLOC) — The percentage reduction applied to a pro-rata value to reflect that a minority holder cannot control dividends, strategy, remuneration or exit. Its size depends on the rights the interest actually carries — a shareholders' agreement can narrow it substantially.
• ·Discount for lack of marketability (DLOM) — The reduction reflecting that an interest in a private company cannot be sold quickly or cheaply. Applied after DLOC where both apply. Both discounts must be reasoned from the facts of the entity, not defaulted from a textbook table.
• ·Combined (sequential) discounts — DLOC and DLOM apply multiplicatively, not additively: a 20 per cent DLOC followed by a 20 per cent DLOM is a combined discount of 36 per cent, not 40. Getting the arithmetic wrong overstates the discount.
• ·Key person risk — The risk that earnings depend on one or two individuals. It can be reflected in the multiple, the discount rate or a specific discount — but only once. Double-counting key person risk in both the multiple and a separate discount is a recognisable error.
• ·Marketability — The ability to convert an interest into cash quickly and at low cost. Listed shares are marketable; private company interests are not, which is the entire basis of the DLOM.

Tax, deal and dispute terms: where the definitions get applied

The terms below sit at the border between valuation and tax or legal advice. The definitions are general reference, not advice on your circumstances — Prismi prepares independent valuations only and is not a registered tax agent; your accountant or lawyer applies these provisions to your matter.

• ·CGT event — The statutory trigger for a capital gains tax calculation under the ITAA 1997 — a sale, a transfer, a restructure, entering certain agreements. Many CGT events require a market value where no arm's length price exists, which is what makes the valuation load-bearing.
• ·Cost base — The tax-recognised cost of an asset, from which the capital gain or loss is measured. Where an asset was acquired from a related party for other than market value, the market value substitution rule can reset the cost base.
• ·Market value substitution rule (s 116-30 ITAA 1997) — The provision that replaces actual proceeds with market value where the parties did not deal at arm's length or no consideration passed. It is why a one-dollar transfer to a family trust still needs a defensible market valuation.
• ·Small business CGT concessions (Division 152 ITAA 1997) — Concessions that can reduce or eliminate a capital gain on the disposal of an active small business asset. Eligibility turns on tests — including the net asset value and active asset tests — that depend directly on market valuations.
• ·Active asset test (s 152-35 ITAA 1997) — The Division 152 requirement that the asset satisfy the definition of an active asset (s 152-40) — used, or held ready for use, in carrying on a business — for the requisite period. Valuation evidence often bears on whether and when an asset qualifies.
• ·Maximum net asset value test — The Division 152 gateway that caps the net market value of the assets of the taxpayer and connected entities at the statutory $6 million threshold. Because the test applies at market value just before the CGT event, the supportability of the valuation can decide eligibility.
• ·Small business restructure rollover (Subdivision 328-G ITAA 1997) — The rollover allowing small businesses to move active assets between entity structures without an immediate tax cost, provided conditions including a genuine restructure are met. Market values at the restructure date document that the transaction is what it claims to be.
• ·Division 7A (ITAA 1936) — The provisions treating certain private company loans, payments and debt forgiveness to shareholders and their associates as unfranked dividends unless placed on complying terms at the ATO's benchmark interest rate. Asset transfers at other than market value can trigger it — another point where the valuation carries the compliance weight.
• ·Arm's length — Terms that unrelated, self-interested parties would agree between themselves. The benchmark against which related-party transactions are tested throughout tax law, and the assumption embedded in the market value definition itself.
• ·Related-party transaction — A dealing between entities under common ownership, control or family connection. Not improper in itself — but its pricing attracts scrutiny precisely because the parties could have set any number they liked, which is why market value evidence matters.
• ·Share sale vs asset sale — The two routes to selling a business: selling the entity's shares (the buyer takes the history, contracts and liabilities) or selling the business assets out of the entity. The route changes the tax outcome, the warranty exposure and what exactly is being valued.
• ·Earn-out — Deferred purchase consideration contingent on future performance. Common where buyer and seller disagree on maintainable earnings; earn-out rights have their own specific CGT treatment, which is a matter for the tax adviser.
• ·Vendor finance — Part of the price left outstanding as a loan from seller to buyer. It changes the risk profile of the transaction, and prices agreed with generous vendor finance are not directly comparable with clean cash sales.
• ·Restraint of trade — The seller's undertaking not to compete after completion. Because goodwill can walk out the door without it, the scope and enforceability of restraints directly affect the value a purchaser will pay.
• ·Buy-sell agreement — The agreement among co-owners governing what happens to an interest on death, disability or exit — often specifying the valuation basis and mechanism in advance. The drafted basis governs, which is why the wording deserves valuation input before it is signed.
• ·Single expert — In family law property proceedings, a valuer jointly appointed by the parties (or appointed by the court) whose opinion is the primary valuation evidence. A single expert owes their duty to the court, not to either party.
• ·Shadow expert — A valuer engaged by one party to review the single expert's work, brief the legal team and frame the questions put to the single expert. The shadow expert works behind the scenes and does not usually give evidence.
• ·Due diligence — The buyer's investigation of the business before completion — financial, legal, operational. From a valuation standpoint, due diligence is the market testing the same evidence a well-prepared valuation file should already contain.

Which Prismi engagement you need once the terms are clear

Knowing the vocabulary is the first half; matching the engagement to the stakes is the second. For a straightforward entity where a single methodology will carry the conclusion — an internal transfer, a preliminary position, a simple restructure step — the Essential report (from $1,495 + GST, 10–14 business days) is usually sufficient. Where multiple methodologies need testing, where Division 152 eligibility or a Subdivision 328-G restructure turns on the number, or where an adviser needs the supportable range reasoned rather than asserted, the Comprehensive report (from $3,995 + GST, 15–25 business days) is the standard recommendation. Where the valuation is likely to be examined — a dispute, litigation, an anticipated ATO review — the Defensible Valuation File (from $8,995 + GST, 25–35 business days) builds the complete evidence file behind every input, and the premium Valuation Range & Scenario Review suits boards weighing alternative structures against the range. Retrospective valuations attract a surcharge of $495 per historical date, additional entities are $750 each, and rush delivery is +30% of the base fee subject to capacity. Every fee is fixed at engagement and never contingent on the outcome — and if a client asks for a target number rather than an evidence-led conclusion, we will say so and decline the engagement on those terms.