Business valuation glossary

Earnings before interest, tax, depreciation and amortisation, after correcting for anything that would not continue under a new owner. It is the profit figure a buyer actually applies a multiple to, rather than the profit shown in the statutory accounts.

Why it matters: Two valuations of the same company usually differ because of the adjustments, not the multiple. Every adjustment should be listed, quantified and evidenced.

Profit restated to show a typical, repeatable trading year. Unusual income, unusual costs and any owner-specific arrangements are stripped out so that one year can fairly be compared with another, and one business with another.

Why it matters: Normalising is what makes a three-year trend meaningful. Without it, a single good or bad year can distort the whole valuation.

The level of profit the business can reasonably be expected to keep earning, after all adjustments and after paying market rates for the work the owner does. It usually sits between the best and worst of the last three years rather than at either extreme.

Why it matters: This is the number the multiple is applied to. If you only interrogate one figure in a valuation report, make it this one.

A cost in the accounts that is added back to profit because it would not exist for a new owner. Typical examples are the owner's private motor costs, family members on the payroll who do not work in the business, and one-off legal fees.

Why it matters: Buyers accept add-backs that can be evidenced from invoices or payroll records, and discount the ones that cannot. Unevidenced add-backs are the most common reason a price falls in due diligence.

A correction that replaces whatever the owner currently pays themselves with the market cost of employing someone to do the same job. It works in both directions: profit rises where the owner is over-paid, and falls where the owner is working full-time for a token salary.

Why it matters: In owner-operated businesses this is usually the single largest adjustment, and the one most often left out of broker appraisals.

Costs that hit a particular year but are not part of normal trading — a flood repair, a tribunal settlement, a rebrand or a failed acquisition. They are removed from the earnings figure so that the year reflects ordinary trading.

Why it matters: A cost is only genuinely one-off if it is unlikely to recur. Recurring "exceptional" items across several years are not exceptional.

A figure applied to adjusted maintainable earnings to arrive at the value of the business. A company earning £200,000 valued at 4x is worth £800,000 on this basis.

Why it matters: The multiple reflects risk and transferability — customer concentration, management depth, contract length and sector demand. Most UK SMEs fall between 3x and 6x.

A method that forecasts the cash the business will generate over several years and converts it to a value today using a discount rate that reflects risk. It is the most theoretically complete method and the most sensitive to its own assumptions.

Why it matters: Useful where future cash flows are genuinely predictable — long contracts, subscriptions, infrastructure. For a typical owner-managed SME it is a cross-check, not the headline.

Value based on what the business owns less what it owes, with assets restated to realistic current values rather than book cost. Property, plant and stock are the items most often restated.

Why it matters: It sets the floor. A profitable trading business should be worth more than its net assets; if it is not, the earnings case needs explaining.

What it would cost a buyer to build the same business from scratch — premises, equipment, licences, recruitment and the losses incurred while reaching the same trading level. Also called the cost to replicate.

Why it matters: It gives a buyer a sanity check: no one pays materially more for a business than the cost of creating it, unless what they are buying is time or an established name.

Running more than one method and comparing the results. Where the methods broadly agree, confidence in the figure is high; where they disagree, the report should explain which one governs and why.

Why it matters: A valuation that quotes one method and no cross-check is an opinion. Triangulation is what makes a figure defensible to a buyer, a lender, a court or HMRC.

Evidence from businesses of similar size and sector that have actually changed hands, used to support the multiple. Completed deals are the evidence that counts — asking prices are not evidence of anything.

Why it matters: Ask which transactions the multiple came from, how recent they are, and how they compare on size. A multiple with no evidence behind it is just an assertion.

A reduction applied when valuing a shareholding that cannot control the company. A holder who cannot force a sale, set salaries or declare a dividend owns something worth less per share than the majority holder.

Why it matters: Common in shareholder disputes, share buy-backs and HMRC valuations. The size of the discount depends on how little influence the holding actually carries.

A reduction reflecting how hard it is to sell shares in a private company. Unlike listed shares, there is no ready buyer, no published price and often a restriction in the articles on who the shares can be sold to.

Why it matters: It applies to majority holdings too, not just minorities — a whole private company still takes months to sell.

The extra a buyer pays for the ability to run the company — appoint directors, set strategy, decide on dividends and sell the business. It is the mirror image of the minority discount.

Why it matters: It explains why buying the last 20% of a company can cost proportionally more than the first 20%, where that stake takes the buyer through a control threshold.

A discount scaled to the size and influence of the particular shareholding. A 5% holding, a 25% holding that can block special resolutions and a 49% holding all carry very different discounts.

Why it matters: HMRC valuations in particular turn on these thresholds, so the exact percentage and the wording of the articles both matter.

The financial statement both parties complete in English and Welsh divorce proceedings. Where one party owns a business, Form E asks for an estimate of its value, which is why many valuations are commissioned at this stage.

Why it matters: An unsupported figure entered on Form E is frequently challenged. A short independent valuation at this point often avoids a far more expensive fight later.

One expert instructed by both parties together to produce a single valuation for the court. Both sides share the instructions, the questions and the cost, and both receive the same report at the same time.

Why it matters: It is the default in financial remedy proceedings because it is faster and cheaper than two competing experts, and courts prefer it.

The Civil Procedure Rules governing expert evidence in the courts of England and Wales. They require the expert's duty to be to the court rather than to whoever is paying, and set out what a report must contain.

Why it matters: A valuation that does not comply — missing the statement of truth, the range of opinion or the declaration of duty — can be ruled inadmissible however good the analysis is.

An expert instructed by one side only, often to review or challenge a single joint expert's report. The duty to the court still applies, but the instruction comes from one party.

Why it matters: Usually used where a joint report is thought to contain a clear error of approach or fact, and permission to rely on further evidence is being sought.

The court process that divides finances on divorce in England and Wales. A business interest is one of the assets the court considers, alongside property, pensions and income.

Why it matters: The court is generally interested in what a business is worth to the owner who will keep it, and what cash it can realistically release, not just a headline sale price.

The price a willing buyer would pay a willing seller, both acting freely and with full information, in an open sale. It assumes a reasonable period of marketing and no forced sale.

Why it matters: It is the standard basis for sale and tax valuations, and it is not the same as fair value, which is used in some dispute and shareholder-agreement contexts.

Actual market value: the value of a shareholding taking account of any restrictions attached to the shares, such as leaver provisions or transfer limits. It is normally lower than the unrestricted value.

Why it matters: AMV is the figure used to set the exercise price on EMI options, so getting it agreed matters to every option holder.

Unrestricted market value: the value of the same shares ignoring the restrictions in the articles or shareholders' agreement. It is the reference point against which the discount for restrictions is measured.

Why it matters: HMRC looks at both AMV and UMV on an EMI valuation, and the gap between them has to be justified by the actual terms of the shares.

The HMRC form used to ask Shares and Assets Valuation to agree a share valuation for EMI option purposes. It sets out the company, the proposed values and the reasoning behind them.

Why it matters: An agreed VAL231 valuation is normally valid for 90 days, so option grants should be planned around that window.

A share valuation prepared to support an Enterprise Management Incentive option scheme, submitted to HMRC for agreement before options are granted. It establishes both the restricted and unrestricted value of the shares.

Why it matters: Granting options at a value HMRC later disputes can cost employees their tax relief, which is why the valuation is agreed in advance.

Inheritance tax relief that can reduce the taxable value of a trading business or its shares, at either 100% or 50% depending on what is held. Investment assets held within the business generally do not qualify.

Why it matters: Where a company holds surplus cash or investment property, a valuation often needs to separate the trading and non-trading parts so the relief position is clear.

The full inheritance tax account submitted to HMRC when someone dies and a return is required. It reports the whole estate, including any business or shareholding.

Why it matters: Executors are personally responsible for the figures returned, so a supported valuation is worth having before the account is signed.

The supplementary inheritance tax schedule for unlisted stocks, shares and business interests. It is where a private company shareholding held at death is declared.

Why it matters: This is the form that usually triggers the need for a written, evidenced valuation rather than an estimate.

A valuation of the business or shareholding as at the date the owner died, ignoring anything that happened afterwards. Later trading, later offers and later losses are irrelevant to the figure.

Why it matters: Because it is backward-looking, the evidence base is the accounts and market conditions of that moment, which is why the working needs to be shown.

The value of the trading business itself, before taking account of its cash or its borrowings. It is the figure that comes straight out of applying a multiple to adjusted maintainable earnings.

Why it matters: Headline offers are usually quoted as enterprise value, which is why an apparently generous offer can shrink once debt is deducted.

What the shares are worth, and therefore what the shareholders receive. It is enterprise value plus surplus cash, less borrowings, finance leases and hire purchase.

Why it matters: This is the number that matters to a seller. Always check which of the two figures an offer refers to.

A pricing convention where the buyer values the business as though it had no cash and no borrowings. The seller keeps surplus cash and settles the debt out of the proceeds.

Why it matters: It sounds neutral but the detail matters: what counts as debt, and how much working capital must be left behind, are both negotiable and both move the cash you receive.

Accounts drawn up shortly after the sale completes to establish the actual cash, debt and working capital on the day. The price is then adjusted up or down against the agreed target.

Why it matters: Most post-deal disputes are completion accounts disputes. Agreeing the working capital target and the accounting policies in the heads of terms prevents most of them.

Part of the price paid later, conditional on the business hitting agreed performance targets after the sale. It bridges a gap between what a seller believes the business is worth and what a buyer will pay upfront.

Why it matters: Whether the earn-out is actually paid usually depends on who controls costs, overheads and investment after completion — so define the measure precisely, in writing.

The short document setting out the agreed shape of a deal before lawyers draft the contract — price, structure, timing, exclusivity and conditions. It is mostly non-binding, but it frames everything that follows.

Why it matters: Terms conceded at this stage are very hard to win back later. It is the cheapest point at which to take advice.