Glossary
This glossary explains common business, accounting, and valuation terms used by entrepreneurs, investors, and financial professionals. Understanding these concepts helps business owners evaluate financial performance, improve profitability, and prepare for growth or sale.
A
Accounts Payable (AP): Money a business owes to suppliers or vendors for goods or services purchased on credit.
Accounts Receivable (AR): Money owed to a business by customers for products or services delivered but not yet paid for.
Accrual Accounting: An accounting method where revenue and expenses are recorded when earned or incurred rather than when cash is received or paid.
Acquisition: When one company purchases another company or its assets.
Amortization: The gradual expensing of an intangible asset over its useful life.
Asset Approach: A valuation method that determines the value of a business based on the value of its assets minus liabilities.
Assets: Resources owned by a business that have economic value such as cash, inventory, equipment, or property.
Adjusted EBITDA: EBITDA adjusted to remove unusual, one-time, or discretionary expenses to better reflect true operating performance.
B
Balance Sheet: A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.
Beta: A measure of how much a company’s value or stock price moves relative to the overall market.
Benchmarking: Comparing a company's performance metrics to industry standards or competitors.
Book Value: The value of a company's assets minus liabilities as recorded on the balance sheet.
Break-Even Point: The point at which total revenue equals total expenses resulting in no profit or loss.
Burn Rate: The rate at which a company spends cash before generating positive cash flow.
Business Model: The way a company creates, delivers, and captures value.
Business Valuation: The process of determining the economic value of a business or ownership interest.
C
Capital Asset Pricing Model (CAPM): A financial model used to estimate the cost of equity based on risk-free rate, beta, and equity risk premium.
Capital Expenditures (CapEx): Funds used to acquire or upgrade physical assets such as property or equipment.
Capital Structure: The mix of debt and equity used to finance a company's operations.
Cash Conversion Cycle (CCC): The time it takes for a business to convert inventory purchases into cash from customers.
Cash Flow: The net movement of money into and out of a business.
Comparable Companies (Comps): Similar businesses used as benchmarks when estimating the value of another company.
Contribution Margin: Revenue remaining after variable costs are deducted.
Conversion Rate: The percentage of potential customers who complete a desired action such as making a purchase.
Cost of Goods Sold (COGS): The direct costs associated with producing the goods or services sold by a company.
Current Assets: Assets expected to be converted into cash within one year.
Current Liabilities: Short-term financial obligations due within one year.
Current Ratio: A liquidity ratio measuring a company's ability to pay short-term obligations.
D
Debt: Money borrowed by a business that must be repaid with interest.
Debt Financing: Raising capital by borrowing money from lenders.
Debt Service Coverage Ratio (DSCR): A ratio measuring a company’s ability to service its debt using operating income.
Debt-to-Equity Ratio: A financial ratio comparing total debt to shareholder equity.
Depreciation: The gradual reduction in value of a tangible asset over its useful life.
Discount Rate: The rate used to convert future cash flows into present value.
Discounted Cash Flow (DCF): A valuation method that estimates value by projecting future cash flows and discounting them to present value.
Discount for Lack of Control (DLOC): A reduction in value applied to ownership interests without control.
Discount for Lack of Marketability (DLOM): A reduction reflecting the difficulty of selling privately held shares.
Due Diligence: The investigation performed before completing a transaction.
E
EBIT: Earnings before interest and taxes.
EBITDA: Earnings before interest, taxes, depreciation, and amortization.
EBITDA Margin: EBITDA divided by revenue, measuring operating profitability.
Economic Profit: Profit remaining after deducting the cost of capital.
Economic Value Added (EVA): A performance measure calculating value created above the cost of capital.
Enterprise Value: The total value of a company including debt and equity.
Equity: Ownership interest in a company.
Equity Risk Premium: Additional return investors expect for investing in stocks rather than risk-free assets.
Earnout: A transaction structure where part of the purchase price is contingent on future performance.
F
Fair Market Value (FMV): The price at which a business would change hands between willing buyer and seller.
Financial Buyer: An investor or private equity firm acquiring a company for financial return.
Financial Statements: Formal records showing financial performance including income statement, balance sheet, and cash flow statement.
Fixed Costs: Expenses that remain constant regardless of production volume.
Free Cash Flow: Cash available after operating expenses and capital expenditures.
G
Goodwill: The value of a business beyond identifiable assets.
Gross Profit: Revenue minus cost of goods sold.
Gross Margin: The percentage of revenue remaining after subtracting cost of goods sold.
Growth Rate: The rate at which revenue or profits increase over time.
I
Income Approach: A valuation approach based on expected future income.
Income Statement: A financial report showing revenue, expenses, and profit over a period of time.
Intangible Assets: Non-physical assets such as patents, trademarks, and software.
Intellectual Property: Legally protected inventions or creations.
K
Key Performance Indicator (KPI): A measurable value used to evaluate business performance.
L
Leverage: Using borrowed funds to increase potential return.
Liabilities: Financial obligations owed by a business.
Liquidity: The ability to meet short-term financial obligations.
Letter of Intent (LOI): A preliminary agreement outlining key transaction terms.
M
Market Approach: A valuation approach comparing a company to similar businesses.
Market Capitalization: The total market value of a company’s outstanding shares.
Market Share: The percentage of total industry sales captured by a company.
Minority Interest: Ownership representing less than controlling interest.
N
Net Income: Profit remaining after all expenses are deducted from revenue.
Net Profit Margin: Net income divided by revenue.
Net Working Capital: Current assets minus current liabilities.
Normalized Earnings: Adjusted earnings removing unusual or non-recurring items.
O
Operating Expenses: Costs associated with running the daily operations of a business.
Operating Income: Profit generated from core operations before interest and taxes.
Operating Margin: Operating income divided by revenue.
Operating Profit: Profit from core operations before financing costs.
P
Profit: Revenue remaining after all expenses are deducted.
Profit Margin: The percentage of revenue that becomes profit.
Price-to-Earnings Ratio (P/E): A valuation ratio comparing share price to earnings.
Purchase Price Allocation (PPA): Assigning values to assets and liabilities acquired in a transaction.
Q
Quick Ratio: A liquidity ratio measuring ability to meet short-term obligations using liquid assets.
R
Return on Assets (ROA): Net income divided by total assets.
Return on Equity (ROE): Net income divided by shareholder equity.
Return on Invested Capital (ROIC): A measure of how efficiently capital generates profit.
Return on Investment (ROI): Profit divided by investment cost.
Revenue: Income generated from selling goods or services.
Revenue Growth Rate: The percentage increase in revenue over time.
Risk-Free Rate: The theoretical return on a riskless investment.
S
Scalability: The ability of a business to grow without a proportional increase in costs.
Strategic Buyer: A company acquiring another to create strategic advantages.
SWOT Analysis: A framework analyzing strengths, weaknesses, opportunities, and threats.
Synergies: Additional value created when companies combine.
T
Target Market: The group of customers a company aims to serve.
Terminal Value: The estimated value of a business beyond the forecast period.
Transaction Multiples: Valuation ratios derived from comparable business sales.
V
Valuation Multiple: A ratio comparing company value to financial metrics.
Variable Costs: Costs that change with production or sales volume.
Weighted Average Cost of Capital (WACC): The blended cost of debt and equity financing.
Working Capital: Current assets minus current liabilities representing operational liquidity.