In a valuation report there may be some valuation-specific terms that you may not be familiar with if you have not previously reviewed a valuation report. Therefore, we thought it would be helpful to set out some of the key terms that you will likely encounter in a valuation report.
“En Bloc” fair market value – the fair market value of all of the issued and outstanding shares of the company as a whole rather than the value for a partial ownership interest in a company.
Arm’s length – this term is used to refer to two parties who are unrelated and independent from each other. Metrics derived from transactions between parties not acting at arm’s length may not be reliable as the transaction may not have been conducted on market terms.
EBIT and EBITDA – the letters in these acronyms stand for the following:
E – earnings
I – interest
T – taxes
D – depreciation
A – amortization
EBIT and EBITDA are proxies for earnings that adjust certain items to provide a better gauge of cash flow to an investor. EBIT adds back interest paid on long-term debt and income taxes as the investor may have a different tax status or may choose to utilize a different capital structure. EBITDA takes the amount determined for EBIT and adds back depreciation and amortization expense as these are non-cash items. EBITDA is the most commonly used metric used to measure earnings in the private company marketplace.
Depreciated replacement value – Replacement value is the cost a company would bear to replace an asset (e.g. equipment) with a new version of the asset being replaced. Depreciated replacement value adjusts replacement value to reflect a reduction in the value of the equipment due to the passage of time and the use of the equipment over that time.
Sustaining capital reinvestment – The level of expenditures on capital assets (e.g. machinery, equipment, leasehold improvements etc.) required each year for the company to continue its operations at the current level.
Tax shield – When capital assets are acquired, their cost is not deducted in full on a company’s tax return, but instead it is amortized (i.e. recognized over the estimated useful life of the asset) and deducted annually on the company’s tax return. The tax shield calculates the value today of the tax deductions that will be available in future years.