Glossary

Business Valuation Glossary

Plain-English definitions of the terms behind every valuation, from EBITDA and DCF to the VA Range.

EBITDA: EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It measures a company's core operating profitability by stripping out financing decisions, tax regimes, and non-cash accounting charges. Investors and buyers use EBITDA as a quick proxy for cash earnings and to compare companies on a consistent operating basis.
DCF (Discounted Cash Flow): Discounted cash flow (DCF) is a valuation method that estimates a company's value as the present value of its expected future cash flows. Each projected cash flow is discounted to today using a rate that reflects risk and the time value of money. DCF is favored for capturing a business's intrinsic, forward-looking worth.
EV/EBITDA: EV/EBITDA is a valuation multiple that divides enterprise value by EBITDA, showing how many times earnings the market or a buyer pays for a business. Because it is capital-structure neutral and ignores non-cash charges, it is the most common multiple for comparing companies and pricing acquisitions across industries.
WACC: WACC, the weighted average cost of capital, is the blended rate a company pays to finance its assets using both debt and equity, weighted by their share of total capital. It represents the minimum return a business must earn to satisfy its investors and is the standard discount rate used in DCF valuations.
SDE (Seller's Discretionary Earnings): Seller's discretionary earnings (SDE) measures the total financial benefit a single owner-operator derives from a small business. It is calculated by adding the owner's salary, perks, and one-time or non-essential expenses back to pre-tax profit. SDE is the standard earnings basis for valuing owner-run small businesses and main-street acquisitions.
Comparable Company Analysis: Comparable company analysis values a business by applying valuation multiples derived from similar public companies. Analysts select peers in the same industry and size range, calculate their multiples such as EV/EBITDA, and apply them to the target's metrics. This market-based approach estimates value from what investors currently pay for comparable firms.
Precedent Transactions: Precedent transactions analysis values a business using the prices paid in past acquisitions of similar companies. Analysts gather completed M&A deals in the same sector, derive the multiples buyers paid, and apply them to the target. Because these prices include control premiums, this method often yields higher valuations than public-company comparables.
Terminal Value: Terminal value represents a company's worth beyond the explicit forecast period in a DCF, capturing all cash flows expected into perpetuity. It is typically estimated using a perpetuity growth rate or an exit multiple, then discounted to the present. Terminal value often accounts for the majority of a DCF valuation.
Free Cash Flow: Free cash flow (FCF) is the cash a company generates from operations after paying for capital expenditures needed to maintain and grow its asset base. It represents the money genuinely available to repay debt, pay dividends, or reinvest. FCF is the core input in DCF valuation and a key indicator of financial health.
Enterprise Value: Enterprise value (EV) is the total value of a business to all capital providers, calculated as equity value plus net debt (debt minus cash). It represents the theoretical cost to acquire the entire operating business regardless of how it is financed, making it the standard basis for valuation multiples like EV/EBITDA.
Equity Value: Equity value is the portion of a company's worth that belongs to its shareholders, calculated as enterprise value minus net debt. For public companies it equals market capitalization. Equity value tells an owner what their ownership stake is actually worth after the business's debts have been settled.
Valuation Multiple: A valuation multiple is a ratio that expresses a company's value relative to a financial metric, such as EV/EBITDA, EV/revenue, or price-to-earnings. Multiples let analysts benchmark and price a business quickly against its peers. The appropriate multiple reflects industry norms, growth prospects, profitability, and risk.
Monte Carlo simulation: Monte Carlo simulation is a technique that runs thousands of valuation scenarios by randomly varying key assumptions such as growth, margins, and discount rates within defined ranges. Instead of a single estimate, it produces a probability distribution of possible values. This reveals the range and likelihood of outcomes, quantifying the uncertainty in a valuation.
Asset-Based Valuation: Asset-based valuation determines a company's worth from the value of its assets minus its liabilities. It can use book values or, more often, the fair market or liquidation value of each asset. This approach suits asset-heavy, holding, or distressed businesses, and sets a useful value floor for any company.
Add-Backs / Normalization: Add-backs, or normalization, are adjustments to reported earnings that remove one-time, non-recurring, or discretionary items to reveal a business's true ongoing profitability. Common add-backs include owner perks, above-market salaries, and unusual legal costs. Normalizing earnings is essential to producing a realistic EBITDA or SDE figure for valuation.
NAICS: NAICS, the North American Industry Classification System, is the standard code system used to classify businesses by industry across the United States, Canada, and Mexico. Each company is assigned a numeric code reflecting its primary activity. In valuation, NAICS codes are used to identify comparable companies and source industry-specific benchmark multiples.
PKD: PKD (Polska Klasyfikacja Dzialalnosci) is Poland's official statistical classification of economic activities, aligned with the EU's NACE system. Every registered Polish business is assigned a PKD code describing its main line of activity. In valuation, PKD codes help match a company to relevant Polish industry peers and benchmark data.
VA Range: VA Range is Value Alpha's estimated valuation range for a private company, expressed as a low-to-high band rather than a single number. It blends multiple methodologies such as DCF, comparable companies, and precedent transactions to reflect the realistic spread of what a business could be worth in a transaction.
VARI (Value Alpha Range Index): VARI, the Value Alpha Range Index, is a proprietary metric that summarizes where a company's valuation falls within its expected range and how the supporting methods converge. It distills multiple valuation signals into a single, comparable index, helping owners quickly gauge the strength and positioning of their business's valuation.
Confidence Score: The Confidence Score indicates how reliable a valuation estimate is, based on the quality, completeness, and consistency of the underlying data and methods. A higher score signals strong, corroborating inputs and tight agreement between valuation approaches, while a lower score flags missing data or wide divergence that warrants caution when interpreting the result.