Paul Horton: Business Valuation Law

As a business owner, present or future, you’ll want to be familiar with what business valuations are and the required accounting terminology that is used in a business valuation. Here you will find useful business and accounting terms in alphabetical order.

Accounts payable: Business debts that generally are payable within 30 days.

Accounts receivable: Money that customers presently owe the company.

Accrued payroll and payroll taxes: Accrued payroll is payment owed for employee work already done. Accrued payroll taxes are employment taxes for work already performed by employees, which have not yet been turned over to the state or federal revenue services.

Appraisal: See “Valuation.”

Assets: Anything with monetary value that a business owns. See “Current Assets” and “Fixed Assets.”

Balance sheet: A financial statement showing the assets, liabilities, and net worth of a business as of a specific date.

Book value: Total assets, without the inclusion of intangibles such as goodwill, minus total liabilities. The book value of a company is its base liquidation value.

Cost approach to valuation: This valuation approach considers the replacement cost of the company’s assets as an indication of what a prudent buyer would pay for the business.

Current assets: Cash, accounts receivable, securities, inventory, and any other assets that can be converted into cash within one year or during the normal course of business.

Current liabilities: Liabilities payable within one year. They include accounts payable, notes payable, accrued expenses such as wages and salaries, taxes payable, and the portion of long-term debts due within one year.

Current ratio: Current Ratio = Total Current Assets/Total Current Liabilities. The current ratio shows a company’s financial solvency.

Depreciation: An accounting method to take into account an asset’s physical deterioration. It allocates the asset’s cost over its useful life.

Debt/worth ratio: Debt/Worth Ratio = Total Liabilities/Net Worth. Debt/worth ratio is a measure of how dependent a company is on borrowing rather than equity.

Fair market value: A price at which a willing buyer and a willing seller, both knowing the relevant facts about the business, would transfer a company.

Fixed assets: Assets that are used to produce revenue and are not intended for sale, such as office furniture, vehicles, real property, building improvements, and factory equipment. Also called “long-term” assets.

Generally accepted accounting principles (GAAP): Accepted conventions, rules, and procedures that define accounting practice.

Goodwill: Goodwill is based on a company’s reputation and relationships with customers, vendors and the community, and its participation in trade-related activities. In broad terms, goodwill is a measure of how willing these individuals would be to continue doing business with a company.

Income approach to valuation: Any valuation method that is based on the company’s expected income stream.

Income statement: See “Profit/Loss Statement.”

Intangible assets: Business assets that are not material in nature, which have been created through time and effort. Some examples of intangible assets are patents, specialized mailing lists, and goodwill.

Inventory: Goods ready to be sold, raw materials, and partially completed goods that will be sold.

Liabilities: Debts owed by the business. See “Current Liabilities” and “Long-Term Liabilities.”

Liquidation: Selling the business’s assets rather than the entire business as a going concern.

Liquidation value: The estimated total amount that could be realized from selling the business’s individual assets, after satisfying all of the business’s liabilities.

Liquidity: How quickly and easily an asset can be converted into cash.

Long-term assets: See “Fixed Assets.”

Long-term liabilities: Debts owed by the business which must be repaid more than one year from the date of the balance sheet.

Market approach to valuation: Any valuation method that compares the company’s financial data with multiples from acquisitions of similar businesses or from stock prices of comparable publicly traded companies.

Market value: See “Fair Market Value.”

Net worth: The business owner’s equity in a company, calculated by subtracting the company’s total liabilities from its total assets.

Price/earnings (P/E) ratio: The relationship between the selling price of a company’s common stock to the company’s annual profits per share.

Prepaid expenses: The cost of goods or services already paid for but not yet fully used or consumed. Prepaid insurance premiums and prepaid rent are examples of prepaid expenses.

Profit/loss statement: A financial statement summarizing the results of business activities (income and expenses) for a given period of time. Also called an income statement.

Quick ratio: Quick Ratio = (Current Assets – Inventory)/Current Liabilities. The quick ratio shows a company’s liquidity, and helps determine whether a business can meet its obligations in hard times.

Securities: Notes, stocks, bonds, debentures, investment contracts, or any other interests or instruments commonly known as “securities.”

Under-capitalization: When available funds are consistently insufficient for a business, hampering its efficient operations.

Valuation: A value estimate or opinion, or the process of estimating value. A valuation report is usually a written document setting forth an opinion of a business’s value as of a specified date, supported by the presentation and analysis of relevant data.

Working capital: The capital available to the business on a short term, calculated by subtracting current liabilities from current assets.

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