30+ Terms
Business Valuation Glossary
Key Terms Defined
Business valuation relies on a specialized vocabulary that connects financial analysis, deal structuring, and market comparables into a unified framework for determining what a company is worth. Whether you are calculating seller's discretionary earnings for the first time, interpreting an EBITDA multiple from a broker's listing, or evaluating earnout terms in a purchase agreement, understanding these concepts is the foundation of informed decision-making.
Each term below includes a plain-language definition, formula (where applicable), practical usage context, and frequently asked questions. Select any term to see the full explanation, or use our free business valuation calculator to apply these concepts to your own financials.
Earnings Metrics
7Key profit measures used to determine what a business earns and what a buyer would pay.
Seller's Discretionary Earnings (SDE)
SDE = Net Income + Owner's Compensation + Owner's Perks + Depreciation & Amortization + Interest Expense
Seller's discretionary earnings (SDE) is the total pre-tax economic benefit a single owner-operator derives from a business in one year. SDE...
EBITDA
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's core operational profitability by...
Net Income
Net Income = Total Revenue - COGS - Operating Expenses - Interest - Taxes - Depreciation - Amortization
Net income is the total profit a business earns after deducting all expenses, including cost of goods sold, operating expenses, interest, ta...
Free Cash Flow (FCF)
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Free cash flow is the cash a business generates from operations after subtracting capital expenditures required to maintain or expand its as...
Normalized Earnings
Normalized earnings are a company's earnings adjusted to remove one-time, irregular, or non-recurring items that do not reflect ongoing oper...
Add-Backs
Add-backs are expenses recorded on a company's income statement that are added back to net income when calculating seller's discretionary ea...
Owner Benefit
Owner Benefit = Net Profit + Owner's Salary + Owner's Perks + Depreciation & Amortization
Owner benefit, also called owner's benefit or owner's cash flow, is the total financial benefit a business provides to its owner-operator in...
Valuation Multiples
3Ratios applied to earnings or revenue to estimate business market value.
SDE Multiple
Business Value = SDE x SDE Multiple
An SDE multiple is the factor applied to a business's seller's discretionary earnings to estimate its market value. SDE multiples for small ...
EBITDA Multiple
Enterprise Value = EBITDA x EBITDA Multiple
An EBITDA multiple is a valuation ratio that expresses a company's enterprise value as a multiple of its EBITDA. EBITDA multiples are the st...
Revenue Multiple
Business Value = Annual Revenue x Revenue Multiple
A revenue multiple is a valuation ratio that expresses a company's value as a multiple of its annual revenue or trailing twelve-month (TTM) ...
Valuation Methods
4Recognized approaches for calculating what a business is worth.
Discounted Cash Flow (DCF)
DCF Value = Sum of (FCF / (1 + r)^n) + Terminal Value / (1 + r)^n
Discounted cash flow (DCF) is a valuation method that estimates the present value of a business by projecting its future free cash flows and...
Asset-Based Valuation
Asset-Based Value = Total Assets (at Fair Market Value) - Total Liabilities
Asset-based valuation is a method that determines business value by calculating the net value of all tangible and intangible assets minus to...
Comparable Transactions (Comps)
Comparable transactions, also called market comparables or comps, is a valuation method that estimates business value by analyzing the price...
Rule-of-Thumb Valuation
Rule-of-thumb valuation is an informal, industry-specific shorthand for estimating business value using a simple formula or percentage of a ...
Deal Terms & Structure
5Components of business acquisition agreements and transaction mechanics.
Goodwill
Goodwill is the intangible asset that represents the excess of a business's purchase price over the fair market value of its identifiable ne...
Working Capital
Working Capital = Current Assets - Current Liabilities
Working capital is the difference between a business's current assets (cash, accounts receivable, inventory) and current liabilities (accoun...
Seller's Note (Seller Financing)
A seller's note, also called seller financing or a vendor take-back, is a loan provided by the business seller to the buyer as part of the p...
Earnout
An earnout is a contractual provision in a business sale where a portion of the purchase price is contingent on the business achieving speci...
Due Diligence
Due diligence is the comprehensive investigation a buyer conducts before completing a business acquisition. This process verifies the accura...
Financial Concepts
11Foundational financial metrics, rates, and discounts used in valuation analysis.
Gross Margin
Gross Margin = ((Revenue - COGS) / Revenue) x 100
Gross margin is the percentage of revenue remaining after subtracting the direct cost of goods sold (COGS), expressed as a ratio. It measure...
Discount Rate
The discount rate is the rate of return used to convert future cash flows into their present value in a discounted cash flow (DCF) valuation...
Terminal Value
Terminal Value = Final Year FCF x (1 + g) / (r - g), where g = long-term growth rate and r = discount rate
Terminal value represents the estimated value of a business beyond the explicit forecast period in a discounted cash flow (DCF) analysis. Be...
Capitalization Rate (Cap Rate)
Capitalization Rate = Discount Rate - Long-Term Growth Rate; Business Value = Earnings / Cap Rate
The capitalization rate, or cap rate, is the rate of return used to convert a single year's earnings into a business value in the capitaliza...
Fair Market Value (FMV)
Fair market value is the price at which a business would change hands between a willing buyer and a willing seller, neither being under comp...
Book Value
Book Value = Total Assets - Total Liabilities
Book value is the net value of a company's assets as recorded on the balance sheet, calculated as total assets minus total liabilities. It r...
Enterprise Value (EV)
Enterprise Value = Equity Value + Total Debt - Cash and Cash Equivalents
Enterprise value is the total value of a business to all capital providers, including both equity holders and debt holders. It is calculated...
Weighted Average (in Valuation)
In business valuation, a weighted average is a calculation method that assigns different levels of importance to multiple valuation estimate...
Risk Premium
A risk premium is the additional return an investor requires above the risk-free rate to compensate for the uncertainty of investing in a pa...
Discount for Lack of Marketability (DLOM)
A discount for lack of marketability (DLOM) is a percentage reduction applied to the value of a business interest to reflect the fact that p...
Minority Discount
A minority discount is a percentage reduction applied to the pro-rata value of a business interest when the interest being valued represents...
From Definitions to Dollars
Knowing the terminology is the first step. Applying it to your own business is where the value lies. Run a free valuation with your numbers to turn these concepts into a concrete dollar estimate by applying SDE, EBITDA, and revenue multiples calibrated to your specific industry. Enter your financial data and receive an instant valuation range based on the same methods professional appraisers and business brokers use every day.
For industry-specific context, including the multiples, margins, and growth rates that shape valuations in your sector, explore our industry valuation data covering 50+ business types from restaurants and SaaS companies to dental practices and construction firms.
Frequently Asked Questions
What does SDE mean in business valuation?
SDE stands for seller's discretionary earnings. It measures the total financial benefit available to one full-time owner-operator by adding back the owner's compensation, personal perks, depreciation, amortization, and interest to net income. SDE is the standard earnings metric for valuing small businesses with under $5 million in revenue.
What is the difference between SDE and EBITDA?
The key difference is owner compensation. SDE adds back the owner's salary and benefits to show total cash flow available to an owner-operator. EBITDA does not add back owner compensation, making it the standard for businesses with hired management or revenue above $5 million. Individual buyers use SDE because they plan to run the business themselves. Institutional buyers and private equity firms use EBITDA because they will hire a manager.
What is fair market value in business valuation?
Fair market value is the price at which a business would change hands between a willing buyer and a willing seller, both having reasonable knowledge of relevant facts and neither being under compulsion to act. It is the most commonly applied standard of value for business sales, SBA loans, and IRS reporting.
What is goodwill in a business valuation?
Goodwill represents the intangible value of a business above its tangible net assets. It includes brand reputation, customer relationships, trained workforce, proprietary processes, and other factors that generate earnings beyond what the physical assets alone could produce. In a divorce valuation, courts distinguish between personal goodwill (tied to the owner) and enterprise goodwill (transferable to a buyer).
What is a valuation multiple?
A valuation multiple is a ratio used to estimate business value by multiplying an earnings metric (SDE, EBITDA, or revenue) by a factor derived from comparable transactions. For example, if similar businesses sell for 3x SDE, a business earning $200,000 in SDE would be valued at approximately $600,000. Multiples vary significantly by industry, business size, and risk profile.
Ready to Value Your Business?
Stop reading definitions and start calculating. Enter your seller's discretionary earnings or EBITDA, select your industry, and get a data-backed valuation estimate in under five minutes.
Try the Free Valuation Calculator