Valuation terms defined

The four questions that resolve most valuation confusion

Which earnings? Reported, adjusted, trailing twelve months, or forecast. A multiple applied to a forecast and the same multiple applied to last year's audited figure are entirely different offers, and the difference is rarely stated aloud.

Which value? Enterprise or equity. Almost every headline price is enterprise value; almost every seller is thinking about equity value. Establish which is being discussed before negotiating either.

Which stake? A controlling interest and a minority interest are valued differently, and neither is simply a percentage of the other. Control premiums and minority discounts exist because control confers the ability to direct cash.

Whose synergies? If a valuation includes benefits only a specific buyer can realise, it is that buyer's valuation, not the market's. Sellers frequently anchor on a strategic number and then negotiate with financial buyers who cannot reach it.

Where valuation language causes disputes

Most valuation arguments are terminological rather than mathematical, and three recur often enough to be worth pre-empting.

Debt-free, cash-free. Almost every offer assumes it, and the definition of debt is negotiable in ways sellers do not expect. Buyers frequently seek to treat items as debt-like — deferred consideration owed on a past acquisition, unpaid dividends, provisions, sometimes even accrued leave. Each item reclassified as debt reduces equity value directly.

Normal working capital. The benchmark against which completion is measured is usually a twelve-month average, but a seasonal business will find that average unrepresentative of any given completion date. Agree the benchmark and how seasonality is handled at the same time as the price, not afterwards.

Surplus cash. Cash the business genuinely does not need is added to equity value; cash required to operate is not. Where the line falls is a judgement, and on a cash-generative business it can be worth a great deal.

Terms that behave differently in African markets

Discount rates are structurally higher, carrying country risk, currency exposure and illiquidity above the ordinary cost of capital. A valuation that looks conservative against international comparables may simply be correctly priced for the market it sits in.

Illiquidity discounts bite harder where the buyer population is small. A business with three plausible acquirers is worth less than an identical business with thirty, and no amount of process design changes that arithmetic.

Currency is frequently unstated. A valuation agreed in rand and one agreed in dollars are different deals once a holding period passes, and which one governs at exit is a term to settle explicitly at the outset.

Comparables are scarce. Where few relevant private transactions exist, advisers reach for listed comparables and apply layered discounts — each defensible, and each a judgement stacked on the last. Ask what the underlying transactions actually were.

Index of terms

Adjusted EBITDA

Reported EBITDA restated for owner remuneration, personal expenses, one-off items and related-party terms, to show what the business earns under normal ownership.

Asset-based valuation

Valuing a business by what its assets would cost to replace or fetch if sold, rather than by its earnings.

Comparable transaction

A completed sale of a similar business, used to derive a multiple applicable to the business being valued.

Control premium

The additional amount a buyer pays for a controlling stake over the pro-rata value of a minority holding.

Discount rate

The rate at which future cash flows are reduced to present value, reflecting the risk of not receiving them. Small changes swing a DCF dramatically.

Discounted cash flow (DCF)

A valuation method forecasting future free cash flow and discounting it, plus a terminal value, back to present value.

EBITDA

Earnings before interest, tax, depreciation and amortisation — a proxy for operating earnings that allows comparison across differently financed businesses.

Enterprise value

The value of the business operations, debt-free and cash-free. The figure usually quoted as the headline price.

Equity value

What shareholders actually receive: enterprise value less debt, plus surplus cash, adjusted for working capital.

Free cash flow

Cash generated by operations after tax and the capital expenditure needed to sustain the business — the amount genuinely available to providers of capital.

Goodwill

The excess of purchase price over the fair value of identifiable net assets, representing brand, relationships and other intangibles.

Illiquidity discount

A reduction applied because private company shares cannot be sold quickly or easily, unlike listed shares.

Key person risk

The risk that a business depends on one or a few individuals whose departure would materially damage it.

Minority discount

A reduction applied to a stake that carries no control, reflecting the holder's inability to direct the business.

Multiple

The factor applied to earnings to derive value — shorthand for how many years of current earnings a buyer will pay.

Net asset value

Total assets less total liabilities, as recorded in the accounts.

Normalisation

The process of adjusting reported earnings to reflect sustainable performance under normal ownership.

Recurring revenue

Revenue contracted or reliably repeating, as distinct from project or one-off revenue. It attracts a premium because it reduces uncertainty about future earnings.

Sensitivity analysis

Testing how a valuation changes as key assumptions vary. A valuation without it is a claim rather than an analysis.

Size premium

The tendency of larger businesses to attract higher multiples for the same earnings, reflecting lower fragility and a wider buyer population.

Sum of the parts

Valuing a business by valuing each division or asset separately and adding them, used where units have very different characteristics.

Synergies

Cost savings or revenue gains a specific buyer can achieve by combining the target with their own operations, which is why a trade buyer may pay more than a financial one.

Terminal value

The estimated value of all cash flows beyond the explicit forecast period in a DCF, often more than half the total.

Trailing twelve months (TTM)

The most recent twelve months of performance, used to avoid distortions from a financial year that ended some time ago.

WACC

Weighted average cost of capital — the blended cost of a business's debt and equity, commonly used as the discount rate in a DCF.

Working capital adjustment

A price adjustment at completion reflecting whether working capital delivered matches the agreed normal level.