ICA Glossary

A/P - Accounts Payable
Definition: Invoices for goods or services that are due vendors, employees, and government. They have been expensed for accounting purposes, but not yet paid.

A/R - Accounts Receivable
Definition: Outstanding customer invoices that have been recognized as revenue, but not yet collected.

Business Value
Definition: Expressed monetarily, what your business or business opportunity is worth. Business Value can be different for buyer, seller, and management. Business Value is synonymous with Enterprise Value, Firm Value, and Company Value. If interest bearing debt is outstanding then the Equity Value will be less than the Business Value. Most business valuations will separate the Intrinsic Value of the business from any real estate the company may own.

CAPX - Capital Expenditures
Definition: Annual purchases of long term assets such as computers, machinery, vehicles, tools, leasehold improvements, etc. The useful life of these assets is greater than one year. Companies may finance the purchase of CAPX with debt, equity, or surplus cash from the business.

Capitalized Lease Payments
Definition: Payments to a lender for long term use of equipment or machinery used in the business. Capitalized lease payments reflect a choice as to how to finance an asset of the business.

Cost of Capital
Definition: Expected rate of return used to evaluate your business opportunity. The Cost of Capital represents what investors expect to earn on their investment taking into consideration the risk and volatility of your company/industry. Volatility doesn't mean your business is good or bad. Great businesses can be highly volatile; but volatility does create uncertainty. The greater the uncertainty, the higher the Cost of Capital needed to adequately compensate investors. Also known as K, WACC, discount rate, hurdle rate.

COS - Cost of Sales
Definition: Represents the direct costs of service or production. These highly variable expenses track in direct proportion to company sales.

CY - Current Year
Definition: Like LTM often used when referring to financial statistics.

DCF - Discounted Cash Flow
Definition: This widely recognized valuation technique emphasizes the future revenue and expenditure fundamentals of your company to estimate cash flow and value. It gives the best estimate of your companys Intrinsic Value. Other techniques include using sales prices for what other comparable businesses sold for, looking at stock market benchmarks for companies in your industry, tangible asset value, opportunity cost, make or buy, or simply gut instinct.

D/K - Debt to Capital Ratio
Definition: Interest Bearing Debt divided by Total Capital (Debt plus Equity). This financial ratio represents the amount of leverage or debt used in the calculation of the discount rate used in your analysis.

EBITDA - Earnings Before Interest Taxes Depreciation and Amortization
Definition: Fundamental measure of your company's operational health. A key measure in determining the amount of financing a lender can provide. Positive EBITDA allows the business to pay interest, taxes, dividends, and repay loans. EBITDA is equal to Revenue less Cost of Sales and SGA.

Equity Value
Definition: Equal to Business Value less Net Debt. If your business opportunity has debt outstanding it must be subtracted to determine what the business owner is entitled to.

Forecast Period
Definition: Equal to the number of years in your business projections. Goodwill Definition: Excess of the purchase price over a company's acquired assets. The goodwill value shown on a company's books is periodically revised based upon an updated valuation of the company's future prospects. Publicly traded companies must reassess goodwill on an annual basis.

Gross Margin
Definition: Revenue less COS. Expressed as a percentage. This is the first measure of a company's financial performance.

Intrinsic Value
Definition: The value of your company based upon the forecasted cash flow fundamentals, plus the cash flow beyond your forecast (known as the Terminal Value). Intrinsic Value is best thought of as what the projected cash flows of your business opportunity are worth to you. Helping others to understand your company's Intrinsic Value based upon its cash flow potential will maximize the sales price.

LTM - Last Twelve Months
Definition: Generally referred to in this manner when referencing a financial statistic, e.g., Business Value as a Multiple of Sales (using LTM results).

NCF - Net Cash Flow
Definition: Equal to Operating Cash Flow (OCF) minus CAPX. The amount of cash generated or used by the business for a given year after Net Income, Working Capital, Capital Expenditures, and market adjusted business owner's compensation. Net Cash Flow whether historical or projected is considered the ultimate measure of business performance.

New Funding
Definition: If your business opportunity has negative NCF (Net Cash Flow), based upon your projections, then additional equity investment or loans will be required to finance the business. Also referred to as New Money, External Funding Requirement.

Net Debt
Definition: Interest bearing debt minus cash balance. Used in the calculation of Equity Value (Business Value less Net Debt). n.a. - Not Available, Not Applicable n.m. - Not Meaningful Used when a calculation produces an erroneous result.

NOL - Net Operating Loss
Definition: Equals negative earnings before taxes on the income statement. The NOL is carried forward to a year or years where this historical loss can be offset against current year earnings. Doing so reduces the current year tax liability and provides a positive impact to cash flow and value. Normalized Definition: To place on a comparable basis. In a typical valuation, historical results are adjusted to remove interest expense, goodwill amortization, and any taxes paid. Both historical and future financial results are also adjusted to remove any excess business owner's compensation. Typically, any discretionary expenses that would not be paid to a non-business owner, professional manager are also removed. Normalizing financial results allows for a better comparison of company results over time.

OCF - Operating Cash Flow
Definition: Cash flow generated from business operations prior to CAPX. OCF is another key measure of financial performance that illustrates the financial health of a business. Companies with positive Operating Cash Flow can more easily invest in machinery and equipment to grow the business.

Other Income/(Expense)
Definition: Not considered part of the core business operations. Should only be included if expected to continue into the future. Prospective business owners will likely completely ignore any financial projections in this category.

PCFwOC - Pretax Cash Flow with Business Owner's Compensation
Definition: Sum of EBITDA, Working Capital Source/(Use) of Funds, and Market Value of Business Owner's Compensation. Very useful in showing how much money the business owner/operator expects to cash flow from the business before income taxes and capital expenditures are paid. If this value is negative, then operations must improve significantly within one to two years to avoid bankruptcy (duration depends upon the business owners access to financing).

PPE
Definition: Balance Sheet amount of Gross Property Plant and Equipment (PPE). After accumulated depreciation is subtracted, it is referred to as Net PPE.

Present Value
Definition: Value of future cash flows as if they were available today. A simple example is that an individual might be willing to receive $100 per year for the next ten years for a total of $1,000 as an alternative to receiving $600 (the "present value" of $1,000) today. The $600 is less than the total of $1,000, but it is a "bird in the hand" - and the investor doesn't have to wait for ten annual payments. Buying or selling a business is much the same way. What are you willing to pay or receive now for a company in exchange for its future cash flows?

SGA - Sales General & Administrative
Definition: General overhead and fixed expenses of the business that typically must be paid in a given year regardless of sales volume. FYI, many companies split their labor expense between production (COS) and administration/management (SGA) to allocate the variable versus fixed labor charges.

Straight Line Depreciation
Definition: Depreciation expense evenly amortized over an asset's useful life.

Tax Effect
Definition: Tax payments or benefits based upon taxable income will impact the cash flow of your business opportunity. This is an important assumption in estimating the economic value of your business opportunity, regardless of whether taxes are paid at the company level or personal level.

TV - Terminal Value
Definition: Equals the Present Value of your company's cash flows beyond your forecast projection. The Terminal Value is combined with the Present Value of your forecast to determine Business Value. We develop the estimate of our client company's Terminal Value based upon the future profile of the company: business longevity, revenue growth, marketability, exit from the business, and end of the business life cycle.

Unlevered
Definition: Refers to the calculation of cash flow without the effects of debt financing (e.g., no interest expense, issuance or repayment of debt). Unlevered cash flow shows the pure operating performance of a company. Our unlevered financial analysis provides a true picture of your business opportunity's fundamental performance.

USD United States Dollar Volatility
Definition: Refers to the movement of your business and your company's industry in relation to the economy as a whole. If your business moves up and down in the same fashion as the economy, then your business has an average level of volatility. However, if your business either performs much better or much worse than the economy, your business has greater volatility. In general, more volatile businesses require a promise of greater financial returns to compensate their investors for greater uncertainty.

Working Capital
Definition: Represents the Current Assets and Current Liabilities of your company - most significantly Accounts Receivable (A/R), Inventory, and Accounts Payable (A/P). Increases or decreases in Current Assets and Current Liabilities create a cash flow source or use of funds. Understanding your Working Capital source or use of funds is important to understanding how your company's Operating Cash Flow (OCF) is calculated. For example when A/R increases as sales grow from year to year, a use of funds will occur because revenues are greater than the actual cash collected. Similarly if your operating expenses increase the company's A/P balance will increase and create a source of funds because recorded expenses are greater than cash payments made to creditors. For example, retailers' changes in the inventory balance can require cash funding to support higher inventory levels or provide a source of funds if inventory balances are lowered, while still maintaining current sales volume levels.