Page 101 - M & A Disputes

Engagement to estimate value. An engagement, or any part of an engagement (for example, a tax,
litigation, or acquisition-related engagement), that involves determining the value of a business,
business ownership interest, security, or intangible asset. Also known as valuation service.
(Practitioner — Appendix C)

Equity. The owner’s interest in property after deduction of all liabilities. (Practitioner — Appen-
dix B)

Equity net cash flows. Those cash flows available to pay out to equity holders (in the form of divi-
dends) after funding operations of the business enterprise, making necessary capital investments,
and increasing or decreasing debt financing. (Practitioner — Appendix B)

Equity risk premium. A rate of return added to a risk-free rate to reflect the additional risk of equi-
ty instruments over risk free instruments (a component of the cost of equity capital or equity dis-
count rate). (Practitioner — Appendix B)

Equity value. The value of an entity available to the stockholders (equity owners). Generally ac-
cepted definitions include the book value of equity (generally accepted to mean the value of the
assets of an entity less its liabilities.) The market equity value of an entity is generally accepted
to mean the number of all outstanding shares of stock multiplied by the price per share. fn 7

Escrow. 1. A legal document or property delivered by a promisor to a third party to be held by the
third party for a given amount of time or until the occurrence of a condition, at which time the
third party is to hand over the document or property to the promisee <the agent received the es-
crow two weeks before the closing date>. 2. An account held in trust or as security <the earnest
money is in escrow>. 3. The holder of such a document, property, or deposit <the attorney per-
formed the function of escrow>. 4. The general arrangement under which a legal document or
property is delivered to a third person until the occurrence of a condition <creating an escrow>.
(BLD)

Escrow agreement. The instructions given to the third-party depositary of an escrow. (BLD)

Excess earnings. That amount of anticipated economic benefits that exceeds an appropriate rate of
return on the value of a selected asset base (often net tangible assets) used to generate those an-
ticipated economic benefits. (Practitioner — Appendix B)

Excess earnings method. A specific way of determining a value indication of a business, business
ownership interest, or security determined as the sum of a) the value of the assets derived by cap-
italizing excess earnings and b) the value of the selected asset base. Also frequently used to value
intangible assets. See excess earnings. (Practitioner — Appendix B)

Excess operating assets. Operating assets in excess of those needed for the normal operation of a
business. (Practitioner — Appendix C)

Fair market value. The price, expressed in terms of cash equivalents, at which property would
change hands between a hypothetical willing and able buyer and a hypothetical willing and able

fn 7 See footnote 4.

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