Valuation Glossary

A secondary buyout is a financial transaction where a private equity firm sells its investment in a company to another private equity firm. Secondary buyouts can happen for various reasons, such as the original private equity firm wanting to exit the investment to realize gains or the new private equity firm seeing potential for further growth and value creation.

An S corporation is a special type of corporation in the US that meets specific Internal Revenue Code requirements. The main benefit of an S corporation is that it allows profits to be passed directly to shareholders without being subject to corporate income tax.

A rule of thumb is a simple and practical guideline or general principle that helps with making decisions or estimates based on common sense or experience. It's a quick and easy way to get a rough idea or approximation without doing complex calculations. However, it may not be perfectly accurate or suitable for every situation, so it's important to consider the specific circumstances and use it as a starting point rather than a definitive answer.

The risk-free rate is the return you can expect to earn on an investment without taking on any risk. It represents the minimum level of return that investors would require for investing in an asset that is considered to have no chance of defaulting or losing value. Typically, government bonds or treasury bills are considered risk-free because they are backed by the government. The risk-free rate is used as a reference point for evaluating the potential returns of other investments that carry higher levels of risk.

Risk premium refers to the extra return that investors expect to earn for taking on additional risk in an investment. It represents the compensation for bearing the uncertainty and potential losses associated with riskier investments compared to a risk-free investment. Essentially, it is the difference between the expected return on a risky investment and the return on a risk-free investment. A higher risk premium reflects a higher level of perceived risk and indicates that investors require a greater reward for taking on that risk. It helps investors assess the potential returns and evaluate the trade-off between risk and reward in their investment decisions.