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Glossary

Adjusted Book Value.  The book value (equity) of a company after adjusting the values of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet. 

Adjusted Earnings.  The earnings of a business after adjustment for one-time or extraordinary expenses, excess owner compensation, and discretionary expenses or other expenses that are not essential for the successful ongoing operation of the business. 

Acceleration Clause.  A clause used in a note and/or security agreement which gives the lender the right to demand payment in full if a certain event occurs such as default or if the ownership of the business changes without the lender’s consent. Sometimes referred to as a “due on sale” clause.

Allocation.  A breakdown of the purchase price usually required when a business is sold.  For example, the allocation might contain a breakdown of the inventories, fixtures and equipment, leasehold improvements, goodwill, and any other purchased assets.  Generally, value is placed on each component of the allocation and the buyer and seller agree on this breakdown.  The IRS requires that such an allocation be a part of the buyer’s and seller’s tax return when a sale takes place; Form 8594, the “Asset Acquisition Statement”, must be filed with the buyer’s and seller’s tax return for the year in which an “applicable asset acquisition” takes place.

Asking Price.  The total amount for which a business or an ownership interest is offered for sale.

Asset Approach.  A way of estimating the value of a business ownership interest using one or more methods based on the value of the Adjusted Book Value of the company. 

Asset Sale.  A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser.  The corporate entity is not transferred. 

Assignment.  A transfer in writing of an interest in property or other things of value from one person or entity to another.

Attorney-In-Fact.  One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.

Base Year.  The Company’s current fiscal year.  Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management. 

Blue Sky.  Any intangible portion of a price above the maximum goodwill that can be reasonably supported through the application of established valuation methodology. 

Book Value.  The value, net of depreciation, at which an asset appears on a company’s balance sheet. 

Bulk Sale.  A transfer in bulk of all or substantially all of the inventory and fixtures of a business that is not in the ordinary course of business.

Bulk Sales Act.  Laws enacted by the states to protect creditors against secret sales of all or substantially all of a business’s goods.  It requires certain notices prior to the sale and sets forth ways of voiding the sale (see Uniform Commercial Code).  NOTE:  No longer required in New Mexico since 7-1-92; however, each state has its own Bulk Sales laws.

Business Broker.   A Business Broker is an intermediary dedicated to serving clients and customers who desire to sell or acquire businesses.  A business broker is committed to providing professional services in a knowledgeable, ethical and timely fashion.  Typically, a Business Broker provides information and business advice to sellers and buyers, maintains communications between the parties, and coordinates the negotiations and closing processes to complete desired transactions.

Capital Structure.  The mix of invested equity and debt financing of a business enterprise. 

Capitalization Factor or Rate.  Any multiple or divisor used to convert anticipated economic benefits over time into a present economic value. 

Capitalizing Net Income.  Determining the value of a Company by dividing annual adjusted income by the capitalization rate (required ROI). 

Cash Flow.  The amount by which the total cash coming into a business from all sources exceeds the total cash going out. 

Cash Flow Statement.  An analysis of all the changes that affect the cash account during an accounting period.  These changes may be shown as either sources or uses of cash. 

Cashier's Check.  A check drawn on the bank’s own funds.  It is often used to close a sale because there is generally no waiting for the check to clear.

Caveat Emptor.  “Let the buyer beware”.  

Certified Check.  A personal check guaranteed by the bank.  The bank holds the necessary funds and will not accept any withdrawals against the certified amount.  The bank also will not usually honor a stop payment on a certified check.

Chattel (U.C.C.) Search. A chattel is an article of personal property and it includes both animate and inanimate property. U.C.C. stands for the Uniform Commercial Code that governs the granting of security agreements.  A chattel search is a review of the appropriate county and Secretary of State records in regard to any liens against chattels, tax liens and judgments.

Client.   An entity with which a Business Broker has a fiduciary relationship.

Closing.  When all the details of the business sale are completed and the money distributed to the seller, seller’s agents, creditors and others.

Closing Documents.  The legal documents that are part of a business closing.  They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreement, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.

Co-Brokerage.   An agreement between two or more Business Brokers for sharing services, responsibility and compensation on behalf of the client.

Co-Business Broker.  A Business Broker who shares services, responsibility and compensation on behalf of a client

Contingency.  A clause in a agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event.  For example, the sale of the business is contingent upon the buyer obtaining financing.

Covenant-Not-To-Compete.  An agreement made part of a purchase contract, in which the seller promises not to enter into a similar or competing business, for a specified period of time, within a designated area.

Customer.   An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker

dba. “doing business as” - an identification of the trade name of the business, which may differ from the legal corporate name.

Deal Structure.  The combination of types of payment by which the purchase of a business is accomplished.  It can include cash, notes, stock, consulting agreements, earn-out provisions, and covenants not to compete.  The sale can take the form of an asset sale or a stock sale.  See those definitions. 

Discount Rate.  A rate of return used to calculate the present value of a stream of payments. 

Discretionary Earnings.  Earnings of a business enterprise prior to these expenses:

  • Income taxes

  • Non-operating income & expenses

  • Non-recurring income & expenses

  • Depreciation and amortization

  • Interest expense or income

  • A single owner’s total compensation and benefits.

Earn-out.  The portion of the purchase price that is contingent on future performance of the business.  It is payable to the sellers after certain predefined levels of sales or income are achieved in the year(s) after acquisition. 

Enterprise Value.  The total value of the stock of the business, plus the face value of all interest-bearing debt owed by the business. 

Exclusive Right To Sell Listing.  When a business owner gives one Broker or Agent the authority to sell his/her business. The Broker or Agent receives commission no matter who sells the business - even if the seller finds the buyer during the listing period.  (See Agency Listing)

Fair Market Value.  The estimated price at which an asset or service would pass from a willing seller to a willing buyer, assuming that both buyer and seller are acting rationally, at arms length, in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.  It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale. 

Financing Statement.  A recorded document filed generally in the secretary of state’s office of the state and shows that there is a lien against the fixtures and equipment (personal property) of the business.

Finders Fee.   An amount paid to another party for locating and referring a client or customer.

Fixed Interest Rate.  An interest rate which does not fluctuate over the term of the loan. 

Franchise.   The right or license granted to an individual or group (franchisee) to market a company’s (franchisor’s) goods or services in a particular geographic territory.

Free Cash Flow.  Cash available for distribution to owners after taxes but before the effects of financing.  Calculated as net income, plus depreciation and amortization, plus interest expense, less required capital expenditures and changes in working capital. 

Going Concern Value.  The gross value of a company as an operating business.  This value may exceed or be at a discount from the liquidation value.  The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place. 

Goodwill.  The amount by which the price paid for a company exceeds the company’s estimated net worth at market value of the underlying tangible assets and liabilities.  Goodwill is a result of name, reputation, customer loyalty, location, products, etc. 

Hard Assets.  (Also referred to as “Tangible Assets”)  Those assets which are material or physical (e.g. inventory, equipment, tools, vehicles, real estate, leasehold improvements).

Income (Income Based) Approach.  General way of determining the value of a business, business ownership interest, security, or intangible asset using one or more methods that calculate the present value of anticipated future income. 

Instrument.  A written legal document, created to affect the rights of the parties.

Intangible Asset.  That which has no physical existence but represents value, such as goodwill, going concern value, business trade name.  (See Blue-Sky)

Intrinsic Value.  An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price. 

Investment Value.  The value to a particular investor based on individual investment requirements and expectations. 

Lease. A written legal document in which possession of a property is given by the owner (lessor) to second party (lessee) for a specified time and for a specified rent, and setting forth the conditions upon which the lessee may use and/or occupy the property.

Lease with option to purchase.  A lease in which the lessee has the right to purchase the property for a stipulated price at or within a stipulated time.

Leasehold Improvements.  Any article or fixture that is attached to land or buildings.

Letter of Intent (LOI).  A description of the key points in a potential acquisition of a business. Drafted to see if the parties are in general agreement on key issues before proceeding further in negotiations, and is generally designed not to be legally binding on either party. Sometimes buyers or sellers will use a more informal Memorandum of Understanding to identify the key points of a potential business purchase.

NOTE:  Key points that buyers and sellers want to come to a general agreement on often include: stock or asset purchase, purchase price, down payment, seller financing terms, liabilities assumed, covenant-not-to-compete terms, consulting/employment agreement terms and real estate lease terms.

Liquidation or Liquidating Value.  The estimated value, net of liabilities, of a company based on the market value of its assets. 

Market (Market-Based) Approach.  General way of determining a value indication of a business, business ownership interest, security, intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold. 

Merger.  Any combination that forms one company from two or more previously existing companies.

Misrepresentation.  A statement contrary to fact.  If the statement or action is made with intent to deceive, it may be deemed to be fraudulent.

Net Book Value.  With respect to a business enterprise, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity).  With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise. 

Net Cash Flow.  Cash available for distribution after taxes and after the effects of financing.  Calculated as net income plus depreciation less expenditures required for working capital and capital items. 

Net-Net-Net Lease (Triple Net Lease).  A lease in which the tenant (lessee) pays a prorata share of normal property expenses such as real estate taxes, insurance, maintenance, etc., thereby assuring the landlord (lessor) of a fixed income.

Non-operating/Non-contributing Asset.  An asset unnecessary to the operation of a business enterprise and the generation of its revenues.

Offset (Set-Off).  A deduction by one against a claim of another; e.g. unknown claims against the assets purchased by a buyer may be “offset” against the obligation the buyer owes to the seller (seller financing).

Owner.  A generic term used in business brokerage to represent the proprietor, general partner or controlling shareholder (singular or plural as appropriate) of a business enterprise.

Owner’s Salary.  The salary or wages paid to the owner, including related payroll burden.

Owner’s Total Compensation.  Total of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value.

Perquisites.  Expenses incurred at the discretion of the owner that are unnecessary to the continued operation of the business.

Present Value.  The value today of a future payment, or stream of payments, discounted at some appropriate compound interest (discount) rate. 

Pro Forma Financial Statements.  Hypothetical financial statements.  Financial statements as they would appear if some event, such as increased sales or production had occurred or were to occur.  Also used to make projections for future years. 

Projection.  Prospective financial statements which present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions. 

Promissory Note.  A signed, written instrument that acknowledges a debt, with the promise to pay the debt on specified terms (i.e. payment amount, payment date(s), interest rate).

Proration.  The division of money obligations according to some formula.  In a business closing, a seller may have paid for certain benefits into the futures that are assumed by the buyer.  The costs of these benefits are “prorated” between the seller and the buyer as part of the closing statement (e.g. prepaid rent, prepaid advertising, security deposits).

Purchase Agreement.  The agreement setting out the terms for the purchase of a business.  A purchase agreement is the “road map” followed by the buyer and the seller in a business transaction.  It would include items such as a description of what is being purchased, the down payment and repayment terms, buyer and seller representations, warranties, and indemnification’s, and so on.

Recasting.  Financial recasting eliminates from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decision of the current owner and may not represent financing preferences of a new owner.  Recasting provides an economic view of the company, and allows meaningful comparisons with other investment opportunities. 

Recast Book Value.  See also Adjusted Book Value.  The value of a balance sheet item(s) (asset, liability, or equity) after recasting adjustments have been made. 

Release.  The relinquishment of some right or benefit by a person or entity who already has some interest or right therein.

Residual Value.  The estimated market value of an asset at the end of the period being considered. 

Return on Investment (ROI).  The rate of return at which the sum of the discounted future cash flows plus the discounted future residual value equals the initial cash outlay. 

Stock Sale.  A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser. 

Synergy.  The post-acquisition performance, in which the profitability of the continued entity is greater than the sum of the profitability of the individual entities before the acquisition.

Transaction Value.  Total of all consideration passed at any time between the Buyer and Seller for an ownership interest in a business enterprise and may include but is not limited to all remuneration for tangible and intangible assets such as:  furniture, equipment, supplies, inventory, working capital, non-competition agreements, customer lists, employment and/or consultation agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, earn-outs, and future considerations. 

Uniform Commerical Code (U.C.C.).  State laws that regulate the transfer of personal property.  Article Nine of the U.C.C. deals with transactions that are intended to create a security interest in personal property.

Valid. Legally binding.

Valuation Approach.  A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more valuation methods.  There are three Approaches generally used to value a business:  Asset Approach, Income Approach, and Market Approach. 

Variable Interest Rate.  An interest rate that adjusts periodically to a predefined margin above or below an index rate.  A commonly used index is the bank prime rate. 

Valuation Method.  Within a Valuation Approach, a specific way to determine value. 

Valuation Procedure.  The act, manner and technique of performing the steps of an appraisal method. 

Void. To have no force or effect; that which is unenforceable.

Waive.   To relinquish or abandon; to forego a right to enforce or require anything.

Warrant or Warranty.  To legally assure or a legal or binding promise.

Without Recourse.  The lender can only look to the security for the debt and cannot go after the buyer personally in the case of default.  Often bank loans to closely held businesses require “personal guarantees” of the business owner(s).

Working Capital.  The excess of current assets over current liabilities.

    

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