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.
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.
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.
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
total amount for which a business or an
ownership interest is offered for sale.
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.
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.
A transfer in writing of an interest in property
or other things of value from one person or
entity to another.
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.
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
intangible portion of a price above the maximum
goodwill that can be reasonably supported
through the application of established valuation
value, net of depreciation, at which an asset
appears on a company’s balance sheet.
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
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.
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
mix of invested equity and debt financing of a
Factor or Rate.
Any multiple or divisor used to convert
anticipated economic benefits over time into a
present economic value.
Determining the value of a Company by dividing
annual adjusted income by the capitalization
rate (required ROI).
Flow. The amount
by which the total cash coming into a business
from all sources exceeds the total cash going
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.
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.
Emptor. “Let the buyer beware”.
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
(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
An entity with which a Business Broker has a fiduciary
When all the details of the business sale are
completed and the money distributed to the
seller, seller’s agents, creditors and others.
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
An agreement between two or more
Business Brokers for sharing services,
responsibility and compensation on behalf of the
A Business Broker who shares services,
responsibility and compensation on behalf of a
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
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.
entity to a transaction who receives services
and benefits, but has no fiduciary relationship
with the Business Broker
business as” - an
identification of the trade name of the
business, which may differ from the legal
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
Rate. A rate of
return used to calculate the present value of a
stream of payments.
Earnings of a business enterprise prior to these
income & expenses
income & expenses
expense or income
single owner’s total compensation and
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
Value. The total
value of the stock of the business, plus the
face value of all interest-bearing debt owed by
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
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.
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.
An amount paid to another party for locating and referring
a client or customer.
An interest rate which does not fluctuate over
the term of the loan.
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.
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
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
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,
Assets. (Also referred to as
“Tangible Assets”) Those assets which
are material or physical (e.g. inventory,
equipment, tools, vehicles, real estate,
(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
A written legal document, created to affect the
rights of the parties.
Asset. That which has no physical
existence but represents value, such as
goodwill, going concern value, business trade
name. (See Blue-Sky)
analytical judgment of value based on the
perceived characteristics inherent in the
investment as distinguished from the current
Value. The value
to a particular investor based on individual
investment requirements and expectations.
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.
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
Improvements. Any article or fixture
that is attached to land or buildings.
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.
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,
consulting/employment agreement terms and real
estate lease terms.
or Liquidating Value.
The estimated value, net of liabilities, of a
company based on the market value of its assets.
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
Any combination that forms one company from two
or more previously existing companies.
A statement contrary to fact. If the
statement or action is made with intent to
deceive, it may be deemed to be fraudulent.
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.
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.
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.
An asset unnecessary to the operation of
a business enterprise and the generation of its
(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).
generic term used in business brokerage to
represent the proprietor, general partner or
controlling shareholder (singular or plural as
appropriate) of a business enterprise.
The salary or wages paid to the owner,
including related payroll burden.
Total of an owner’s salary and
perquisites, after the compensation of all other
owners has been adjusted to market value.
Expenses incurred at the discretion of
the owner that are unnecessary to the continued
operation of the business.
Value. The value
today of a future payment, or stream of
payments, discounted at some appropriate
compound interest (discount) rate.
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.
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
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).
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).
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.
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
Book Value. See
also Adjusted Book Value. The value of a
balance sheet item(s) (asset, liability, or
equity) after recasting adjustments have been
The relinquishment of some right or benefit by a
person or entity who already has some interest
or right therein.
estimated market value of an asset at the end of
the period being considered.
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
Sale. A form of
acquisition whereby all or a portion of the
stock in a corporation is sold to the purchaser.
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.
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.
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.
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
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.
Method. Within a
Valuation Approach, a specific way to determine
act, manner and technique of performing the
steps of an appraisal method.
have no force or effect; that which is
To relinquish or abandon; to forego a right to
enforce or require anything.
or Warranty. To legally assure or a
legal or binding promise.
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).
excess of current assets over current