Business Broker Glossary of Terms

 
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Addendum
A written instrument that adds a clause to a written contreact.
Adjusted Earnings aka Seller's Discretionary Earnings (SDE) aka Cash Flow
The process of adjusting earnings to better reflect seller's true benefit is referred to as recasting the financials. The process is used to avoid skewing the books when making a Business Appraisal, among other activities, adjusted earnings expresses the true revenue/profit of a business after accounting for one-time or other extraordinary expenses (such as excess owner compensation, discretionary expenses, income taxes, non-operating income & expenses, depreciation, amortization, interest expense or income, etc.) that are not essential for the ongoing operation of the business in question. The recasting can also include reflecting new owner operator verses existing absentee owner.
Agreement of Sale aka Asset Purchase Agreement (APA)
A bilateral contract whereby the buyer promises to buy and seller agrees to sell by execution and delivery of deed; also known as a Purchase and Sale Agreement (P&S). In this context, Agreement means the same as Contract.
Asset Sale
A sale of a business in which the buyer acquires only specific assets (and possibly assumes some liabilities) without transferring the ownership structure.
Unlike a stock sale, the buyer obtains the assets usually free and clear of any known and unknown liabilities of the seller.
Note: Asset Sale can also mean a business is priced based solely upon the value of the tangible assets.
Blue Sky
Any intangible portion of a price, above the maximum goodwill, that cannot be reasonably supported through the application of established business valuation methods.
Business Broker
A Business Broker usually functions as 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.
Business Intermediary
Business Intermediaries, also called business ownership transfer agents, assist buyers and sellers of privately held business in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale. They typically represent the transaction and serve as a dual agent for the buyer and seller.
Corporation
A business unit created by charter, generally owned by one or more shareholders who contribute the resources required to start the business. This business structure has continuous existence regardless of that of its owners and limits liability of owners to the amount invested in the organization in most cases. The entity ceases to exist only if dissolved according to a proper legal process. It is easily transferable and has an unlimited life. Characteristics of a corporation include: (a) continuity of life, (b) centralization of management, (c) limited liability, and (d) free transferability of interest.
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.
Confidentiality Agreement aka Non-Disclosure Agreement (NDA)
A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.
Cost of Goods Sold (COGS)
The amount paid for goods that has been sold by a business. It is calculated as follows: COGS = Beginning inventory + Net purchases – Ending inventory.
Covenant Non-Compete
An agreement consented to by the seller of a business to its purchaser to not compete with it in the field or a similar one over specified period of time, and within a specified geographic region.
Deal Structure
The combination of varying methods of payment through which the purchase of a business is completed. These can include cash, promissory 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.
Debt Service
The payment of principal and interest required on a debt (usually a loan or mortgage) over a specific range of time and at a certain interest rate.
Depreciation
Charges against earnings to write off the cost less the salvage value of an asset over its estimated useful life. It's a book-keeping entry for accounting and tax purposes and does not represent cash outflow of any sort. Do not forget to account for this when doing a Certified Business Valuation on your or someone else's business that you are thinking of acquiring.
Draw (Owners)
Sometimes the owner of a small business (sole proprietorship or closely held corporation) will take income as a draw as opposed to a salary. The terms are essentially the same except that usually a salary means that all withholding taxes et al, are accounted for on the books of the business, whereas a draw is straight cash that is transferred to the owner, who then pays all his/her tax obligations separately on their personal income tax return.
Due Diligence
Due diligence is general a contingency in an offer for purchase of a business that allows for a period of time to verify all the information the buyer has been provided prior to making the offer. This means reviewing IRS returns and/or financial statements, verifying inventory, verifying customers and sales, performing a fair market business valuation etc., in general, as a verification of any and all claims made by the business owner with regards to the operation of the business in order to satisfy the buyer that all representations made by the seller are accurate. Additionally, it is also the legal process of ensuring the legal due diligence process such as clear titles of assets, pending litigations, and so forth. The buyer can usually withdraw their offer during this period for any reason and have their full deposit returned.
Earnest Money Deposit
The deposit provided by a buyer to a seller as part of an offer to purchase a business under certain conditions. The funds represent a serious intention on the part of the potential buyer. This money is usually deposited in escrow within 72 hours of seller accepting the buyer's written offer and equal to a minimum of 10% of the total purchase price.
Escrow
The holding of something of value by a person (escrowee or escrow agent) for the benefit of other parties.
Fictitious Name
A name often used by sole proprietors or partnerships to provide a business name, other than those of the owners or partners, under which the business will operate. Also known as the trade name and the "doing business as" (DBA) name.
Fiduciary
A position or person in a position of trust upon which certain reliance of facts may be placed.
Franchise
A form of business in which the franchiser (the primary company) provides to a franchisee (the local business owner that executes the primary company's processes) a market tested business package involving a product or service. The franchisee runs their operation underneath the franchiser's trade name and markets goods and/or services in agreement within set contractual obligations.
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 workforce, an operational plan and all the necessary licenses, systems and procedures in place to run the business from an efficiency and legal standpoint.
Goodwill
The amount by which the price paid for a business exceeds the company's Adjusted Book Value of its tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income, among other intangible factors.
Inventory Turnover
Total cost of goods sold divided by the average value of inventory. Some businesses have very high inventory turnover and generally can work on very low product markups. Other businesses have low turnover (such as furniture stores, jewelry stores, major equipment manufacturers) and consequently, usually have much higher markups.
Key Person Insurance
Often called "key man" insurance, in which the business is paying for the life insurance for key persons (usually the owner) with the business backers (partners, spouse, investors, etc.) as the beneficiaries. This protects the investors from a potential catastrophic loss in case of the insured person's death/incapacitation. This is fully deductible and is sometimes used by small business owners as a way to get the IRS/revenue agency in the country in question to underwrite part of their personal life insurance premiums. It is frequently an add-back in a reconstruction of business expenses.
Lease - General
Contract between lessor (landlord) and lessee (tenant) for exclusive possession of realty for specified period under specific terms after which property reverts to lessor. The buyer's ability to negotiate acceptable lease terms is often a contingency in a business purchase offer.
Lease - Net-Net-Net (Triple Net Lease)
A lease in which the tenant (lessee) pays a prorate share of normal property expenses such as real estate taxes, insurance, maintenance, etc., thereby assuring the landlord (lessor) of a fixed income.
Letter of Intent
This type of document is between a buyer and a seller used in connection with the acquisition of a larger company. The letter of intent describes the basic terms and conditions of the transaction between the buyer and the seller, including price, due diligence periods, exclusivity or no-shops, and the basic conditions to closing the deal. Customarily presented before a definitive purchase agreement is entered into, the letter of intent provides a road map for the parties involved in the transaction. This document is less powerful than an actual offer with the terms defined….it is intent. If an seller had two similar offers he/she would most likely accept the written offer than the letter of intent.
Limited Partnership
A partnership composed of some partners whose contributions and liabilities are limited. A limited partnership requires at least one general partner and one limited partner. The general partner(s) are responsible for the management and liability for its debts. A limited partner has no right in management and his/her liability is limited to amount of investment.
Market (Market-Based) Approach
General way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to businesses and business ownership interests that are similar to their own, and similar securities or intangible assets that have been sold in the recent past. This approach may be used during the undertaking of a Fair Market Business Valuation.
Most Probable Selling Price
A term that is usually used to describe the value, or range of values, that the business broker believes that the business will bring in the current market. This is different from the terms "Evaluation," "Valuation," and "Appraisal," which connote a much broader scope of work performed by professionals that are uniquely qualified to evaluate such aspects of business operations than the work that is typically by a business broker. MPSP is a frequently used abbreviation for this term.
Partnership
A legal business structure between two or more individuals that co-own a business. As a result of this arrangement, they share the profits and losses among each other. Two of the most common types of this type of business organization are general and limited partnerships (also, see Limited Partnership). Partnerships must lack two or more of the four corporate characteristics (see Corporations) to be taxed as such.
Patent
An exclusive right given to an inventor or the inventor's assignee so that they have the right to use a certain process or product.
Perquisites
Expenses incurred at the owner's discretion that are not necessary to the ongoing operation of their business.
Promissory Note
A written promise to pay a sum of money on a discretely named future date in accordance with a pre-determined interest rate and payment schedule agreed upon by both parties. Normally written from the buyer to the seller for a period of five to ten years at slightly higher than prevailing bank rates. This form of deferred payment can sometimes defer income and save on income taxes…consult your tax advisor.
Recasting
Financial recasting eliminates from the historical financial record items such as excessive and discretionary expenses and nonrecurring revenues and expenses, as they reflect the financing decisions of the present owner. The purpose of recasting is to show that the proposed financing priorities of a new owner will have a markedly positive impact on the financial health of a company. It provides an economic view of the company under new ownership and it allows meaningful comparisons with other investment opportunities.
SBA Lender Terms
SBA Lender Terms - CLP (Certified Lender Program) This process is for the more sophisticated and experienced lenders who have graduated beyond GP status. Typically, the lender now submits a complete package to the SBA and as a CLP Lender they are guaranteed a 3-day turnaround from the SBA.
SBA Lender Terms - GP (General Program) This is the lowest rating and is given to lenders who know little about the SBA process. These lenders must submit each loan application to the SBA for additional underwriting and ultimate approval. This process can take up to two weeks with multiple requests for additional information.
SBA Lender Terms - PLP (Preferred Lender Program) This is the top designation and enables the respective lenders to approve their own loans with no additional underwriting by the SBA. Typically, this designation means that the lender has sufficient experience and track history to adhere to SBA standards and make quality loans.
Sole Proprietorship
A business owned by one person or married persons. The owner is personally liable for the debts of the business. The business is not incorporated.
Stock Sale
The purchase of a company's shares of stock and in which the purchaser assumes all of the assets and all of the debt, both tangible and intangible as well as known and unknown.
Trademark
A legal right given by the Patent and Trademark Office for a name or symbol, granting its creator exclusive use of it.
Trade Name
The name under which a business operates. Also known as DBA name (doing business as …)
Transaction
An exchange of value which will result in changes to a firm's assets, liabilities, or the owners' equity, or in more than one of these.
Transaction Value
The 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 not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, noncompetition agreements, employment and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemptions, real estate, leases, royalties, earn-outs and future considerations.

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