SELLING PRIVATELY HELD BUSINESSES


–SINCE 1982–

Business Sales Terms and Definitions

If you are trying to buy or sell a business, then you know that the terminology can get quite confusing. The FBB Group, Ltd. compiled the following list of terms and their respective definitions to try and clear up any questions you might have on how to buy a business or sell a business.

Glossary of Terms & Definitions

  • ACQUISITION: When a company, entity or individual purchases a majority interest in another company.
  • ADD-BACKS: Discretionary expenditures made by business owners that are “added back” to the bottom line during the recasting process.
  • ADD-ON ACQUISITION: A strategic acquisition fit for an existing platform/portfolio company.
  • ADDENDUM: A written instrument that adds something to a written contract.
  • ADJUSTED BOOK VALUE: The value that results after one or more asset(s) or liability amounts are added, deleted, or changed from their respective financial statement amounts.
  • AGENCY DISCLOSURE: A written explanation to be signed by a prospective buyer or seller, explaining to the client the role that the broker plays in the transaction (The purpose of disclosure is to explain whether the broker represents the buyer or seller or is a dual agent, representing both, or a subagent, an agent of the seller’s broker. This allows the customer to understand to which party the broker owes loyalty.)
  • ALLOCATION OF PURCHASE PRICE: Also called Purchase Price Allocation, this term refers to the manner in which the purchase price of a business is divided between seller and buyer for taxation purposes.
  • AMENDMENT: A written instrument that changes something previously agreed to.
  • AMORTIZATION: The periodic expense of an amount paid for an intangible asset over a period of time.
  • ARBITRATION: The submission of a disputed matter for resolution outside the normal judicial system. It is often faster and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA). Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.
  • ASKING PRICE: The total amount for which a business or an ownership interest is offered for sale.
  • ASSET SALE: A sale of a company when only the assets of the business are sold, not the stock of the corporation (This allows the new buyer to depreciate most of the assets over five or fifteen years and eventually recoup most or all of the purchase price. An asset sale also frees a buyer from any liabilities the previous owner may have incurred.)
  • ASSIGNMENT: A transfer in writing of an interest in property or other things of value from one person or entity to another.
  • AUDIT: An examination of a company’s financial records and the accounting systems, controls, and records that produced them.
  • BALANCE SHEET: A report listing the balances of the assets, liabilities, and equity as of a specific date.
  • BASKET: The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50). Dollar-One Basket (Tipping Basket): Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150).
  • BENEFIT STREAM: Any level of income, cash flow, or earnings generated by an asset, group of assets, or business enterprise. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.
  • BETA: A measure of systematic risk of a security; the tendency of a security’s returns to correlate with swings in the broad market.
  • BILL OF SALE: A written agreement by which one person assigns or transfers his or her rights to or interest in goods and personal property to another.
  • BLOCKAGE DISCOUNT: An amount or percentage deducted from the current market price of a publicly traded security to reflect the decrease in the per share value of a block of those securities that is of a size that could not be sold in a reasonable period of time given normal trading volume.
  • BLUE-SKY: The portion of a requested price that cannot be supported through the application of established valuation methodology and which generates no economic benefit.
  • 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. Related uses or terms: BUSINESS INTERMEDIARY, INVESTMENT BANKER.
  • BUSINESS ENTERPRISE: A commercial, industrial, service, or investment entity, or a combination thereof, pursuing an economic activity.
  • BUSINESS INTERMEDIARY: A merger and acquisition (M&A) advisor who assists buyers and sellers of privately held small businesses throughout the business transfer transaction process. An agency relationship typically exists between the intermediary and either the buyer or the seller. The intermediary offers transaction advisory services such as estimating the value of the business; advertising it for sale with or without disclosing its identity; managing the initial buyer/seller interviews, discussions, and negotiations; facilitating the progress of the due diligence investigation and generally assisting with the business sale. Intermediaries require specific skills – number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling hours. On Main Street, an intermediary is often referred to as a (business) broker. Certified Business Intermediary (CBI) is an industry designation awarded by the International Business Brokers Association (IBBA). Related uses or terms: BUSINESS BROKER, INVESTMENT BANKER.
  • BUSINESS TYPE: The legal structure of the business. Types include Sole Proprietorship, Partnership, S-Corporation, C-Corporation, Limited Liability Company or Limited Liability Partnership as follows:
    • SOLE PROPRIETORSHIP: A business entity that involves just one individual who owns and operates the enterprise.
    • PARTNERSHIP: A business that is unincorporated and organized by two or more individuals.
    • S-CORPORATION: A type of corporation that provides its owners with tax treatment that is similar to a partnership and liability protection similar to a corporation.
    • C-CORPORATION: A type of corporation, unlike an S‐corporation, that is not restricted as to the types of eligible shareholders (The shareholders can include other individuals, corporations, trusts, partnerships, LLCs, and other quasi‐entities. The impact of double taxation ‐ on the corporation’s income and the separate taxation on the dividends ‐ constitutes the impact of the C‐corporation treatment.)
    • LIMITED LIABILITY COMPANY (LLC): A flexible form of business enterprise that blends elements of a corporation and a partnership or sole proprietorship, depending on how many owners there are.
    • LIMITED LIABILITY PARTNERSHIP (LLP): A partnership in which some or all partners have limited liability (It therefore exhibits elements of partnerships and corporations.)
  • CAP: The maximum amount of damages the buyer can recover from the seller under the indemnification provisions. Many agreements include separate caps for different types of breaches.
  • CAPITAL ASSET PRICING MODEL (CAPM): A model in which the cost of capital for any security or portfolio of securities equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the security or portfolio.
  • CAPITAL STRUCTURE: The composition of the invested capital of a business enterprise; the mix of debt and equity financing.
  • CAPITALIZATION: A conversion of a single period stream of benefits into value.
  • CAPITALIZATION FACTOR: Any multiple or divisor used to convert anticipated benefits into value.
  • CAPITALIZATION RATE: Any divisor (usually expressed as a percentage) used to convert anticipated benefits into value.
  • CAPITALIZED ITEMS: Assets with an economic life of one year or more. (The cost is moved to the Balance Sheet and these costs can be written down by depreciation or amortization over time.)
  • CASH FLOW: 1) Cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, “discretionary” or “operating”) and a definition of exactly what it means in the given valuation context. 2) Profit after principal and interest are deducted from net operating income (NOI).
  • CLIENT: An entity with whom 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, and the buyer receives title to the assets.
  • CLOSING COSTS: The costs of seller and buyer at conveyance of business and property. (These can include accounting and legal fees as commissions to a business broker or intermediary.)
  • 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.
  • CLOSING STATEMENT: A statement which contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.
  • COLLAR: The ceiling and floor of the price fluctuation on an underlying asset. For example, the price fluctuation where stock in part of the consideration; or, the fluctuation in the amount of trued-up working capital compared to estimated working capital.
  • COLLATERAL: A security, such as a mortgage, given to protect debt.
  • COMMITTED EQUITY CAPITAL: Equity investment funds readily available to an investor to make investments according to a pre-defined investment strategy. Related uses or terms – CAPITAL UNDER MANAGEMENT, CAPITAL AVAILABLE FOR INVESTMENT
  • CONDITIONAL SALES CONTRACT: A contract in which the owner retains title until the buyer has met all terms and conditions; a familiar device in land sales; also called land contract or installment contract. (Buyer acquires equitable title until final payment; after delivery of deed, buyer has legal title.)
  • CONDITIONS TO CLOSING: Certain obligations that must be fulfilled in order to legally require the other party to close the transaction. Other than conditions to closing relating to corporate approvals and governmental filings and approvals, compliance with a particular condition to closing may be waived by the party that benefits from the condition.
  • CONFIDENTIAL BUSINESS PROFILE: A document utilized in the sale of businesses that details and showcases aspects of the business for sale while being accurate and truthful.
  • CONFIDENTIAL BUSINESS REVIEW (“CBR”): A CBR, sometimes called “The Book“, Pitchbook, Confidential Business Profile or a Confidential Information Memorandum (CIM), is drafted by an M&A advisory firm or investment banker for a sell-side engagement to market a business to prospective buyers. This document details and showcases aspects of the business for sale while being accurate and truthful.
  • CONFIDENTIALITY AGREEMENT: An agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations for a larger contract, when the parties may need to divulge information about their operations to each other. In this situation, the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever signed. Also known as a non-disclosure agreement.
  • CONTINGENCY: A clause in an agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event. For example, the sale of the business may be contingent upon the buyer obtaining financing.
  • CONTRACT: A voluntary and lawful agreement between two or more parties to do, or not to do, something. Elements of an enforceable contract include: (a) an offer to be bound to do or refrain from doing something, which has been accepted, (b) sufficient consideration, (c) a valid subject matter, (d) legal capacity of the parties, and (e) for those contracts to which the Statute of Fraud applies, its requirements must be met.
  • CONTROL: The power to direct the management and policies of a business enterprise.
  • CONTROL PREMIUM: An amount (expressed in either dollar or percentage form) by which the pro rata value (calculated, in proportion value) of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise, that reflects the power of control.
  • CONVEYANCE: A transfer of title.
  • COST APPROACH: A general way of estimating a value indication of an individual asset by quantifying the amount of money that would be required to replace the future service capability of that asset.
  • COST OF CAPITAL: The expected rate of return (discount rate) that the market requires in order to attract funds to a particular investment.
  • COST OF GOODS SOLD (COGS): The cost of a product or service sold to customers.
  • COUNTER OFFER: Voids first offer and creates new offer.
  • COVENANT: Negative covenants restrict the seller from taking certain actions prior to the closing without the buyer’s prior consent. Negative covenants protect the buyer from the seller taking actions prior to the closing that change the business that the buyer expects to buy at the closing. Affirmative covenants obligate the seller or the buyer to take certain actions prior to the closing.
  • 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.
  • CURRENT ASSETS: Assets that are either cash, will turn into cash, or will be used up within one year.
  • CURRENT LIABILITIES: Debts the business must pay within one year.
  • CURRENT MARKET VALUE: What someone is willing to pay you for an item should you choose to sell it today.
  • CUSTOMER: An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker.
  • DEBT SERVICE: The total payment of principal and interest on loans.
  • DEPRECIATION: The reduction in value of an asset over its useful life.
  • DISCOUNT: A reduction in value or the act of reducing value.
  • DISCOUNT FOR LACK OF CONTROL: An amount or percentage deducted from the pro rata share of value of one hundred percent (100%) of an equity interest in a business to reflect the absence of some or all of the powers of control.
  • DISCOUNT FOR LACK OF MARKETABILITY: An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
  • DISCOUNT RATE: A rate of return (cost of capital) used to convert a monetary sum, payable or receivable in the future, into present value.
  • DIVESTITURE: Large public or private parent corporations selling off non-core business units.
  • DUE DILIGENCE: A process where a buyer inspects a potential investment. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.
  • DUE DILIGENCE PERIOD: A period of time in which the buyer learns more about and investigates a business for sale in order to determine its worth. (This can also be applied to the seller, especially in the case of seller financing, meaning a period of time in which the seller investigates the buyer to determine the buyer’s ability to run the business and the buyer’s creditworthiness. Due diligence is often performed on the acquirer as well as the target.)
  • EARN-OUTS: An agreement in the sale of a company where the buyer agrees to pay the seller consideration in the future (typically cash or stock) based upon certain future events or performance of the business post-close. Because earn-out payments are contingent on the future performance of the acquired company, they are not included in the purchase price.
  • EARNEST MONEY: A sum of money given to bind an agreement or an offer.
  • EBITA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION): All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income (It purports to measure cash earnings without accrual accounting, canceling tax‐jurisdiction effects, and canceling the effects of different capital structures.)
  • ECONOMIC LIFE: The period of time over which property may generate economic benefits.
  • ENTERPRISE VALUE: Enterprise value (EV) is a financial metric representing the entire value of a company after taking into account both holders of debt and equity. EV is calculated as the company’s market capitalization plus debt, minus cash.
  • EQUITY: The investment in the business by the owner(s).
  • EQUITY NET CASH FLOWS: Those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and reflecting increases or decreases in debt financing.
  • EQUITY RISK PREMIUM: A rate of return in addition to a risk-free rate to compensate for investing in equity instruments because they have a higher degree of probable risk than risk free instruments (a component of the cost of equity capital or equity discount rate).
  • ESCROW: The holding of something of value by a person (escrowee or escrow agent) for the benefit of other parties.
  • ESCROW PERIOD: The length of time (in months) after the closing date that the escrow is held before being released to the seller.
  • EXCESS EARNINGS: That amount of anticipated benefits that exceeds a fair rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated benefits.
  • EXCESS EARNINGS METHOD: A specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of the value of the assets obtained by capitalizing excess earnings and the value of the selected asset base. Also frequently used to value intangible assets. See EXCESS EARNINGS.
  • EXCLUSIVE RIGHT TO SELL: An agreement and contract giving the broker the right to receive a commission if the property or business is sold by anyone, including the seller, during the term of the agreement.
  • EXIT PLAN: A strategy, planned or unplanned, to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for the time when that business owner is no longer involved in the operations of the company. Examples of unplanned exits include death, divorce, incapacity, disability, management disputes, influx of competition, technological obsolescence, loss of a major customer, or other unforeseen economic events.
  • FAIR MARKET VALUE (“FMV”): 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 seller, acting at arm’s 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. {NOTE: In Canada, the term “price” should be replaced with the term “highest price”.}
  • FAMILY SUCCESSION: In family successions or retirement transitions, ownership transfers from passive owners to active family members or outside shareholders. Facilitators are particularly sensitive to estate planning issues, family business dynamics, and the need for discretion and trust to make these transactions seamless and successful.
  • FF&E (FURNITURE, FIXTURES, AND EQUIPMENT): Items of value that are part of a business but are considered personal property.
  • FIDUCIARY: A position of trust (e.g. agent or broker to principal).
  • 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.
  • FORCED LIQUIDATION VALUE: Liquidation value at which the asset or assets are sold as quickly as possible, such as at an auction.
  • FRANCHISE: An agreement under which the franchisor (owner of the rights) licenses the franchisee (the business owner) the right to sell a given product/service or to use certain trademarks or trade names, usually within a designated area.
  • FRANCHISE FEES: Cash paid to a franchisor for the use of a franchise.
  • FREE CASH FLOW: The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits and negative adjustments for capital expenditures. Formally defined as Operating Cash Flow (Net Income plus depreciation and amortization plus taxes plus interest) minus capital expenditures and dividends.
  • GOING CONCERN: An ongoing operating business enterprise.
  • GOING CONCERN VALUE: The value of a business enterprise that is expected to continue to operate into the future. 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.)
  • GROWTH CAPITAL: An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership.
  • GUARANTEE: A pledge by a third party to repay a loan in the event that the borrower defaults.
  • GUARANTOR: A person or organization that guarantees repayment of a loan if the borrower defaults or is unable to pay.
  • 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).
  • INDEMNIFICATION: Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.
  • INTANGIBLE ASSET: Non-physical assets (such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts as distinguished from physical assets) that grant rights, privileges, and have economic benefits for the owner.
  • INVESTED CAPITAL: The sum of equity and debt in a business enterprise. Debt is typically long term liabilities or the sum of short term interest bearing debt and long term liabilities. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.
  • INVESTED CAPITAL NET CASH FLOWS: Those cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments.
  • INVESTMENT BANKER: An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank’s division that is involved with these activities. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers. Investment bankers require specific skills – number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling hours. Related uses or terms: BUSINESS BROKER, BUSINESS INTERMEDIARY.
  • INVESTMENT RISK: The degree of uncertainty as to the realization of expected returns.
  • INVESTMENT VALUE: The value to a particular investor based on individual investment requirements and expectations. {NOTE: In Canada, the term used is “Value to the Owner.”}
  • KEY PERSON DISCOUNT: An amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.
  • LEASEHOLD: The interest which a lessee has in realty.
  • LETTER OF INTENT (LOI): A description of the key points in a potential sale/ acquisition of a business. It is 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 Indication of Interest 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, covenant-not-to-compete terms, consulting/employment agreement terms and real estate lease terms.
  • LEVERAGED BUYOUT (LBO): The acquisition of a business utilizing equity or investment capital and third-party debt financing. Typically includes a change of control or change of ownership.
  • LEVERED BETA: The beta reflecting a capital structure that includes debt.
  • LIEN: A claim or charge upon real or personal property for the satisfaction of some debt or duty which can arise either by agreement or by operation of law.
  • LIEN SEARCH: A search of public records to determine if a business has any outstanding liens for payment of some debt.
  • LIQUIDATION VALUE: The net amount that can be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced”.
  • LIQUIDITY: The ability to quickly convert property to cash or pay a liability.
  • LISTING: A written engagement (contract) between a principal and an agent authorizing the agent to perform services for the principal involving the principal’s property (business) (Generally the services provided by the agent involve the proposed sale of the principal’s property or business. Also, the property or business listed by the agent is called a Listing.)
  • LOWER MIDDLE MARKET (“LMM“): Lower middle market is the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with annual revenues in the range of $5 million to $50 million are grouped under the lower middle market category.
  • M&AMI: Merger & Acquisition Master Intermediary (M&AMI) certification is a designation that distinguishes its holders as seasoned intermediary professionals who have a solid educational background, proven accomplishments in completing deals and a strong passion for the M&A Source and M&A work. The M&AMI designation requires both educational credits and successful completion of multiple middle-market transactions.
  • MAJORITY CONTROL: The degree of control provided by a majority position.
  • MAJORITY INTEREST: An ownership interest greater than fifty percent (50%) of the voting interest in a business enterprise.
  • MANAGEMENT BUY-IN: Financing an outside manager or management team to acquire a target company. In a management buy-in (MBI), an external management team partners with a company with a management void. This could be a private company, a stand-alone company, or an orphaned division of a larger company. Again, managers retain operational control while holding significant equity.
  • MANAGEMENT BUY-OUT: A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund/group (PEG). Management buy-outs (MBOs) are generally pursued by management teams that have little or no ownership in a business and want to obtain more ownership, but lack the financial resources to buy the company from the current owners. In these circumstances, a PEG can provide the financing necessary to facilitate the purchase of the business. The PEG also gives the management team a large equity stake to cement their commitment to continue running the business and pursue growth opportunities. Related uses or terms – MBO (MANAGEMENT BUY OUT).
  • MARKETABILITY: The ability to quickly convert property to cash at minimal cost.
  • MARKETING PLAN: A written explanation of how you plan on reaching customers, making sales, and reaching your financial goals.
  • MEDIATION: A form of alternative dispute resolution (ADR), a way of resolving disputes between two or more parties with concrete effects. Typically, a third party, the mediator, assists the parties to negotiate a settlement.
  • MERGER: Any combination that forms one company from two or more previously existing companies.
  • MERGERS AND ACQUISITIONS (M&A): A term that is commonly used for the mergers, acquisitions and the selling of companies. M&A is a commonly used abbreviation for this term.
  • MERGERS & ACQUISITION ADVISOR VS. MAIN STREET BUSINESS BROKER: M&A Advisors service owners of Lower Middle-Market companies – deals that involve complex business transactions with sophisticated buyers, often including intricate deal structuring, and challenging valuation and finance arrangements. M&A Advisors, often work on national transactions, which may involve intricate business merging, or sale, spanning multiple locations and typically confidentially present the acquisition opportunity to a small select group of targeted buyers. Main Street Business Brokers are often defined as Brokers that typically sell businesses for less than $1,000,000. These companies [i.e. dry cleaners, hair salons, restaurants, gas stations, convenience stores, franchises, or small service businesses] are usually purchased by individuals who want the independence of running their own company and want to replace their salary with the income of the business.
  • MINORITY INTEREST: An ownership interest less than fifty percent (50%) of the voting interest in a business enterprise.
  • MISSION STATEMENT: A series of brief sentences or paragraphs that describe the purpose of your business, its products or services, customers, markets, and philosophy.
  • MOST PROBABLE SELLING PRICE: The price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to seller and probable buyer.
  • 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 TANGIBLE ASSET VALUE: The value of the business enterprise’s tangible assets (excluding excess assets and non-operating assets) minus the value of its liabilities. {NOTE: In Canada, tangible assets also include identifiable intangible assets.}
  • NON-OPERATING ASSETS: Assets not necessary to ongoing operations of the business enterprise. {NOTE: In Canada, the term used is “Redundant Assets.”}
  • NON-DISCLOSURE AGREEMENT (NDA): A legally enforceable agreement preventing one party from using or disclosing commercially sensitive information belonging to the disclosing party to a third party.
  • OPERATING EXPENSES: Selling, general, and administrative expenses that are necessary to run the business (Examples include salaries, insurance, advertising, and rent. Any expenses other than cost of sales.)
  • OPERATING INCOME: The amount of profit earned during the normal course of operation.
  • OPERATING PLAN: A written explanation of how one plans on running the business (An operating plan should include a description of the business facility, required operating equipment, supplier and vendor relationships, and needed personnel.)
  • ORDERLY LIQUIDATION VALUE: Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.
  • ORGANIZATIONAL CHART: A diagram of the relationships and responsibilities of individuals or functional departments within your business.
  • PLATFORM COMPANY: A platform company is a company that a Private equity group (PEG) views-when investing through acquisition in a new industry or market space-as a starting point for follow-on acquisitions in the same area.
  • PORTFOLIO COMPANY: A company acquired and owned by a private equity fund.
  • PORTFOLIO DISCOUNT: An amount or percentage that may be deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that may not fit well together.
  • POST-CLOSING WORKING CAPITAL ADJUSTMENT: In a merger and acquisition transaction, a working capital adjustment typically represents a pre-determined amount of working capital the selling company must have on the books as of the closing date. If the actual amount is more than the pre-determined target amount, the purchase price is increased by the excess. If it is less, the purchase price is decreased.
  • PREMISE OF VALUE: An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; e.g. going concern, liquidation.
  • PRINCIPLE OF SUBSTITUTION: A buyer will pay no more than that which he/she would have to pay to purchase an equally desirable substitute.
  • PRIVATE EQUITY: An investment in non-public securities of, typically, private companies. Also an investment asset class typically reserved for large institutional investors such as pension funds and endowments as well as high net worth individuals. Includes investments in privately-held companies ranging from start-up companies to well-established and profitable companies to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, growth capital and distressed investments.
  • PRIVATE EQUITY FUND: An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of available equity capital.
  • PRIVATE EQUITY GROUP (PEG): See Private Equity and Private Equity Fund.
  • PROFIT AND LOSS STATEMENT (P&L): A financial report listing sales, expenses, and net income that gives operating results for a specific period.
  • PROMISSORY NOTE: A signed, written instrument which 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 future which are assumed by the buyer. The cost 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.
  • PURCHASE PRICE: The total consideration paid to the target company and/or its shareholders by the buyer upon consummation of the transaction. The purchase price amount includes cash, debt assumed, seller notes and escrow amounts, and excludes non-compete payments, earn-out payments, royalty payments, revenue sharing payments and other specified adjustments.
  • PURCHASE PRICE ALLOCATION: The manner in which the purchase price of a business is divided between asset categories for taxation purposes.
  • QUALITY OF EARNINGS: The quality of earnings refers to the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies.
  • RATE OF RETURN: An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment.
  • RATIO ANALYSIS: A ratio analysis is a quantitative analysis of information contained in a company’s financial statements, used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.
  • RECAPITALIZATION: A financing transaction that allow owners to harvest some of the value they have created in their companies while retaining a large ownership stake in the business going forward.
  • RECASTING: As applied to financial statements, a method of restating financial results in order to determine seller’s discretionary earnings (SDE) (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 decisions 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.)
  • REPLACEMENT COST NEW: The current cost of a similar new property having the nearest equivalent utility to the property being valued.
  • REPORT DATE: The date conclusions are transmitted to the client.
  • REPRESENTATION: A statement or condition made that something is true or accurate.
  • REPRESENTATIONS AND WARRANTIES: Specific assurances in a purchase and sale agreement stating that certain statements are true. The purchase and sale agreement also includes specific remedies should assurances made turn out to be false or inaccurate.
  • REPRODUCTION COST NEW: The current cost of an identical new property.
  • RESIDUAL VALUE: The prospective value as of the end of the discrete projection period in a discounted benefit streams model.
  • 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.
  • RISK FREE RATE: The rate of return available in the market on an investment free of default risk.
  • RISK PREMIUM: A rate of return in addition to a risk-free rate to compensate the investor for accepting risk.
  • ROLL UP: A Rollup (also “Roll-up” or “Roll up”) is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged. The principal aim of a rollup is to reduce costs through economies of scale.
  • ROLLOVER: The amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar value of equity retained.
  • RULE OF THUMB: A mathematical relationship between or among variables based on experience, observation, hearsay, or a combination of these, usually applicable to a specific industry.
  • SBA LOAN: A loan that qualifies for a guarantee from the U.S. Small Business Administration.
  • SEARCH FUND: An individual or group of individuals seeking to identify an acquisition candidate that the individual or group can acquire and subsequently manage. Typically, search funds do not have dedicated capital to acquire a business but, rather, have informal pledges from potential investors. Related uses or terms – FUND-LESS SPONSOR
  • SELLER FINANCING: A method of financing a business acquisition in which the seller carries a note for a portion of the purchase price. Also called Seller Carryback or Seller Note.
  • SELLER NOTE: A note payable or loan to the shareholder(s) or owner(s) of a business provided in the sale or transition of a company by the buyer. Seller financing is typically used to bridge a valuation gap either where other forms of financing are not available or where a buyer desires to preserve the borrowing ability of the selling company for secured financing. Seller financing is typically unsecured and subordinated below all other debt.
  • SELLER’S DISCRETIONARY EARNINGS (SDE): A term used to denote a business’s cash flow or the amount of pretax money a buyer can expect to earn in first-year operations, assuming similar economic performance by the business.
  • SPECIAL INTEREST PURCHASERS: Acquirers who believe they can enjoy post-acquisition economies of scale, synergy, or strategic advantages by combining the acquired business interest with their own.
  • STANDARD OF VALUE: The identification of the type of value being utilized in a specific engagement; e.g. fair market value, fair value, investment value.
  • STOCK SALE: The buyer purchases the stock in a corporation so the corporation is acquired in whole and the buyer obtains all assets and liabilities.
  • STRUCTURE (TRANSACTION TYPE): The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the form of either cash or stock. The parties could also merge by exchanging stock.
  • SUBORDINATION: The act of making an encumbrance secondary or junior to another lien.
  • SUCCESS FEE: Money or other valuable consideration given to broker by principal for services rendered; the amount is usually set forth in the listing agreement.
  • SURVIVAL PERIOD: The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying the buyer (e.g., claims by the buyer must be made on or before that date).
  • SUSTAINING CAPITAL REINVESTMENT: The periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays.
  • SYSTEMATIC RISK: The risk that is common to all risky securities and cannot be eliminated through diversification. When using the capital asset pricing model, systematic risk is measured by beta.
  • TEASER: An anonymous document circulated to potential buyers of a specific business is for sale. The document, often prepared by an advisor, details information that is designed to entice potential buyers
  • 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.
  • UNIFORM COMMERCIAL CODE (U.C.C.): State laws which regulate the transfer of personal property. Article Nine of the U.C.C. deals with transactions which are intended to create a security interest in personal property.
  • U.C.C. SEARCH: A UCC search is a review of the appropriate county and State records in regard to any liens against personal property, tax liens and judgments.
  • UNLEVERED BETA: The beta reflecting a capital structure without debt.
  • VALUATION: The act or process of determining the value of a business, business ownership interest, security, or intangible asset.
  • 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: Determines the business value based on the value of its assets less its liabilities (The commonly used valuation methods under this approach are: asset accumulation method and capitalized excess earnings method.)
    • INCOME APPROACH: The value of a business based on its ability to generate desired economic benefit for the owners (The key objective of the income based methods is to determine the business value as a function of the economic benefit. The economic benefit such as the seller’s discretionary cash flow or net cash flow is capitalized, discounted or multiplied to perform the valuation. The well‐known methods under the income approach are: Discounted cash flow method; Capitalization of earnings method; Multiple of discretionary earnings method.)
    • MARKET (MARKET-BASED) APPROACH: Establishes the business value in comparison to historic sales involving similar businesses (The business valuation methods under the market approach that are typically used in professional business appraisals include the Comparative transaction method and the Guideline publicly traded company method.)
  • VALUATION DATE: The specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).
  • VALUATION METHOD: Within valuation approaches, a specific way to determine value.
  • VALUATION PROCEDURE: The act, manner, and technique of performing the steps of an appraisal method.
  • VALUATION RATIO: A fraction in which a value or price serves as the numerator and financial, operating, or physical data serve as the denominator.
  • WARRANTY: An expressed or implied statement that a situation or thing is as it appears to be or is represented to be.
  • WEIGHTED AVERAGE COST OF CAPITAL (WACC): The cost of capital (discount rate) determined by the weighted average at market value of the cost of all financing sources in the business enterprise’s capital structure.
  • WORKING CAPITAL: Working capital is a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets – Current Liabilities. The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as Net Working Capital.