ADD–BACKS: Discretionary expenditures made by business owners that are “added back” to the bottom line during the recasting process.
ADDENDUM: A written instrument that adds something to a written contract.
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 transaction broker, not representing either the buyer or the seller in a fiduciary capacity. This allows the customer to understand to which party the broker owes loyalty.)
AMENDMENT: A written instrument that changes something previously agreed to.
AMORTIZATION: The periodic expense of an amount paid 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. 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.
ASSET SALE: A sale of a company when the assets of the business are sold, not the stock of the corporation (This allows the new buyer to depreciate most of the assets. An asset sale also eliminates the buyer’s exposure for certain 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.
BILL OF SALE: A written agreement by which one person assigns or transfers his or her rights to or interest in personal property to another.
BUSINESS BROKER OR INTERMEDIARY: A professional who assists in the buying and selling of businesses.
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.
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: Profit after principal and interest are deducted from net operating income (NOI), and depreciation and interest are added back.
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.
COLLATERAL: A security, such as a mortgage, given to protect debt.
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.)
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.
CONFIDENTIALITY AGREEMENT: An agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations, 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 transaction closes. 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.
CONVEYANCE: A transfer of title.
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-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.
DEBT SERVICE: The total payment of principal and interest on loans.
DEPRECIATION: The reduction in value of an asset over its useful life.
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.)
EBITDA (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, normalizing tax-effects, and neutralizing the effects of different capital structures.)
EARNEST MONEY: A sum of money given to bind an agreement or an offer.
EQUITY: The investment in the business by the owner(s).
ESCROW: The holding of something of value by a person (escrowee or escrow agent) for the benefit of other parties.
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.
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 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.
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.
(originally published in November 2014 eNewsletter)