–SINCE 1982–

M&A Glossary (Part 2 of 2)

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.)

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).

INTANGIBLE ASSET: That which has no physical existence but represents value, such as goodwill, going concern value, and business trade name.

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.

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.

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.)

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.

MISSION STATEMENT: A series of brief sentences or paragraphs that describe the purpose of your business, its products or services, customers, markets, and philosophy.

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.

NONDISCLOSURE AGREEMENT: 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.)

ORGANIZATIONAL CHART: A diagram of the relationships and responsibilities of individuals or functional departments within your business.

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 ALLOCATION: The manner in which the purchase price of a business is divided between asset categories for taxation purposes.

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 expense decisions of the current owner and may not represent expense preferences of a new owner. Recasting provides an economic view of the company, and allows meaningful comparisons with other investment opportunities.)

REPRESENTATION: A statement or condition made that something is true or accurate.

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.

SBA LOAN: A loan that qualifies for a guarantee from the U.S. Small Business Administration.

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 assuming similar economic performance by the business.

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.

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.

SUBORDINATION: The act of making an encumbrance secondary or junior to another lien.

SUCCESS FEEMoney or other valuable consideration given to broker by principal for services rendered; the amount is usually set forth in the listing agreement.

VALUATION APPROACHA 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.)

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.)

WORKING CAPITALThe excess of current assets over current liabilities.

WARRANTY: An expressed or implied statement that a situation or thing is as it appears to be or is represented to be.

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.

(originally published in December 2014 eNewsletter)