Glossary of Business Broker Terms Acknowledge: A declaration by a party that a statement is true. Example: A seller acknowledges that the fair market business valuation of their website, in terms of expected annual income and resale value, is $30,000. Accounting: The process noting the financial activities of a business (revenues/expenses/etc.), summarizing them in a clear and concise fashion, and interpreting the results in a useful manner. Accounting Equation: Used to determine total assets by adding together the businesses’ liabilities and the owner’s equity in the venture. This is vital when one is trying to come with an accurate business appraisal. Accounts Payable: Cash owed to suppliers, lenders, etc. for goods and services (like a Certified Business Valuation) that have been bought on credit. Accounts Receivable: Cash that is owed to the business by customers. One measure of the health of a business is how quickly customers pay what they owe (Account Receivable Turnover). For example, if an M&A Advisor using one of our services pays off his account in less than 30 days, then this is an excellent outcome. 30-60 days might be an acceptable time frame, but waiting over 60 days for payment is usually a problematic situation, but it might be ok dependent on the industry in question. Accounting Cost: The process of gathering various materials, labor, and other overhead costs and allocating them to the products that require them. Accounting Period: The period over which a business’s income and expense statement summarizes changes over previous time frames. Accrued Interest: Accumulated unpaid interest up to the present moment on a note or mortgage. Accrued Liabilities and Expenses: Accumulated charges, such as interest or taxes, owed by but not yet billed to the business by external vendors and agencies. Accumulated Depreciation: The total depreciation of an asset that has been charged as an expense to the present day. This value has significant impact on a business valuation, so be sure to keep tabs on it. Acid-test Ratio: Current assets less the inventory, and divided by present liabilities. As any professional Mergers and Acquisitions Advisor will tell you, the industry standard is 1:1, and comparing your results to it, it will give you a good indication of the health of your business. A business needs enough current income to balance current expenses or it could potentially get into trouble should financial disaster strike. Adjusted Book Value: The Book Value (equity) of a company after adjusting the values of assets and liabilities to reflect the present estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet. Using this stat is essential for a Mergers & Acquisitions Advisory and Business Brokerage firm to get the best possible price for a business that you want to buy or sell. Adjusted Earnings: 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, etc.) that are not essential for the ongoing operation of the business in question. Affidavit: A sworn statement or written oath (such as an acknowledgment) that is legally binding. Affirmation: A solemn declaration such as a non-religious oath. Agency: The legal relationship between a principal and their agent (such as an M&A Advisor) originating from a contract in which the principal authorizes the agent to perform certain acts on their behalf. Agency Disclosure: A written explanation to be signed by a potential purchaser or seller, explaining to the client the role that the Mergers & Acquisitions Advisory and Business Brokerage firm plays in the transaction. The purpose of disclosure is to explain whether the business 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, thereby reducing potential friction as the deal progresses. Agent: A person (natural), corporation, society, association or partnership (legal persons) acting by authority of a principal in a realty transaction for compensation, financial or otherwise. Agreement of Sale: 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. Amortization: Spreading out expenses over a period of time similar to depreciation. A common example of this is the reduction of debt by way of periodic payments that covers interest and a portion of the principal over an extended period of time. This is different from depreciation in that depreciation usually refers to physical things, whereas amortization applies to things that expire in time, such as mortgages. Appraisal: An estimate of value (e.g. the business appraisal determined that the client’s oil drilling company had a value in the tens of millions of dollars per annum). Appreciation: An increase in value that results from various market mechanisms such as demand exceeding supply. When determining the value of your business, a Certified Business Valuation takes this into account. Assessed Valuation: The taxable value of an asset as it is determined by relevant governmental authorities. Assets: Everything a company owns or is owed to it: current assets, such as cash on hand, investments, money owed, materials, and inventories; fixed assets, such as land holdings and buildings (real estate), and machinery; and intangible assets, such as patents, intellectual property and other goodwill. In a business valuation, keeping diligent records of everything that has value/generates value in your company is vital, so make sure your accounting is on point. Asset (Current Asset): An asset which is either currently liquid (in the form of cash) or is slated to be converted into cash in the near future, (less than 1 year). Asset (Fixed Asset): Tangible physical property of relatively long life that generally is used in the production of goods and provision of services, and is not intended to be sold to businesses or consumers. Asset (Intangible Asset): Assets which normally have no physical form such as: skilled employees, patents, trade names, intellectual property and the company’s positive reputation in the community. Asset (Net Book Value): Crucial to a fair market business valuation, it is the original cost of the asset less accumulated depreciation. Asset Approach: A way of estimating the value of a business ownership interest during a business appraisal using one or more Valuation Methods based on the Adjusted Book Value of the company. Asset Sale: This term has two definitions (to be sure of the proper one, speak with a trusted Mergers and Acquisitions Advisor), which changes depending on the situation: a) The process by which a business owner transfers ownership of tangible and intangible assets to another owner without transferring the ownership structure. b) The sale of a business enterprise at a cost based completely on the value of its tangible assets. Audited Financial Statements: A business’s financial statement that has been completed by a certified public accountant (CA, CGA, CPA (USA).) independent of the business owner in accordance with Generally Accepted Accounting Principles (GAAP). These statements show the business’s current financial state and its results of its operations, making it indispensable for a Fair Market Business Valuation. Attachment: A writ issued, beginning or during a legal action compelling a sheriff to attach (seize) property, rights and effects of defendant to satisfy possible credit demands of plaintiff should the verdict comes down in the plaintiff’s favor. Attorney-in-Fact: Anyone who is authorized in writing to perform certain acts for another person/body under the written power of attorney; this is valid only during the lifetime of the party granting this power. Balance Sheet: A statement showing the nature and amounts of a business’s assets, liabilities, and equity at a certain moment in time. In dollars, the balance sheet shows what the business owned, the debt it owed to third parties, and the ownership interest in the company of its owners. It is a snap shot of the financial condition of the business on a given date. When conducting a business valuation, it grants clarity to all parties involved. Base Year: The current fiscal year in which a company exists. Since complete financial statements are not available for the current year, sales and income are extrapolated according to the expectations of management. Bill of Sale: A written instrument which is the proof of transfer of one person’s right to a piece of personal property to another individual/body. 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. Bonds Payable: Long-term debt proven in writing by the presence of a contract and the issuance of certificates. Book Value (Asset): The accounting value of an asset shown on the Balance Sheet that is the original expense of the asset, minus accumulated depreciation. It is worth noting that this value may have little/no relationship to the real market value of the asset as determined by a Certified Business Valuation. Frequently, depreciation expenses are charged much faster than the actual decline in the asset’s market value. Book Value (Business): The book value of a business is gleaned from financial records, by adding the current value of all assets (usually excluding intangibles such as goodwill), then subtracting all debts and other liabilities. Book value of the business may have no significant relationship to actual market value due to depreciation and a lack of consideration of the value of intangible assets during a business appraisal. Break-even Point: The point where a business’ net sales revenue equals its total expenses. This is a vital statistic for business buyers that are conducting a business valuation on a prospective purchase. The equation for a break-even point as expressed as an amount of sale units is as follows: B/E in sales volume = Total Fixed Cost/ Contribution Margin per unit Contribution margin per unit = price/unit â€” marginal cost/unit Bridge Loan: A very short term loan that covers an unusual expense or a sudden drop in revenues. Sometimes, bridge loans are used by purchasers of businesses to get them over the hump of the 30 to 90 day transition period of the changeover in ownership of a business. An M&A Advisor can aid you in this process if you think that you will require financial assistance to make it through a changeover in ownership. Buildings: Structures that are owned by a firm and used in the operation of their business. Buildings are considered to be a fixed asset. Business Plan: A written plan that outlines a business’s sales projections, expenses, marketing strategy, and primary objectives. A business plan is of paramount importance to anyone buying a business, or starting one, even with a business broker mediating the process. You will never get anywhere if you do not know where you are going in the first place. Bulk Transfer: A US Term. Article 6 of the Uniform Commercial Code regulates the bulk transfer through the sale or ownership change of a large portion (usually greater than 50%) of a business’s inventory, material, supplies, merchandise, and equipment. Requirements include the advance notification of creditors of the impending sale of a business and its assets listed above to prevent the commission of fraud. Provisions differ from one state to another, so check your local statutes and liaise with a Mergers and Acquisitions Advisor before proceeding with a deal with a purchaser. Book Value: The value, including depreciation, at which an asset appears on a company’s balance sheet. Business Intermediary: An agent (such as a business broker or an M&A advisor) who is a mergers and acquisitions specialist for a buyer/investor or seller who is expected to facilitate the transaction between them and the other party involved. Capital: The amount of currency instruments that an individual, partner, or shareholder/stockholder has invested in a business. Capitalization: The conversion of future income into a present value by use of a capitalization factor, usually expressed as a percentage such as return on investment (ROI). Capitalization of an asset: The accounting listing of an expenditure as a balance sheet asset rather than as an expense. Capitalization of a business: The capital structure of a business consisting of the sum of its long term debt and the owner’s equity in it. Capitalization of Net Profit: A process by which one determines the present value of a business by applying a capitalization rate (ROI) to the expected net profit of a business. Capital Expenditures: Investments of cash that are intended to improve functions of a company (e.g. better equipment, new training protocols, etc.) in order to remain competitive in a given industry. Capitalized Items: Have an economic life of one year or more, allowing these costs to be moved to the balance sheet, which enables them to be written down by depreciation or amortization over a lengthy period of time. Capitalization Rate: Any multiple or divisor used to convert a single period (usually a year) of expected economic benefits into a current economic value. Capital Structure: The mix of invested equity and debt financing of a business enterprise. Capitalizing Net Income: Determining the worth of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (an investor’s required ROI). Cash Flow: (also Sellers Discretionary Cash Flow /Earnings). The total financial benefit to an owner in his/her business. From this cash flow, an owner must pay themselves a salary, pay business income taxes, purchase capital improvements (if required), all while squirreling away funds for a rainy day. This statistic (another value that is essential to someone doing a Certified Business Valuation) is calculated by deducting the following expenses from one’s net income: Interest Taxes Depreciation Amortization Owner’s Compensation Owner’s Fringe Benefits One-Time Expenses Chattel Mortgage: A financial claim on specific items of personal property (non-real estate) in order to secure money that is owed on the property. Client: An entity with whom a Business Broker has a fiduciary relationship. Closely Held Corporation: An incorporated business whose corporate shares are held primarily by the principals in the business and are not publicly traded. Closing Costs: Costs that are owed by the seller and buyer (such as fees payable to the business broker or M&A advisor) at conveyance of a piece of property or a business. Closing Statement: A written accounting of funds transferred between the seller and buyer at the passing of papers. Co-Brokerage: An agreement between two or more Business Brokers for sharing services, responsibilityand compensation on behalf of a specific client. Co-Business Broker: A Business Broker who shares services, responsibility, and compensation on behalf of a client with a separate professional. Cooperating Business Brokers: Business Brokers who share their knowledge, expertise, and skills for the benefit of their profession, the clients and customers they serve, the public good as a whole, and share the commission. Customer: An entity in a transaction who receive services and benefits, but has no fiduciary relationship with the Business Broker with whom they do business with. Collateral: A security or tangible item, such as a mortgage, given to secure a debt that is issued to a customer. Commingling: The mixing of funds held for the benefit of others with the business brokers personal or business funds. Commission: An amount of currency or other objects of value that are awarded to a business broker in return for the successful provision of their services; the amount is determined by an agreement prior to said services being rendered. Conditional Sales Contract: A contract in which an owner retains the title until the buyer has satisfied all terms and conditions laid out in the document. It is a commonly used device in the sale of land, where it is typically called a land or installment contract. Buyer acquires equitable title until they make the final payment, after delivery of deed, buyer then acquires the legal title. Consideration: An item of value that is exchanged between parties in a contract. These can include currency, services, goods or promises. CLP (Certified Lender Program): This process is for more sophisticated and experienced lenders who have graduated beyond GP status. The lender submits a complete package to the SBA, and as a CLP Lender, they are guaranteed a 3-day turnaround from the SBA. Common Shares/Stock: Shares of ownership in a company or corporation. Copyright: An exclusive privilege of publication that extends legal protection to authors of original works through common law and through registration with the U.S. Copyright Office. 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 (ask a Mergers and Acquisitions Advisor about how to make this happen) and has an unlimited life. 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. Creditor: An entity or person to whom a business owes a debt, one who has a financial stake in the firm’s assets. Contract: A legal instrument between two parties to do or not to do something. All contracts must be in writing to be legally valid, as verbal “contracts” are non-binding by their inherent lack of physical documentation. Counter Offer: A deal in response to the first offer, thereby invalidating it. Covenant: A promise in an agreement or contract that agrees to the performance or nonperformance of certain acts, or that requires or prevents the commission of certain acts or uses. 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. Confidentiality Agreement: A legally binding contract that prohibits buyers, sellers, and their agents (e.g. M&A Advisor, Business Broker) in a given business deal from leaking information about the transaction to other persons/entities. Current Assets: Cash and other resources which are reasonably expected to be converted into cash or sold or consumed within one year or one operating cycle (whichever is longer). Common current asset items include cash, marketable securities, accounts receivable, inventory and prepaid expenses, all of which are vital stats that need to be properly accounted for before a Business Valuation is conducted. Current Liabilities: Debts which must usually be paid within a year. The payment typically requires the use of current assets to pay them down. Current Ratio: The comparison of current assets to current liabilities which is the total current assets divided by total current liabilities. This ratio indicates how well a business can pay off its current debts with the current assets that it has on the books. A great ratio to strive for is 2:1. 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. Deficiency Judgment: The court award to a lender if sale at public auction does not equal mortgage debt owed. 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. Discount Rate: A rate of return used to calculate the current value of multiple periods (typically over years) of payments. Discretionary Earnings: See Cash Flow. Dividends: A distribution of income to shareholders/stockholders that is earned by a corporation. 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: The process of investigation by a potential buyer into a business’s claimed financial and operational performance. This means reviewing CRA/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. Earnest Money: A US term. “Trust funds” would be the Canadian equivalent. 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 to negotiate on the part of the potential buyer. Earnings: Means the same as income and profit. Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA): The earnings of a business after eliminating non-cash expenses for depreciation and amortization, and after eliminating the discretionary expense of interest on debt and taxes. This is a measure of the cash flow of a given business, and is one of the more important figures to uncover during a business appraisal. Employment Agreement: This is an agreement whereby cornerstone employees agree to remain with the business for a specific period of time under certain conditions. Earn out: The part of the purchase price that hinges on the future performance of the business. It is payable to the seller after certain predefined levels of sales or income are achieved in the year(s) after its acquisition. Equipment: Assets which have long usage lives, are used in the operation of a business, and are not for sale. They are considered to be part of its fixed assets. Equity: Value or interest an owner has above any debt on property; difference between its value and outstanding mortgage debt. Escrow: The holding of something of value by a third party (escrowee or escrow agent) for the benefit of other parties in a given arrangement. Exclusive Right to Sell: An employment agreement and contract giving the business broker the right to receive a commission if the property or business is sold by anyone including the seller during the life of an agreement. Expense: Deductions from revenue or from gross profit on sales, depending upon the type of business activity, to determine one’s net income. Effectively, they are the costs of operating a business. Expense Allocation: The process of distributing an expense to a variety of items or areas on the books. Factoring: A technique used by certain businesses to optimize their cash flow. A factoring company (usually a finance company or a bank) pays to a business a certain portion of the business’s trade debt and then is paid back as the trade- debtors pay down their account. This may be one more reason not to buy the accounts receivable, as you will not have to find and clear any factoring liens. Fair Market Value: The approximate price at which an asset or service would pass from a seller to a buyer, assuming that both buyer and seller are acting rationally, at arm’s length, in a free and unobstructed market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. It is also assumed that the price is not affected by creative financing or sales concessions granted by anyone associated with the sale. In order to determine this figure effectively, one needs to pursue a Fair Market Business Valuation. 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. Fiduciary: A position of trust (e.g. business broker to principal). FIFO: The first in-first out method of inventory accounting that presumes that goods that enter the inventory first are the first ones to be sold. Financial Statements: Accounting reports that include the balance sheet, income statement, statement of owner’s equity, statement of retained earnings, and a statement of cash flow. These documents are central to any business valuation. Finder’s Fee: Fee to a business broker for arranging a loan for a client; can also mean a fee to the broker for locating a desired property for a client. Fixed Interest Rate: An interest rate that remains static over the term of the loan agreement. Fixed Assets: Tangible physical property of relatively long life that is typically used in the production of goods and services, and is not intended for resale purposes under normal circumstances. Fiscal Year: The annual accounting period chosen by a business to best correspond to its operations. A fiscal year can adhere to a normal calendar year or start/end anywhere in-between. Example: the Federal government’s fiscal year begins 1 October and ends 30 September. 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. 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 approval. This can take up to two weeks, as multiple requests for additional information are common. 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. Government Accountant: One who works for an agency of a governmental body rather than for a private firm or for themselves. Gross Margin: The gross profit of the business stated as a percentage of net sales revenue. Gross Lease: Owner receives rent and pays out expenses such as in apartment leasing; net Lease: owner receives rent and tenant also pays out expenses normally paid by owner such as taxes, etc. Gross Profit (or Gross Income): The net sales revenue of the business minus the direct cost of the products sold or services provided. Income before Taxes: Net sales less cost of goods sold less all expenses. Income, Net: Excess of total revenues after total expenses in a given period have been deducted from gross revenues. One of the more important stats to get right during a Business Appraisal. Income Statement: A financial statement that summarizes a business’s revenues, expenses, and profits over a specific period of time. It is usually prepared on a quarterly or annual schedule. Income (Income Based) Approach: A common way of uncovering the value of a business, business ownership interest, security or intangible asset using one or more methods that determine the current value of expected income in the future. Installment Sale: Mostly used in the US and similar to an earn out in Canada. It is the process of selling a business with the payments made over time. This sale is usually accompanied by a Promissory Note. Intangible Asset: A long-lived, non-physical asset, such as a patent, copyright, intellectual property, or a trademark. Intrinsic Value: An analytical judgment of value based on the perceived aspects inherent in the investment as distinguished from the present market price. Inventory: Completed goods that are stored while they await sale, and raw material and partly finished products will be sold by the business that upon their completion. 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. Investment Value: The value to a specific investor based on individual investment requirements and expectations. Irrevocable: Something that is unchangeable. Judgment: A court action describing legal obligations that one is compelled to honor to another person/entity. 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. Land: Real estate owned by a firm which is used in the operation of their business. This aspect of a company is considered to be part of the fixed assets that they have on their books. Lease: Contract between lessor (landlord) and lessee (tenant) for exclusive right to take up residence in the lessor’s realty over a specific period under explicit terms. After this contract has lapsed, possession of this property will revert to the lessor, unless a renewal agreement is struck prior to the end of the initial contract. Leaseback: The purchase of improved property and the leasing of it back to a seller; creates capital and favored tax treatment for the seller. Leasehold: The interest that a lessee has in a piece of realty. Leasehold Improvements: Usually refers to the improvements made by a lessee to a lessor’s property. Generally, leasehold improvements may be capitalized by a business and depreciated against income, but ownership of them will revert to the lessor upon the completion of the agreed lease. Lessee: The person or entity to which a lease of real or personal property is granted for a specific period of time. Lessor: The person or entity granting a lease for real or personal property over a specific period of time. Letter of Intent: A document agreement between a buyer and a seller used in connection with the acquisition of a company (if you have no/limited experience with this part of the process, a Mergers and Acquisitions Advisor can help you understand what you need to do). The letter of intent describes the terms and conditions of the transaction between the buyer and the seller, including price, due diligence periods, exclusivity or no-shops, and the baseline conditions that are required to close the deal. Presented before a definitive purchase agreement is consummated, the letter of intent provides a road map that will help guide both parties involved in the transaction. Liabilities: All financial claims against a business. Liabilities can include accounts and wages and salaries payable, accrued taxes payable, and fixed or long-term liabilities, such as mortgage bonds, debentures, and bank loans. Liability, Current: Obligations against a business that become due within a short time period, usually not exceeding one year out from the present moment. Lien: A debt; a claim by an individual or entity against a property for payment of a debt that is owed to them. Lis Pendens: A notice filed in a registry of deeds that warns all readers that the title to the property in question is currently undergoing litigation. Listing: A written engagement (or 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 (often, a business broker) involve the desired sale of the principal’s property or business. Additionally, the property or business listed by the sales agent is also called a Listing. List: To obtain a Listing Agreement from a third party, usually a business broker. Liquidation or Liquidating Value: The estimated value, net of liabilities, of a business based on the market value of the assets on its books. Liquid Assets: Assets that are easily convertible into currency. These include marketable securities, receivables, checking and savings accounts, and physical cash. Liquidation Value: The market value of a business’s physical assets less its liabilities under the conditions of a forced sale. Liquidity: A measure of the quality and adequacy of current assets to meet financial obligations as they come due. When conducting a Certified Business Valuation, getting a clear picture of a business’s liquidity is key to determining its overall health. Long-term Liability: Debts that are not yet due. These usually have a maturity date that is in excess of a year in the future. Loss, Net: The excess of total expenses over total revenues over a specific period of time. LIFO: The last-in-first-out methodology of inventory accounting that presumes that goods that enter inventory last are the first ones to be sold. Machinery: An example of a fixed asset, which is used to manufacture a product. They have relatively long lives and are not intended for sale to businesses or the general public. Manufacturing Firm: A business entity that makes the product that it sells. Marketable Securities: Temporary investments in marketable stocks and bonds. Markup: The amount added to the wholesale/baseline costs of a product/service to arrive at the desired retail price for said products or services. 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. Merchandise Firm: A business entity that procure goods for the purpose of reselling them at a profit. Merchandise Inventory: The value of the goods in a businesses’s inventory that are intended to be sold in the routine course of operating the business in question. Merger: The combining of two companies in which the stockholders of one company exchanges all of their stock for shares of the dominant company in the process. This is often coordinated with the assistance of an M&A Advisor or team, who is experienced in such complicated matters. The company that receives shares and issues their stock solely is known as the surviving company. Mergers and Acquisitions (M&A): A term that is often used for the mergers, acquisitions and the selling of companies, which is commonly facilitated by a Mergers and Acquisitions Advisor. M&A is a commonly used abbreviation for this term. Mortgage Payable: A written promissory note of debt, usually secured by pledging a specific asset or assets as collateral. 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. Net Asset Value: The value of an asset. It is determined by taking its original cost and subtracting accumulated depreciation and liens applied against it. Net Book Value: The difference between total assets (net of depreciation, depletion and amortization) and total liabilities of a business enterprise as they appear on its balance sheet (synonymous with Shareholder’s Equity). In relation to an individual asset, it’s is derived by taking its capitalized cost less accumulated amortization or depreciation as it appears on the books of the business enterprise that owns it. Net Profit (Net Income or Net Earnings): Cash that remains after deducting all operating expenses (including taxes) from gross revenues. An essential line item in any Business Valuation. Net Worth: See the Book Value of a business. Note Payable: A written promissory to pay a person/entity a specific sum of money on a discretely defined date in the future. Note Receivable: A written promise by a customer to remit a specific sum of cash to a company on a discretely defined date in the future. Nonoperating\Noncontributing Asset: An asset that is not essential to the operation of a business and the creation of its revenues. Obsolescence: A drop in value of a fixed asset due to the emergence of superior assets that are readily available on the market. Operating Cash Flow: This is cash flow directly generated during a business’s day to day operations. It is calculated by taking net income plus depreciation minus the increase in accounts receivable minus any increase in inventory plus any increase in accruals (money owed to the business as a result of operations). It is vital to understand this if you are going to underwrite a business expansion or any other major project that requires significant commitments of capital from the cash flow that is generated by the business. The best way to be certain of this figure is to conduct a thorough Business Appraisal that is overseen by trained and experienced professionals. Operating Income: This is earnings (profit) before interest payments and income taxes are deducted from your standing balance. This is a very important number for a buyer and seller of a business to be aware of, as it is the basis for the ability of the business to repay its debts. In almost every case involving the purchase of a small business, the buyer will finance the purchase in some fashion, be it through a bank, SBA, seller, family, etc. Operating Statement: An alternative title for income statement. Overhead: A way of allocating all non-labor costs (though occasionally, partial labor factors can also be a part of the overhead) to the various products that are manufactured or services that are performed. Owner: A term that is used in business brokerages to represent the proprietor, general partner or controlling shareholder (singular or plural as appropriate) of a business enterprise. Owner’s Salary: The salary or wages paid to the owner, inclusive of payroll burden that is related to said salary or wage. Owner’s Total Compensation: The sum of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value. Partner: One of multiple owners of a business that is unincorporated. 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. 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. Physical Inventory: The process by which physical merchandise is counted. This is usually done by hand, and it is conducted near the end of an accounting period. Prepaid Expenses: Supplies and services paid for in advance of their reception, which have yet to be received. Present Value: The value today of a future payment, or stream of payments, which is discounted at an appropriately determined compound interest rate (Discount Rate). PLP (Preferred Lender Program): This is the top designation and enables lenders that are certified under it to approve their own loans with no additional underwriting by the SBA. Typically, this designation means that the lender has high levels of experience and track record that would suggest that there is a very high degree of certainty that the lender in question will adhere to SBA standards and make quality loans. Private Accountant: One who performs his service as an employee of a firm rather than as an independent contractor. Procuring Cause: A legal term that means the cause resulting in accomplishing a goal. Used in real estate [or business brokerage] to decide whether a business broker is entitled to a commission. Profit: Means the same as earnings and income. Profit (Gross): Sales revenue minus cost of goods sold. Profit and Loss Statement: An alternative title for Income Statement. Pro Forma: A set of projected financial statements for a business which typically includes a Balance Sheet, Income Statements, and Cash Flow Statements. Often, the seller prepares an optimistic Pro Forma Statement during the sales process of a business. The buyer should ensure that a realistic Pro Forma is being used as part of the Business Plan for the business that they are about to acquire. By getting a Fair Market Business Valuation of their prospective purchase from an independent evaluator, negative issues in this process can be reduced or eliminated. Projection: Financial statements that present an entity’s expected financial position in the near future, as well as results of operation and changes in financial position, based upon one or more hypothetical assumptions in relation to expected economic conditions. 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. Proprietor: The sole owner of an unincorporated business who is responsible for its operation and any liabilities arising from it. Prorate: Spread equally over a specified time period. Public Accountant: One who offers his professional services to the public in exchange for a fee. Quick Ratio: The ratio of liquid assets to current liabilities. This is also known as the “acid test” ratio. If an operating business regularly has fewer liquid assets than its current liabilities, sudden financial issues could place the business in significant jeopardy. Receipts: Occasionally used instead of terms like sales and revenue. 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. Referring Business Broker: A Business Broker who provides introductory information for a fellow professional, which then leads to a client relationship. Representation: A statement or condition made that something is true or accurate. Residual Value: The expected market value of an asset at the end of the time period under consideration. Return on Investment (ROI): The rate of return at which the total of the discounted future earnings plus the discounted future Residual Value equals the initial cash investment. Revenue: The gross income earned as a result of the operations of a company before expenses are deducted to determine net profit/loss. Sales: The revenue procured from selling a firm’s merchandise to its customers. States: Territorial regions such as Connecticut, New York, New Jersey, Pennsylvania, Maryland, Delaware, Virginia, North Carolina or Washington DC. They are governed by various laws that differ from each other, so be sure to consult a Business Broker or an M&A Advisor before conducting transactions in states where you are not familiar with their regulations. Service Business Firm: A business entity that generates revenue by performing a service as opposed to making or selling a physical product. SIC Code: Standard Industrial Classification Code given to businesses within an industrial category as determined by the U.S. Department of Commerce. Simple Interest: Interest paid on principal only, as compared to compound interest which is interest on both principal and accumulated interest. Sole Proprietorship: A type of business owned by a single individual. This person is responsible for the operations and liabilities of the entire operation. Solvency: Ability of a business to meet its interest cost and repayment schedules in relation to its long-term obligations. Statement of Changes in Financial Position: A financial statement that shows the movement of funds through a business. Statement of Financial Condition: See balance sheet. Statement of Financial Position: Another name for a balance sheet. Statement of Operations: An alternative title for income statement. Statement of Owner’s Equity: A financial statement that shows the changes that have occurred in the proprietor’s capital over a certain time period. Stipulation: To make a special demand for something to be included as a condition of an agreement. Stock Sale A type of acquisition where all or a portion of the stock in a corporation is sold to a buyer. Subsidiary Operations: The operations of a business that are separately accounted for in the financial statements. Typically used for businesses that have divisions that function as separate profit centers. A daughter company, mother company or related company. Sweat equity: A loosely defined term used to describe the value of a business beyond its net asset value. Also known as the goodwill that the owner of the company has put into their business. Shareholder/Stockholder: The owners of a corporation, who hold shares/stock certificates as proof of ownership. Frequently used for publicly traded companies. Tangible Asset: A physical asset such as a plant asset, equipment, and machinery (i.e. you can touch it). Taxable Income: Income on which income tax is deducted; gross income minus both exemptions and personal deductions. 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: Total sum of all consideration passed at any time between the buyer and seller for an ownership interest in a given 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 consulting agreements, franchise fees, assumed liabilities, stock options/ redemptions, real estate, leases, royalties, earn outs and future considerations. Trust Funds/Deposit: The deposit provided by a buyer to a seller as part of an offer to purchase a business under specific conditions. The cash represents a serious intention to negotiate on the buyer’s part. Turnover: The rate at which an asset is replaced by new assets over a specific period of time. This usually refers to the annual rate of replacement of stock such as “inventory turnover” or payment of accounts receivable turnover. Valuation Approach: The usual method of discovering the value indication of a business, business ownership interest, security or intangible asset using one or more Valuation Methods within the context of a Certified Business Valuation. There are three approaches that are typically used to value a business: Asset Approach, Income Approach and Market Approach. Valuation Method: Under a chosen Valuation Approach, there are various ways to determine the value of a business or of an entity contained therein. Variable Interest Rate: An interest rate that fluctuates on occasion within a predefined margin above or below an index rate. A commonly used index is the bank prime rate. Venture Capitalist: A person or entity with the goal of investing funds in business startups, expansions, acquisitions, new products, etc., for the purpose of realizing positive financial returns through ownership of equity positions in the businesses in which they are involved. Working Capital: Readily convertible capital needed in a business to allow the smooth functioning of operations, thus keeping them free from financial obstacles that might obstruct essential processes. In accounting terms, it is the excess of current assets over current liabilities as at a specific point in time. Write Down: To reduce the book value of an asset to its current market value where the asset has actually dropped in value quicker than it has been depreciated. Yield: The return on one’s investment, often expressed as an annual rate of earnings and usually as a percentage based on cost. Warranty: An expressed or implied statement that a situation or thing is as it appears to be or is represented to be. Contact A Neumann & Associates, LLC If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. 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