Business Broker Industry Terms - Page 1

A helpful Guide to understanding terms you will encounter working with a business broker to buy or sell a business in Florida - page one.

- Go to Glossary of Terms Page Two -

Adjusted Book Value

The book value (equity) of a company after adjusting the values of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet.

Adjusted Earnings

(Sometimes referred to as Adjusted Net Income, Adjusted Cash Flow, or Seller's Discretionary Cash Flow.) The earnings of a business after adjustment for one-time or extraordinary expenses, excess owner compensation, and discretionary expenses or other expenses that are not essential for the successful ongoing operation of the business.

Acceleration Clause

A clause used in a note and/or security agreement which gives the lender the right to demand payment in full if a certain event occurs such as default or if the ownership of the business changes without the lender’s consent. Sometimes referred to as a "due on sale" clause.

Agency Disclosure

A written explanation to be signed by a prospective buyer or seller, explaining to the customer 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 a subagent (an agent of the sellers broker). This allows the customer to understand to which party the broker owes loyalty.  First Venture usually acts as a Transaction Broker and does not represent either seller or buyer, but brings the two together in the transaction.

Accounts Payable

An obligation by a business to pay an amount to a vendor or other creditor for goods and services.

Accounts Receivable

A financial claim by a business against a customer arising from a sale of goods or services on credit. One measure of the health of a business is how fast customers pay off their accounts.  Less than 30 days is good, 30-60 days may be okay, and over 60 days could be a problem.

Allocation of Purchase Price

A breakdown of the purchase price usually required when a business is sold.  For example, the allocation might contain a breakdown of the inventories, fixtures and equipment, leasehold improvements, goodwill, and any other purchased assets.  Generally, value is placed on each component of the allocation and the buyer and seller agree on this breakdown.  The IRS requires that such an allocation be a part of the buyer’s and seller’s tax return when a sale takes place; Form 8594, the “Asset Acquisition Statement”, must be filed with the buyer’s and seller’s tax return for the year in which an “applicable asset acquisition” takes place.

Amortization

Act of liquidation an indebtedness by equal and periodic payments usually monthly; this direct reduction method means each payment remains constant but the ratio of principal and interest changes with an increasing larger portion credited to reducing debt.

Arbitration

The submission of a disputed matter for resolution outside the normal judicial system.  It is often speedier 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 form 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 Approach

A way of estimating the value of a business ownership interest using one or more methods based on the value of the Adjusted Book Value of the company.

Asset Sale

A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser.  The corporate entity is not transferred.

Assignment

A transfer in writing of an interest in property or other things of value from one person or entity to another.

Attorney-In-Fact

One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.

Balance Sheet

A statement showing the nature and amount of a business's assets, liabilities, and equity on a given date. In dollar amounts, the balance sheet shows what the business owned, what it owed, and the ownership interest in the company of its owners.

Base Year

The Company’s current fiscal year.  Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management.

Blue Sky

Any intangible portion of a price above the maximum goodwill that can be reasonably supported through the application of established valuation methodology.

Book Value

The value, net of depreciation, at which an asset appears on a company’s balance sheet.

Breach of Contract

Failure of a party to a contract to perform any or all of his obligations under the contract.

Bulk Sale

A transfer in bulk of all or substantially all of the inventory and fixtures of a business that is not in the ordinary course of business.

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.

Business Plan

A written plan detailing a business's sales projections, expenses, marketing strategy, and objectives. A business plan is of great importance to anyone in business, but of paramount importance to anyone buying or starting a business.  You will never get there if you don't know where you are going.

C-Corporation

Entity or organization created by operation of law with rights of doing business essentially the same as those of an individual.  The entity has continuous existence regardless of that of its owners and generally limits liability of owners to the amount invested in the organization.  The entity ceases to exist only if dissolved according to proper legal process. It is easily transferred and has an unlimited life.

Capital Expenditures

Investments of cash for improvements to remain competitive in business.

Capitalized Items

Have an economic life of one year or more and the cost is moved to the balance sheet, and then these costs can be written down by depreciation or amortization over time.

Capital Structure

The mix of invested equity and debt financing of a business enterprise.

Capitalization Factor or Rate

Any multiple or divisor used to convert anticipated economic benefits over time into a present economic value.

Capitalizing Net Income

Determining the value of a Company by dividing annual adjusted income by the capitalization rate (required ROI).

Cash Cow

A business that has a steady cash flow, but whose earnings have remained nearly the same for the past five years, but before interest, depreciation, taxes, and amortization.

Cash Flow

The amount by which the total cash coming into a business from all sources exceeds the total cash going out.

Cash Flow Statement

An analysis of all the changes that affect the cash account during an accounting period.  These changes may be shown as either sources or uses of cash.

Cashier's Check

A check drawn on the bank’s own funds.  It is often used to close a sale because there is generally no waiting for the check to clear.

Caveat Emptor

"Let the buyer beware".

Certified Check

A personal check guaranteed by the bank.  The bank holds the necessary funds and will not accept any withdrawals against the certified amount.  The bank also will not usually honor a stop payment on a certified check.

Chattel (U.C.C.) Search

A chattel is an article of personal property and it includes both animate and inanimate property. U.C.C. stands for the Uniform Commercial Code that governs the granting of security agreements.  A chattel search is a review of the appropriate county and Secretary of State records in regard to any liens against chattels, tax liens and judgments.

Client

An entity with which 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.

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.

Co-Brokerage

An agreement between two or more Business Brokers for sharing services, responsibility and compensation on behalf of the client.

Co-Business Broker

A Business Broker who shares services, responsibility and compensation on behalf of a client

Contingency

A clause in a agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event.  For example, the sale of the business is contingent upon the buyer obtaining financing.

Co-mingling

The mixing of funds held for the benefit of others with the brokers personal or business funds.

Commission

Money or other valuable consideration given to broker by principal for services rendered. Typically the amount is stated in the listing agreement.

Confidentiality Agreement or Non Disclosure Agreement (NDA).

An agreement signed by the buyer before a business name or specific business information is disclosed.  It states that proprietary information by one party to another for that party's exclusive use, with a prohibition against passing it on to others.

Consideration

Something of value exchanged between parties of a contract; money, services, goods or promises.

Cost of goods sold

The price paid for the merchandise which has be sold by a business; beginning inventory plus net purchases minus ending inventory equals cost of goods sold.

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.

Customer

An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker

dba. "doing business as"

an identification of the trade name of the business, which may differ from the legal corporate name.

Deal Structure

The combination of types of payment by which the purchase of a business is accomplished.  It can include cash, 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.  See those definitions.

Debt Service

This is the payment of principal and interest required on a debt (usually a loan or mortgage) over a specified period of time and interest rate.

Depreciation

Charges against earnings to write off the cost, less salvage value, or an asset over its estimated useful life.  It is a bookkeeping entry for accounting and tax purposes and does not represent a cash outlay.

Discount Rate

A rate of return used to calculate the present value of a stream of payments.

Discretionary Earnings.

Earnings of a business enterprise prior to these expenses: