Business Broker Industry Terms - Page 2
A helpful Guide to understanding terms you will encounter
working with a business broker to buy or sell a business in Florida page two.
- Go to
 Glossary
of Terms Page One -
- Due Diligence
- The investigation of the other party's business practices in an attempt to
uncover previously unknown information.
- Draw, Owner's
- 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 generally a salary means that all withholding
taxes, FICA, etc., are accounted for on the books of the business, whereas draw
is straight cash to the owner who pays all tax obligations separately on a personal
income tax return.
- Earnest money
- A sum of money given to bind an agreement or an offer.
- Earn-out
- The portion of the purchase price that is contingent on future performance
of the business. It is payable to the sellers after certain predefined
levels of sales or income are achieved in the year(s) after acquisition.
- EBITDA
- Earnings before interest, taxes, depreciation and amortization.
- Employment Contract or Agreement
- This is an agreement whereby key employees agree to remain with the business
for a specified period of time under certain conditions.
- Enterprise Value
- The total value of the stock of the business, plus the face value of all
interest-bearing debt owed by the business.
- Equity
- Value or interest an owner of realty has above any debt on the property;
difference between value and mortgage debt.
- Escrow
- Money that is delivered to a third party and held on deposit until the party
to receive it fulfills certain conditions.
- Escrow Attorney
- An attorney usually used to close a business who does not represent the buyer
or seller but make sure both sides interests are protected; they are skilled
in business closings and are usually more cost effective than each side employing
their own attorney. (Buyer and Seller can still have their own attorney review
the documents).
- Exclusive Right To Sell Listing
- When a business owner gives one Broker or Agent the authority to sell his/her
business. The Broker or Agent receives commission no matter who sells the
business - even if the seller finds the buyer during the listing period. (See
Agency Listing)
- Execute
- To complete, to make, to perform, to do, to follow through; to execute a
contract; to make a contract: especially signing, sealing and delivery.
- Fair Market Value
- The estimated price at which an asset or service would pass from a willing
seller to a willing buyer, assuming that both buyer and seller are acting rationally,
at arms 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. It
is also presumed that the price is not affected by special or creative financing
or sales concessions granted by anyone associated with the sale.
- Fictitious Name
- The name of a business. In most areas, this name is filed with a state, county
or local government agency to be legally effective.
- 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.
- Finders Fee
- An amount paid to another party for locating and referring a client or customer.
- Fiscal Year
- The annual accounting period selected by a business to best correspond to
its operations. A fiscal year can correspond to a normal calendar year or begin/end
anywhere in between, e.g.; the federal government's fiscal year begins October
1 and ends September 30.
- Fixed Interest Rate
- An interest rate which does not fluctuate over the term of the loan.
- Franchise
- The right or license granted to an individual or group (franchisee) to market
a company’s (franchisor’s) goods or services in a particular geographic territory.
- Free Cash Flow
- Cash available for distribution to owners after taxes but before the effects
of financing. Calculated as net income, plus depreciation and amortization,
plus interest expense, less required capital expenditures and changes in working
capital.
- 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 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.
- Graduated Lease
- A lease that calls for periodic increases in rent.
- Gross Lease
- Owner receives rent and pays out expenses normally paid by owner such as
taxes, etc.
- 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).
- Holdback Provision
- In the purchase and sale agreement, a provision stating that if a buyer winds
up having to pay a debt that the seller did not disclose, it will be paid from
an amount that was held back at closing and place in an escrow account. Usually
done in all cash sales where there is no note to offset.
- Income (Income Based) Approach
- General way of determining the value of a business, business ownership interest,
security, or intangible asset using one or more methods that calculate the present
value of anticipated future income.
- Income and Expense Statement
- A summary of a business's revenues, expenses, and profits for a specific
period of time, usually for a whole month or fiscal year.
- Indemnification
- Exemption for the buyer from incurred penalties or liabilities after the
closing as a result of incomplete representations and warranties of the seller.
- Instrument
- A written legal document, created to affect the rights of the parties.
- Intangible Asset
- That which has no physical existence but represents value, such as goodwill,
going concern value, business trade name. (See Blue-Sky)
- Intrinsic Value
- An analytical judgment of value based on the perceived characteristics inherent
in the investment as distinguished from the current market price.
- Investment Value
- The value to a particular investor based on individual investment requirements
and expectations.
- Lease
- A written legal document in which possession of a property is given by the
owner (lessor) to second party (lessee) for a specified time and for a specified
rent, and setting forth the conditions upon which the lessee may use and/or occupy
the property.
- Lessee
- A tenant; one who has a right to occupy the premises by virtue of a lease.
- Lessor
- A landlord; one who grants a right to the Lesee to occupy the premises by
virtue of a lease.
- Lease with option to purchase
- A lease in which the lessee has the right to purchase the property for a
stipulated price at or within a stipulated time.
- Leasehold Improvements
- Any article or fixture that is attached to land or buildings.
- Letter of Intent (LOI)
- A description of the key points in a potential acquisition of a business. 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 Memorandum
of Understanding to identify the key points of a potential business purchase.
NOTE: 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.
- Limited Partnership
- A partnership composed of some partners whose contributions and liabilities
are limited. A limited partnership requires at leas one general partner and one
limited partner. The general partner(s) are responsible for the management and
liability for its debts. A limited partner has no right in management and his/her
liability is limited to the amount of the investment.
- Liquidation or Liquidating Value
- The estimated value, net of liabilities, of a company based on the market
value of its assets.
- Market (Market-Based) Approach
- General way of determining a value indication of a business, business ownership
interest, security, intangible asset by using one or more methods that compare
the subject to similar businesses, business ownership interests, securities,
or intangible assets that have been sold.
- Merger
- Any combination that forms one company from two or more previously existing
companies.
- Misrepresentation
- A statement contrary to fact. If the statement or action is made with
intent to deceive, it may be deemed to be fraudulent.
- Net Book Value
- With respect to a business enterprise, the difference between total assets
(net of depreciation, depletion and amortization) and total liabilities as they
appear on the balance sheet (synonymous with Shareholder’s Equity). With
respect to a specific asset, the capitalized cost less accumulated amortization
or depreciation as it appears on the books of account of the business enterprise.
- 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-Net-Net Lease (Triple Net Lease)
- A lease in which the tenant (lessee) pays a prorata share of normal property
expenses such as real estate taxes, insurance, maintenance, etc., thereby assuring
the landlord (lessor) of a fixed income.
- Non-operating/Non-contributing Asset
- An asset unnecessary to the operation of a business enterprise and the generation
of its revenues.
- Note, Promissory
- A written promise to repay a loan. Usually a key part of a busines sale.
Normally written from the buyer to the seller.
- Offset (Set-Off)
- A deduction by one against a claim of another; e.g. unknown claims against
the assets purchased by a buyer may be “offset” against the obligation the buyer
owes to the seller (seller financing).
- Owner
- A generic term used in business brokerage 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, including related payroll burden.
- Owner’s Total Compensation
- Total of an owner’s salary and perquisites, after the compensation of all
other owners has been adjusted to market value.
- Perquisites
- Expenses incurred at the discretion of the owner that are unnecessary to
the continued operation of the business.
- Power of Attorney
- An instrument authorizing a person to act as the agent of a person granting
it. A general power of attorney authorizes the agent to act generally on behalf
of his/her principal; special power of attorney limits the agent to a specific
- Present Value
- The value today of a future payment, or stream of payments, discounted at
some appropriate compound interest (discount) rate.
Principal. The employer of an agent. Also, a sum of money owed excluding
any accrued interest.
- Profit
- All positive cash flow, minus any direct expenses made to generate said revenue.
In Europe, profit is not synonymous with income, although in the USA it is.
- Profit and Loss Statement
- Same as income and expense statement.
- Pro Forma Financial Statements
- Hypothetical financial statements. Financial statements as they would
appear if some event, such as increased sales or production had occurred or were
to occur. Also used to make projections for future years.
- Projection
- Prospective financial statements which present an entity’s expected financial
position, results of operation and changes in financial position, based upon
one or more hypothetical assumptions.
- Promissory Note
- A signed, written instrument that 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 futures that are
assumed by the buyer. The costs 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.
- Recasting
- 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 decision 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.
- Recast Book Value
- See also Adjusted Book Value. The value of a balance sheet item(s)
(asset, liability, or equity) after recasting adjustments have been made.
- Release
- The relinquishment of some right or benefit by a person or entity who already
has some interest or right therein.
- Representations and Warranties
- Indemnifications and covenants written into the purchase and sale agreement
that provide factual information that is important to protect the buyer in the
event of future problems.
- Residual Value
- The estimated market value of an asset at the end of the period being considered.
- 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.
- S-Corporation or Sub-Chapter S
- The IRS designation for a small corporation that offers the same liability
limitations as a C corporation, but does not pay corporate taxes. Taxes on company
profits and losses are paid by the individual shareholders in proportion to their
ownership.
- Security Agreement
- The agreement given by a debtor to a creditor giving the creditor a resource
to look to in case the debtor fails to pay the principal obligation.
- Seller Financing
- A situation in which the seller extends his or her own notes to the buyer
in lieu of paying all cash at closing or obtaining other debt financing, such
as bank loans.
- Skimming
- The business owner's personally taking money "off the top" or a
company's revenue stream.
- Sole Proprietorship
- A form of business owned by one person who is responsible for the entire
business operations and liabilities.
- Stock Sale
- A form of acquisition whereby all or a portion of the stock in a corporation
is sold to the purchaser.
- Sublease
- A lease where the lessee can be the lessor, in effect, on a subsequent lease.
The owner of the property often must approve in writing the tenant's right to
sublease to a new tenant. This is different from a "master Lease" where
the lessee has greater control over subletting the property.
- Subordination
- The act of making an encumbrance secondary or junior to another lien.
- Synergy
- The post-acquisition performance, in which the profitability of the continued
entity is greater than the sum of the profitability of the individual entities
before the acquisition.
- Transaction Value
- 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 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 consultation agreements, franchise fees, assumed
liabilities, stock options or redemptions, real estate, leases, royalties, earn-outs,
and future considerations.
- Uniform Commercial Code (U.C.C.)
- State laws that regulate the transfer of personal property. Article
Nine of the U.C.C. deals with transactions that are intended to create a security
interest in personal property.
- Valid
- Legally binding.
- 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,
Income Approach, and Market Approach.
- Variable Interest Rate
- An interest rate that adjusts periodically to a predefined margin above or
below an index rate. A commonly used index is the bank prime rate.
- Valuation Method
- Within a Valuation Approach, a specific way to determine value.
- Valuation Procedure
- The act, manner and technique of performing the steps of an appraisal method.
- Void
- To have no force or effect; that which is unenforceable.
- Waive
- To relinquish or abandon; to forego a right to enforce or require anything.
- Warrant or Warranty
- To legally assure or a legal or binding promise.
- Without Recourse
- The lender can only look to the security for the debt and cannot go after
the buyer personally in the case of default. Often bank loans to closely
held businesses require “personal guarantees” of the business owner(s).
- Working Capital
- The excess of current assets over current liabilities.
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