Adjusted earnings before taxes, interest income or expense, nonoperating and non-recurring income/expenses, Depreciation and other non-cash charges and prior to deducting an owner’s/officer’s compensation, but after replacing that owner’s/officer’s compensation and benefits with the market rate compensation and benefits to replace that owner’s/officer’s functions. This is a measure of a company’s operating performance without having to factor in financing decisions, accounting decisions or tax environments.
An snapshot of the accounts receivable, usually alphabetized, as of the date of the balance sheet you are using, wherein each account receivable is shown in columnar form as either current, over 30 days, over 60 days, over 90 days, or over 120 days delinquent. The aging report is the primary tool used by collections personnel to determine which invoices are overdue for payment.
This is an accounting technique, used for tax planning purpose, to periodically lower the book value of a loan or an intangible asset over a set period of years. This is accomplished by monthly lowering the intangible asset value on the balance sheet by a specific amount and charging that same amount to expense on the income statement. The amount of Amortization taken as a non-cash charge in any given accounting period is almost always based upon number of years approved by the IRS for cost recovery. See also Depreciation, which is the corresponding accounting technique for tangible assets. More….
This term has two definitions. The proper definition depends on its usage: A. The means by which a business owner transfers ownership of tangible and intangible assets, and possibly some liabilities, to another owner without transferring the ownership entity. B. The sale of a business enterprise that is no longer a viable ongoing concern at a price based solely upon the value of the tangible assets. More….
A financial statement that is one of the three important financial statements used for reporting a company’s financial performance, with the other two key statements being the income statement and the statement of cash flows. The balance sheet is a statement of the financial status of the business on a certain date. More explicitly, it is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by its shareholders. More….
Any obstacle that makes it difficult for a business to enter and succeed at generating revenues in an existing marketplace. Barriers to entry can include government regulations, the need for licenses, and having to compete with other larger companies as a small business start-up.
That portion of a “claimed” value or requested price that cannot be supported, or generally shown to exist, through the application of established valuation methodology. Alternatively, it is that excess value, above the business’ financial value, paid by a strategic buyer based on the buyer’s perceived future value of that business.
A professional 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.
Organization that contributes to the total enrichment and advancement of the business brokers who are members.
A commercial, industrial, service, or investment entity (or a combination thereof) that provides goods and/or services in pursuit of economic gains.
A disclosure document that provides information about an investment offering to the public, and that is required to be filed with the Securities and Exchange Commission (SEC) or local regulator. A Business Prospectus contains information about the company, its management team, recent financial performance, risks and other related information that investors would like to know before investing. More…
Process in which the broker learns the needs and qualifications of a potential buyer.
Investment assets that can be quickly converted into cash, typically within 3 months.
A business’ net income plus non-cash charges (Depreciation, Amortization, depletion). Can be defined (if so qualified) as before or after such items as taxes, debt service (interest only or principal & interest), or extraordinary items. (Should not be confused with net cash flow, a.k.a. free cash flow). More…
An agreement between two or more business brokers or brokerage firms for sharing the responsibilitities for and the fees from the completion of a transaction.
Lists and sells physical property (the real estate that a business occupies).
Financial statements in which each line is expressed as a percentage of the total. On the balance sheet, each line item is shown as a percentage of total assets, and on the income statement, each item is expressed as a percentage of sales. It is used to make comparisons with other similar businesses.
A CBR is drafted by a brokerage firm or Business Broker to market a businesss to prospective buyers. It contains information about the business, including its products, markets, competition, and financial performance. The CBR is provided only to qualified buyers who have signed non-disclosure agreements. See Confidential Information Memorandum (CIM). More….
Sometimes call “the book” or pitchbook is drafted by an M&A advisory firm or investment banker for a sell-side engagement to market a businesss to prospective buyers. It Contains financial information, including Analysis of historical results and future projections. See Confidential Business Review (CBR).
A general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset.
A grouping of those expenses applicable to the materials and labor associated directly with the goods or services delivered.
A technology for managing all your company’s relationships and interactions with customers and potential customers.
Depreciation is a method of spreading the cost of an asset over a specified period of time, typically the asset’s useful life. The purpose of Depreciation is to match the expense of obtaining an asset to the income it helps a company receives. Depreciation is used for tangible assets, which are physical assets such as manufacturing equipment, business vehicles, and computers. Depreciation is a measure of how much of an asset’s value has been used up at a given point in time.In an economic sense, as used in recasting of statements, a loss in value of a fixed asset as a result of wear and tear or obsolescence, which cannot be corrected by normal repairs. In accountants’ financial statements, an expense item that permits the original cost to be written off against income over the assets’ cost recovery period, as dictated from time to time by the Internal Revenue Service or GAAP. The amount of Depreciation taken as a non-cash charge in any given accounting period is almost always based upon number of years approved by the IRS for cost recovery. See Amortization which is the corresponding accounting technique for intangible assets.
A reduction in value or the act of reducing value.
An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability. Discounts for lack of marketability (DLOM) attempt to capture the disadvantages of owning a relatively illiquid investment without a ready market on which to trade it.
The earnings of a business enterprise prior to the following items: income taxes, non-operating income, and expenses, nonrecurring income and expenses, Depreciation and Amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business. Seller’s Discretionary Earnings (SDE) and Seller’s Discretionary Cash Flow (SDCF) and Adjusted Net are other terms used.
A contractual provision stating that the seller of a business is to obtain additional future consideration based on the business achieving certain future business goals. An earn-out is a mutually beneficial tool to getting a deal done if it is structured appropriately. Is maximizes the selling price for the seller and it matches the Company’s future earnings with the payments made to the Seller. An earn-out should not provide a financial “burden” on the Company, but should be structured as a sharing of the future earnings. (Earn-outs are prohibited by the SBA.) Read more earn-out/">here.
Any benefit that can be quantified in terms of the money that it generates. Net income and revenues, for example, are forms of economic benefit. Profit and net cash flow are also economic benefits. An economic benefit may also refer to a reductions in costs, such as lower raw material or labor costs.
The traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period.
Enterprise Value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to equity market Capitalization. EV includes in its calculation the market Capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet. EV is a popular metric used to value a company for a potential takeover.
Third-party arrangement to hold and distribute funds (usually by an attorney); agreed upon by both the buyer and the seller.
Agency agreement that gives only one broker or brokerage firm the right to sell the business. Seller retains the right to find a buyer independently without having to pay a commission to the listing agent or firm.
A strategy to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for the time when that business owner is no longer involved in the operation of the company. Examples of unplanned exits include death, divorce, management disputes, influx of competition, technological obsolescence, loss of a major Customer, or other unforeseen economic events.
The price, expressed in terms of Cash Equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s 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. (NOTE: in Canada, the term “price” should be replaced with the term “highest price.”)
An opinion as to whether or not the consideration in a transaction is fair from a financial point of view. This opinion is usually prepared by an accountant or other financial professional.
An accounting method of valuing inventory, based on the assumption that the “first” unit of an item of inventory purchased (the oldest) is the first unit sold out of inventory. In pricing, the inventory under this valuation method the ending inventory is the aggregate of the cost of the newest, most recently purchased units of each item.
Annual period of time to which a business adheres for financial reporting.
A. Those elements of a business that cause customers to return in sufficient volume to generate profit in excess of a reasonable return on tangible assets. B.That intangible asset that arises as a result of name, reputation, Customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits.
A financial statement that is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period, with the other two key statements being the balance sheet and the statement of cash flows. The income statement primarily focuses on the company’s revenues and expenses during a particular period. Also known as the profit and loss statement, P&L, or the statement of revenue and expense.
Represents how the market perceives the risk of a specific industry compared to the market as a whole.
Intellectual Property is a broad categorical description for the set of intangible assets owned by a company and legally protected from outside use or implementation without consent. Intellectual Property can consist of patents, trade secrets, copyrights, and trademarks or simply ideas. The concept of Intellectual Property relates to the fact that certain products of human intellect should be afforded the same protective rights that apply to physical property.
An advisor who assists buyers and sellers of privately held small business throughout the business transfer transaction process. An agency relationship typically exists between the intermediary and either the buyer or seller. The intermediary offers transaction advisory services such as estimating the value of the business; advertising it for sale with or without disclosing its identity; managing the initial buyer/seller interviews, discussion and negotiations; facilitating the progress of the Due Diligence investigation and generally assisting with the business sale. Intermediaries require special skills – number crunching ability, excellent verbal and written communication skills and the capacity to work very long and grueling hours. For businesses selling below about $2 million, the intermediary is often referred to as a Business Broker. For businesses selling above $5 million, the intermediary is often referred to as a Merger and Acquisition (M&A) advisor or an investment banker.
The value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same opinion. When the term applies to options, it is the difference between the exercise price or strike price of an option and the market value of the underlying security.
Investment Analysis is a broad term encompassing many different aspects of evaluating financial assets, sectors, and trends. It can include analyzing past returns to predict future performance, selecting the type of investment instrument that best suits an investor’s needs, or evaluating securities such as stocks and bonds, or a category of securities, for risk, yield potential or price movements. Investment Analysis is key to any sound portfolio management strategy.
An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities or who works in a large bank’s division that is involved with these activities. Investment bankers may also provide other services to their clients such as mergers and acquisitions advice or advice on specific transactions, such as spinoff or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers. Investment bankers require specific skills – number crunching ability, excellent verbal and written communication skills and the capacity to work for very long and grueling hours.
The degree of uncertainty as to the realization of expected returns.
The Acquisition of a business utilizing equity or investment capital and third-party debt financing. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. Typically includes a change of Control or change of ownership.
An accounting method of valuing inventory, based on the assumption that the “last”, most recent, unit of an item of inventory purchased is the first unit sold out of inventory. In pricing the inventory under this valuation method the ending inventory is the aggregate of the cost of the oldest units of each item, purchased within the accounting period.
The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced.”
Addresses a change made to the original listing. Also called a Listing Addendum.
Occurs when the buyer assumes all of the rights and obligations of a debt currently in the name of the seller.
The debt due to be paid at a date more than one year in the future. Also, the loans and obligations with a maturity of longer than one year; usually accompanied by interest payments. From a business owner’s perspective Long Term Debt Financing usually applies to assets the business is purchasing, such as equipment, buildings, land, or machinery.
Financing an outside manager or management team to acquire a target company. In a Management Buy-in (MBI) an external management team partners with a company that has a management void. This could be a private company, a stand-alone company or an orphaned division of a larger company. Managers retain operational Control while holding significant equity. This type of action can occur when a company appears to be undervalued, poorly managed or requires succession.
A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund/group (PEG). Management buy-outs (MBO) are generally pursued by management teams that have little or no ownership in a business and want to obtain more ownership but lack the financial resources to buy the company from the current owners. In these circumstances, a PEG can provide the financing necessary to facilitate the purchase of the business. The PEG also gives the management team a large equity stake to cement their commitment to continue running the business.
The combination of two or more companies, whether through (1) a pooling of interest in which the accounts are combined (2) a purchase where the amount paid over and above the acquired company’s book value is carried on the books of the purchaser as Goodwill or (3) consolidation in which a new company is formed to acquire the net assets of the combining companies.
That price for the assets intended for sale which represents the total consideration most likely to be established between a buyers and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic or non-financial benefits to seller and probable buyer.
Also Known as Enterprise Value (EV) Multiple, is the inverse of the Capitalization Rate. It is usually the ratio of the price to earnings, particularly for public companies. It can also be the ratio of selling price to DE for a small business. A Multiple can be used to estimate the value of a company. Most often, however, a Multiple is a generated value as an outgrowth of the valuation of a business.
With respect to a business enterprise, the difference between total assets (net of accumulated 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.
This is the net income plus all non-cash charges (Depreciation, Amortization and depletion), less amounts needed for capital expenditures, plus/minus net change in working capital, plus/minus changes in debt. (This would be net cash flow for equity.) invested capital net cash flow would exclude the net change in debt and adjust net income to include interest expense, net of tax.
Refers to after-tax net income, sometimes known as the bottom line or a company’s profits. Net Earnings are the main determinant of a company’s share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. See earnings.
Total revenues less all expenses and other deductible items. Should be identified as pre-tax or post tax.
The exchange of information and ideas among people with a common profession or special interest, usually in an informal social setting.
Document that requires all information about a business to be kept confidential; also referred to as a confidentiality agreement.
Financial statements adjusted for non-operating assets and liabilities and/or for non-recurring, non-economic or other unusual items to eliminate anomalies and/or facilitate comparisons.
An Agreement between a seller and a broker that defines the terms and commissions that the broker would receive upon selling a business or property. However, unlike an Exclusive Right to Sell agreement, this agreement is non-exclusive. Any other broker may also enter into a similar non-exclusive agreement with the seller. The broker who brings in the winning buyer for the property collects a commission.
Contract with no expiration date.
A generic term used mean 100% controlling ownership; whether or not incorporated, and without the distinction that the owner of an unincorporated business owns the business’ assets, while the owner of a corporation owns the stock of the corporation – that owns the assets. Business ownership refers to the Control over an enterprise, providing the power to dictate the operations and functions.
Special additional benefits received because of an employment position. In closely-held businesses these are often a result of the business’ ability to pay for them, more than a result of market rate compensation for the services provided to the business. perquisites are commonly referred to as “perks.” Perks include items such as company paid vehicles, insurance, travel, memberships, salary in excess of market rate, bonuses, etc.
A buyer will pay no more than that which he/she would have to to purchase an equally desirable substitute.
An investment in non-public securities. Also, an investment asset class typically reserved for large institutional investors, such as pension funds and endowments, as well as high Net Worth individuals. Includes investments in privately held companies, ranging from start-up companies to well established and profitable companies, to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, Growth Capital and distressed investments.
The Quality of Earnings refers to the proportion of income attributable to the core operating activities of a business. The amount of earnings attributable to higher sales or lower costs has higher quality, rather than artificial profits created by accounting anomalies such as inflation of inventory. Quality of Earnings may be considered poor during times of high inflation. Also earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive account policies. A key characteristic of high-quality earnings is that the earnings are readily repeatable over a series of reporting periods, rather than being earnings that are only reported as the result of a one-time event.
A financing transaction that allows owners to harvest some of the value they have created in their company while retaining a large ownership stake in the business going forward. For example, Recapitalization can involve exchanging one type of financing for another – debt for equity or equity for debt – or when a company issues debt to buy back its equity shares.
The current cost of a similar new asset or property having the nearest equivalent utility to the asset or property being valued.
The current cost of an identical new asset or property.
A financial provision for recognizing the reduction in value of assets over their estimated useful life. This is done by making regular additions to a fund sufficient to meet the estimated cost of additions to and replacements of the fixed assets when they come to the end of their useful life. The useful life could end due to wear, or becoming obsolete. This reserve is seldom “actually” money set aside for when needed. In concept, the Reserve For Replacement is similar to the charge for Depreciation.
The prospective value as of the end of the discrete projection period in a discounted benefit streams model. It is also the amount that a company expects to receive for an asset at the end of its service life less any anticipated disposal costs.
The amount, expressed as a percentage, earned on a company’s total capital for a given period.
A mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay or a combination of these; usually industry specific. A Rule of Thumb is a common procedure or practice to empirically value a business. These procedures are based on past valuation experiences and estimates in that industry, rather than using more complex calculations.
When the person selling a business offers financing to a buyer instead of or, in addition to the buyer finding third-party financing.
Guarantor/backer of loans offered by banks or credit unions. Note: In Canada called Small Business Loan SBL also provides other services for small businesses.
Acquirers who believe they can enjoy post-acquisition economies of scale, synergies or strategic advantages by combining the acquired business interest with their own. Also known as Strategic Buyers.
Physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, etc.).
An document circulated to potential buyers of a specific business is for sale without disclosing the identity of the business. The documents, often prepared by an advisor, details information that is designed to entice potential buyers.
The 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 not be limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, noncompetition agreements, employment and/or consultation agreements, licenses, Customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemptions, real estate, leases, royalties, earn-outs and future considerations.