The definitions below reflect how the words and terms are used in business and may not necessarily be how they are defined in a dictionary.  This list is intended to provide a quick, basic and easy to understand guide.

Accounting Period

A regular period of time, such as a quarter, for which a financial statement is produced.

Accounts Payable

Debts owed to creditors.

Accounts Receivable

Debts owed to a business, usually owed by customers for goods or services purchased from a business.

Add Backs

Term applied to expense items that were discretionary and not absolutely necessary for the operation of the business.  Adding these items to the business owner’s stated profit constitutes the owner’s financial benefit.  This amount is also referred to as the owner’s “Cash Flow.”

Agency

The legal relationship between a principal and his agent arising from a contract in which the principal engages the agent to perform certain acts on the principals behalf.

Agency Disclosure

A written statement explaining the role of the business broker in the transaction and if the broker represents the Seller, Buyer or both.  It should also mention any other sub-agent that may be involved. 

Agent

A person, corporation, society, association or partnership acting by the authority of a principal in a transaction, generally for compensation.

Agreement of Sale

A bilateral contract whereby buyer promises to buy and seller promises to sell by execution and delivery of deed; also know as Purchase and Sale Agreement.  Agreement means the same as Contract.

Amortization

Act of liquidating an indebtedness by equal and periodic payments usually monthly.  The payments remain constant, but as the note ages, an increasing larger portion is credited to principal.  This is normally how mortgages are computed. (See “Balloon Payment”)

Appraisal

An estimate of value. An appraisal generally refers to an in-depth, detail report that is compiled to determine the value of a business. (See “Valuation”)

Appreciation

Increase in value of an asset resulting from market forces.

Assign

To transfer ownership of an asset to another.

Assumed Name Certificate

A document filed with the county or state whereby an entity, person or corporation, declares that the entity will operate under a specific name.  “Assumed Name Certificates” usually last for ten years. (See DBA)

Audit

Inspection and verification of financial accounts, records and accounting procedures.

Balance Sheet

A financial repot that list assets and liabilities.  (See “Financial Statement”)

Balloon Payment

The last payment of an installment note that is larger than the previous payments.  Traditionally, in business sales when a Seller carries a note for part of the purchase price, the note is amortized over seven to ten years to keep the payments low, but the balance of the note is due at a specified time, before the note fully ages, usually in three to five years. 

Basis

Generally refers to the amount that a person originally paid for a property plus any additional amounts paid since then for hard assets, not inventory.

Bill of Sale

A written instrument which is the evidence of transfer of one persons right in personal property to another.

Bottom Line

Refers to the net profit of the business.

Business Formulas

There are a variety of quick formulas that are used to evaluate the financial condition of a business:

            Debt-to-Worth Ratio (Also known as Debt-to-Equity)

Measures the extent the company is leveraged.  A high Debt-to-Worth Ratio indicates that the company relies heavily on borrowed funds which might affect its ability to repay a loan.  Divide Tangible Net Worth into Total Liabilities.

            Asset Utilization

Determines how effective the company is generating sales from its assets.  A high Asset Utilization is a sign that the company is effective at generating sales from its assets.  Divide Total Assets into Total Sales.

            Return On Assets

Measures how effectively a company’s assets are employed. A high Return on Assets may indicate that the company is effective in generating profits from its assets.  Divide Total Assets into Net Income.

            Return On Sales

This is the best general measure of the profitability of a company.  Divide Sales into Net After-Tax Profit.

            Gross Profit Margin

Indicates the percentage of net sales remaining after the cost of goods are subtracted.  A high Gross Profit Margin indicates that a company can operate profitably as long as its overhead is not excessive.  Divide Sales into Gross Profit.

            Inventory Turnover

Measures the number of times the inventory turns over in a period of a year.  A high Inventory Turnover Ratio can be an indicator of good liquidity or of excellent merchandising.  Divide Inventory into Cost of Goods Sold. .

Businesses - Size Categories

            Small Businesses

Businesses priced under $500,000, annual revenues of less than $750,000, and with less than 10 employees. Generally an owner-operator business.  This category represents almost 80 percent of all businesses.

            Large Small Businesses

Businesses priced between $500,000 and $3 million, annual revenues between $750,000 and $2 million, and less than 20 employees. Generally an active owner-managed business.  This category represents about 10 percent of all businesses.

            Mid-Size Companies

Businesses priced between $3 million and $30 million, annual revenues between $2 million and $6 million, and between 20 to 100 employees. This category represents approximately 10 percent of all businesses.

            Large Companies

Businesses priced over $20 million, annual revenues over $30 million, with over 100 employees. This category represents slightly over 1 percent of all businesses.

Business Structures

There are a variety of legal structures that can be use to organize and operate a business.  The primary structures are: Sole Proprietorships, Partnerships (General), Limited Partnerships, Corporations, S-Corporations and Limited Liability Companies.   In some situations, a combination of two or more business structures can be used to operate a business.  (See definition for each separate business structure.)

Capital

Property of a business used to conduct its business.

Capital Expenditures

Investments of cash for long-term assets such as equipment which, for tax purposes, can be depreciated over a period of time.  Not to be confused with “Expenses”.

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.

Cash Flow

Accountants traditionally define cash flow as profit after principal and interest are deducted from net operating income (NOI).  In business brokering, cash flow generally means cash available to the owner of the business which includes discretionary expenses, financial perks, depreciation and interest payments made on debts of the business.  Simply put, financial benefit to the owner.

Closing Costs

Costs incurred to prepare and execute the documents necessary to convey ownership of property.

Closing Statement

A written accounting of the closing costs and the disbursement of funds to seller and buyer at the closing.

Collateral

Property that is offered to secure a loan, protect the lender in the event of default.  The property is subject to forfeiture and the lender can liquidate the property to apply the value to the lender’s debt.

Commission

Compensation paid to a broker for services rendered.  Business brokers usually charge between 10% to 12% to sell a business.

Compensating Balance

Money required by a bank to be left in a deposit account as part of a loan agreement.

Compound Interest

Interest earned on previously earned interest as well as the principal.

Corporation

Form of a business ownership that is considered an entity on its own with rights to own property and to contract.  The ownership of a corporation is held by its stockholders and is managed and operated by its officers and directors.  Operating a business as a corporation can, but not always, protect its stockholders from personal liability. (See Business Organizations

Conditional Sales Contract

A contract in which owner retains title until buyer has met all terms and conditions; a familiar device in land sales; also called land contract or installment contract.  Buyer acquires equitable title until final payment; after delivery of deed, buyer has legal title.

Consideration

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

Contract

A legal instrument between two parties to do or not to do something.  Although there are verbal contracts and they are enforceable under certain circumstances, all contracts dealing with business sales should be in writing.

Counter Offer

A reply to an offer where the original offer is not acceptable and a revised offer is submitted in its place. Generally, as soon as a counter offer is submitted, the original offer becomes void. (See “Offer”)

Covenant

A promise in an agreement or contract agreeing to performance or nonperformance of certain acts, or requiring or preventing certain acts or uses.

Confidentiality Agreement

An agreement where the signer agrees not to disclose information to other parties.  Generally in business sales a prospective buyer signs a “Confidentiality Agreement” stating that he will not disclose any information about the company to others.

Current Assets

Cash and other assets of a company that the business expects to use within one year,

Current Liabilities

Debts that a business expects to pay in a period of one year or less.

DBA (Doing Business As)

Is the same as an assumed name.  (See “Assumed Name Certificate”)

Depreciation

Decrease in value due to wear and tear and the passage of time.  This usually refers to furniture, fixtures and equipment.  Depreciation is generally a tax deductible item.

Discretionary Expenses

Expenses of a business that are not considered necessary to operate the business, but are recorded as business expenses.  Discretionary Expenses are added to the business owner’s stated profit to determine the owner’s total financial benefit for owning the business.  This total amount is also referred to as the owner’s “Cash Flow.”

Due Diligence

Due diligence refers to the efforts of a prospective buyer of a business to review businesses records to determine if the information presented is in fact accurate.  There is generally a specified period of time for this review.

Earnest Money

Deposit money submitted with an offer to purchase.

Equity

Value or interest an owner has in property that is above any debt on the property including any mortgage.

Escrow

The holding of something of value by a person (escrow agent) for the benefit of other parties.

Exclusive Right to Sell

An agreement giving a broker the exclusive right to sell a particular property or business.  This generally means that the broker would receive the commission if the property sells during the term of the agreement even if sold someone else, including the seller. (See “Listings”)

Expense

Anything that a company buys that has an economic life of less than one year.

FF&E

This is an abbreviation for “Furniture, Fixtures & Equipment” .  The physical assets owned by a business, not including the inventory.

Factoring

Accounts receivable financing in which receivables are assigned to a factoring company.  The factoring company is responsible to collect the receivables.  This is generally an expensive way to borrow money.  (See “Receivables Financing”)

Fiduciary

A position of trust.  Generally refers to holding money for someone for a particular purpose.  This money should be kept separate and apart from other monies and not commingled. 

Financial Statement

A written report as to the financial condition of a person or business.  The Financial Statement generally consists of two reports, the “Balance Sheet” and the “Income Statement”, also know as the “Profit-and-Loss Statement”.

Finders Fee

A specified fee or a defined percentage paid to someone for arranging an introduction that leads to a financial transaction and profit.  The person profiting pays the person making the introduction.

Fiscal Year

Any twelve month period used by a company as an accounting period.

Fixed Costs

Business expenses that are constant as opposed to “Variable Expenses” which increase with production.

Goodwill

The value of the business that exceeds the value of its tangible assets.

Income Statement

Financial statement that provides a historic record of revenues, costs and profitability.  (See “Financial Statement”)

Inventory

Items purchased by a business for the purpose of reselling for a profit. 

Irrevocable

A term used to clearly state that what is defined is unchangeable.

Intangible Assets

Goodwill, trademarks, patents, catalogues, brands, copyrights, formulas, mailing lists and customer lists.

Judgment

A court declaration.  Usually an award given by the court to one party over another as a result of a law suit.  With a judgement, the person awarded the judgement can use legal means to collect the amount awarded.  These means may allow the confiscation of property, the force sale of property or placing a lien against one’s property.  Judgements can keep a person from selling property until the judgement is satisfied. (See “Lien”)

Lease

A contract defining terms in which one party, the lessee, is allowed the use of property for a specified period of time.  The party leasing the property is the lessor. between lessor (landlord) and lessee (tenant) for exclusive possession of realty for specified period under specific terms after which property reverts to lessor.

Leaseback

The purchase of improved property and the leasing of it back to seller; creates capital and possible favored tax treatment for seller.

Leasehold Improvements

The interest which a lessee has in property from improvements made to the property.

Letter of Intent

A document prepared by a prospective buyer of a business which describes the basic terms of a more formal “Offer” that the prospective is willing to make.  This helps to determine if an “Offer” may be acceptable.

Lien

A debt; a claim against property for payment of some debt.

Limited Liability Company

(See “Business Structures”)

Limited Partnership

A partnership where this class of partner does not have a voice in the operation of the business, but also has limited liability. The liability is limited to their investment.  The partners that manage the business are the “General Partners.”  (See “Business Structures” and “Partnerships”)

Liquid Assets

Assets that are easily converted to cash.

Listing

An agreement between a principal of a business and a business broker giving the broker the right to market the business.  The Listing defines the business being offered for sale and how the broker will be compensated.  The listing is usually for a specified period of time.

Listings, Types of

            Exclusive Right to Sell

An agreement giving a broker the exclusive right to sell a particular property or business.  This generally means that the broker would receive the commission if the property sells during the term of the agreement even if sold by someone else, including the seller.

            Exclusive Agency

An agreement giving only one broker the right to sell the property, for a specified period of time, and allowing the owner only to sell the property or business without paying a commission.

            Open Listing

An agreement given to any number of brokers without any liability to pay a commission to anyone except the person who first secures an acceptable buyer according to the terms of the agreement.  Once the property sells, all “Open Listings” are canceled.  In many states, open listings must have an expiration date. Very few professional business brokers would take an “Open Listing” for several reasons.   
       

Managing Expectations

A term that Capitol Business Consultants uses to define one of its roles and that is, to keep both parties aware of the situation and changes as they are made.  To disclose the truth, not what someone wants to hear and to help both parties understand what their expectations should be.

Mergers and Acquisitions

A sophisticated sounding term that simply means the purchase of one business by another business.

Non-Compete Clause

An agreement normally provided by the Seller to the Buyer of a business where the Seller agrees not to engage in a similar business within a specified for a specified period of time.

Offer

Presenting a proposal to purchase a business.  The “Offer” should be in writing.  Offers usually contain the price being offered, terms of the Offer and specify a time period in which the Seller must accept or the Offer will be void.  If a Seller responds by altering the Offer, this is called a “Counter Offer” and it voids the original Offer.  (See “Counter Offer”)

Partnership (General)

A company owned by two or more people, who are jointly and personally liable for the debts and assets of the business.  The partners are General Partners. (See “Business Structures” and “Limited Partnerships”)

Prime Rate

The interest rate that banks charge their best commercial customers.

Pro Forma

Financial and performance projections of a business.

Recast

Financial Caption that reflects the business owner’s total financial benefit which includes salary, financial perks and discretionary expenses.

Receivables Financing

Short term financing where a business borrows against certain receivables and pays the loan when the receivables are received.  The receivables are pledged as collateral and the interest rate is generally high.  (See “Factoring”)