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Business Brokerage Definitions

Transworld understands that from time to time we use terms that may be unfamiliar to you when describing our service offerings and processes. So below we have provided a helpful index of common business brokerage terms for your reference. If you still have questions surrounding business brokerage please don’t hesitate to contact us or schedule a free consultation.

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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: The earnings of a business after adjustments for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and any other expenses that are not essential for the successful ongoing operation of the business.

Amortization: Money that is owed for something that is paid off by making regular payments over a long period of time.

Asking Price: The price at which a business is offered for sale.

Asset Sale: A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a buyer, however, the corporate entity is not transferred.

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.

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

Business Broker: One who acts as an intermediary or an agent who facilitates and negotiates contracts for the purchase and sale of a business. The term may also be described as a Business Intermediary or a Transactional Advisor.

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

Capitalization Rate: Any multiple or divisor used to convert a single period (usually a year) of anticipated economic benefits into a present economic value.

Capitalizing Net Income: Determining the value of a company by dividing one year of Adjusted Earnings by the (investor’s required ROI).

Cash Flow: A measure of a company’s liquidity that usually consists of net income after taxes plus non-cash charges against income.

Deal Structure: The combination of types of payment by which the purchase of a business is accomplished. It can include cash, promissory notes, stock, consulting agreements, earnout provisions and covenants not to compete.

Discount Rate: A rate of return used to calculate the present value of multiple periods (usually years) of payments.

Earnout: The portion of the purchase price that is contingent 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 an acquisition.

EBITDA: Earnings before interest, taxes, depreciation and amortization.

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.

Financial Recasting: Financial recasting eliminates, from the historical financial presentation of a business, items such as excessive and discretionary expenses and non-recurring revenues and expenses, since they reflect the financing decisions 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.

Fixed Interest Rate: An interest rate that does not fluctuate over the term of the loan.

Franchise: The right or license granted to an individual or group to market a company’s goods or services in a particular territory; also a business granted such a right or license.

Goodwill: The amount by which the price paid for a company exceeds the company’s adjusted book value of the underlying tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income.

Letter of Intent (LOI): A letter of intent is a written statement of the intention to enter into a formal agreement following the due diligence period.

Liquidation Value: The estimated value, net of liabilities, of a company based on the market value of its assets.

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. With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears in the books of account of the business enterprise.

Non-Disclosure Agreement (NDA): A Non-disclosure agreement is a legal contract between two parties (the seller and the buyer) that outlines confidential information the parties wish to share with one another but wish to restrict access to by third parties.

Present Value: The value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (discount rate).

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 that present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.

Purchase Price: The amount of money a buyer pays for a business.

Residual Value: The estimated market value of an asset at the end of the period being considered.

Return on Investment (ROI): A profitability measure that evaluates the performance of a business by dividing net profit by net worth.

Seller’s Discretionary Earnings (SDE): A seller’s discretionary earnings is defined as net income before taxes (operating income), interest, depreciation and amortization, owner’s compensation, owner’s benefits and non-recurring expenses.

Seller Financing: A loan provided by the seller of the business to the buyer that will be paid back over a specific time period at a specified interest rate.

Stock Sale: A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

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 consulting agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, earnouts and future considerations.

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.

Working Capital: The excess of current assets over current liabilities.

*All definitions have been provided by Transworld Business Advisors, the Merriam-Webster Dictionary, and the Cambridge Business Dictionary.