Glossary

Accrual Basis Accounting

A method of accounting wherein income and expenses are recognized, within the statements, when the business first acquires the right to receive the income, or the obligation to pay the expense. Companies with inventories are required to use the accrual method for tax purposes. (Also see Cash Basis Accounting.)

Acquisition

One company taking over controlling interest in another company.

Add-backs

All or a portion of expenses that are added back to net income in an effort to place the figures as close as possible to the economic earnings that were actually derived from the business.

Adjusted Book Value

The measure of a company’s valuation after liabilities, including off-balance sheet liabilities, and assets are adjusted to reflect true fair market value.

Adjusted EBITDA(Earnings Before Interest, Taxes, Depreciation, and Amortization)

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.

Adjusted Net

See Discretionary Earnings.

Aging Accounts Receivable

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.

Amortization

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.

Analysis

The act or process of providing information, recommendations and/or conclusions on diversified situations, processes or problems in businesses, other than estimating value. Also (as a noun), the result of the act or process of analysis.

Appraisal

The act or process of estimating value. Also, the result of the process of estimating value. The words “valuing” (verb) and “valuation” (noun) are synonymous with “appraisal.”

Asking Price

The total amount for which a business or an ownership interest is offered for sale. The asking price could be inclusive or exclusive of inventory or other assets.

Asset Sale

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.

Balance Sheet

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.

Barrier to entry

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.

Benefit Stream

Any level of income, cash flow, or earnings generated by an asset, group of assets, or business enterprise. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.

Book Value

Book Value of a company is the difference between a company’s total assets and liabilities. Book Value of an asset is the value at which the asset is carried on a balance sheet, calculated by subtracting its accumulated depreciation from the the original cost of the asset.

Business Broker

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.

Business Enterprise

A commercial, industrial, service, or investment entity (or a combination thereof) that provides goods and/or services in pursuit of economic gains.

Business Prospectus

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.

Business Risk

The degree of uncertainty of realizing expected future returns of a business resulting from factors other than financial leverage. See Financial Risk.

Business Valuation

A process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. See Broker’s Opinion of Value.

Buyer Interview

Process in which the broker learns the needs and qualifications of a potential buyer.

Capital Structure

The composition of the invested capital of a business enterprise and the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. It may also include information about stock, options, warrants and who owns or contributed them.

Capitalization

(1) the conversion of a single period of income into value (2) the capital structure of a business enterprise (3) the recognition of expenditure as a capital asset vs. a periodic expense.

Capitalization Rate

Any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period into a value.

Cash Basis Accounting

A method of accounting wherein income and expenses are recognized, within the statements, when the business receives the income, or pays the expense. (Also see Accrual Basis Accounting.)

Cash Equivalents

Investment assets that can be quickly converted into cash, typically within 3 months.

Cash Flow

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).

Cash Flow Statement

A financial statement that displays the sources and uses of cash over a period of time. The Cash Flow Statement groups together funds in all activities whether they are in “Operations,” “Financing,” or “Investments.”

Client

An entity with whom a Business Broker has a fiduciary relationship.

Closing

The final steps in the sale of the business. The closing entails execution of all necessary legal documents and funding to consummate the transaction.

Closing Attorney

An attorney who assembles all of the closing documents and coordinates/facilitates the closing process. Also known as Closing Agent.

Co-Brokerage

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.

Co-Business Broker

A business broker who shares services, responsibility and compensation on behalf of a client.

Commercial Real Estate Broker

Lists and sells physical property (the real estate that a business occupies).

Committed Equity Capital

Equity investment funds readily available to an investor to make investments according to a predefined investment strategy. Related uses or terms: capital under management, capital available for investment.

Common Size Statements

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.

Confidential Business Review (CBR)

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).

Confidential Information Memorandum (CIM)

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).

Contingency

A requirement that must be met or removed before a closing can take place.

Cost Approach

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.

Cost of Capital

The expected rate of return that the market requires in order to attract funds to a particular investment.

Cost of Goods Sold (COGS, CGS)

A grouping of those expenses applicable to the materials and labor associated directly with the goods or services delivered.

Customer

An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the business broker.

Customer Relationship Management (CRM)

A technology for managing all your company’s relationships and interactions with customers and potential customers.

Depreciation

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.

Discount

A reduction in value or the act of reducing value.

Discount for Lack of Marketability

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.

Discount Rate

A rate of return used to convert a future monetary sum into present value.

Discounted Cash Flow Method

A method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate.

Discounted Future Earnings Method

A method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate.

Discretionary Earnings (DE)

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.

Divestiture

Selling of, or otherwise disposal of, a firm’s assets to achieve a desired objective, such as greater liquidity, reduced debt burden or elimination of non-core operations.

Due Diligence

A process where a buyer inspects a potential transaction. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.

Earn-Out

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.)

Earnings

The gross operating revenues of the business less the expenses and other deductions applicable to the type of earnings you are defining: Net Income Earnings after the payment of all expenses including income taxes. See Net Earnings.

EBIT (Earnings Before Interest and Taxes)

Earnings of a business prior to interest expense or income, and prior to corporate income taxes paid. This definition recognizes interest as a cost of capital, and not as an operating expense.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Earnings of a business prior to interest (expense or income), income taxes, depreciation and amortization expenses.

EBITDA after Adjustments

See Adjusted EBITDA

EBT (Earnings before Taxes)

Earnings of the business prior to income taxes paid.

Economic Benefits

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.

Economic Life

The period of time over which property may generate economic benefits.

Elevator Pitch

Also known as an elevator speech. It is a short overview of a business, products, or services, and typically is used in business settings such as face-to-face networking. An elevator pitch is short and, as the name implies, delivered in the time it takes to complete a typical elevator ride.

Employment Agreement

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

See Business Enterprise.

Enterprise Value

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.

Equity

Also known as shareholders’ equity, which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all company debt were paid off.

Escrow

Third-party arrangement to hold and distribute funds (usually by an attorney); agreed upon by both the buyer and the seller.

Excess Earnings

That amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated economic benefits.

Excess Earnings Method

A specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of a) the value of the assets derived by capitalizing excess earnings, and b) the value of the selected asset base. Also frequently used to value intangible assets.

Exclusive Agency

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.

Exclusive Right to Sell

Employment agreement and contract giving the broker the right to receive a commission if the property or business is sold by anyone, including the seller, during the term of the agreement.

Exit Plan

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.

Fair Market Value

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.”)

Fairness Opinion

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.

Family Succession

In a family succession or retirement transition, ownership transfers from current owners to other family members. Facilitators are particularly sensitive to estate planning issues, family business dynamics and the need for discretion and trust to makes these transaction seamless and successful.

FIFO (First In First Out)

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.

Financial Risk

The degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. See Business Risk.

Finder’s Fee

An amount paid to another party for locating and referring a client or customer. Also known as a “referral fee.”

Fiscal year

Annual period of time to which a business adheres for financial reporting.

Forced Liquidation Value

Liquidation value, at which the asset or assets are sold as quickly as possible, such as at an auction. Because of insufficient time to sell on the open market, Liquidation Value is typically lower than Fair Market Value.

Going Concern Value

The value of a business enterprise that is expected to continue to operate into the future. 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

1. 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.

Goodwill Value

The value of a business attributable to goodwill.

Gross Profit

That portion of net sales that remains after the subtraction of the COGS. See Cost of Goods Sold.

Growth Capital

An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership. Also called expansion capital or growth equity.

Income

See Earnings

Income (-Based) Approach

A general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.

Income Statement

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.

Industry Comparison

Weighted Average Method. Valuation method that uses statistics from comparable businesses.

Industry Risk

Represents how the market perceives the risk of a specific industry compared to the market as a whole.

Intangible Assets

Non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges and have value for the owner. See Tangible Assets.

Intellectual Property

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.

Intermediary

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.

Intrinsic Value

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.

Invested Capital

The sum of equity and debt in a business enterprise. Debt is typically a) all interest-bearing debt, or b) long-term interest-bearing debt. When the term is used, it should be supplemented by a specific definition in the given valuation context.

Investment Analysis

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.

Investment Banker

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.

Investment Risk

The degree of uncertainty as to the realization of expected returns.

Investment Value

The value to a particular investor based on individual investment requirements and expectations. (NOTE: in Canada, the term used is “Value to the Owner.”)

Key Person Discount

An amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.

Leveraged Buyout (LBO)

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.

LIFO (Last In First Out)

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.

Limited Appraisal

The act or process of determining the value of a business, business ownership interest, security or intangible asset with limitations in analyses, procedures or scope.

Liquidation Value

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.”

Liquidity

The ability to quickly convert property to cash or pay a liability. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value.

Listing Amendment

Addresses a change made to the original listing. Also called a Listing Addendum.

Loan Assumption

Occurs when the buyer assumes all of the rights and obligations of a debt currently in the name of the seller.

Long-term Debt

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.

Lower Middle Market -LMM

The lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with an annual revenue in the range of $5 million to $50 million are grouped under the lower middle market category.

Majority Control

The degree of control provided by a majority position.

Majority Interest

An ownership interest greater than 50% of the voting interest in a business enterprise.

Management Buy-in

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.

Management Buy-out

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.

Market (-Based) Approach

A general way of determining a value indication of a business, business ownership interest, security or 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

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.

Minority Interest

An ownership interest less than 50 percent of the voting interest in a business enterprise.

Most Probable Selling Price

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.

Multiple

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.

Net Book Value

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.

Net Cash Flow

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.

Net Earnings

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.

Net Present Value (NPV)

The value, as of a specified date, of future cash inflows less all cash outflows (including the cost of investment) calculated using an appropriate discount rate. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

Net Profit

Total revenues less all expenses and other deductible items. Should be identified as pre-tax or post tax.

Net Tangible Asset Value

The value of the business enterprise’s tangible assets (excluding excess assets and non-operating assets) minus the value of its liabilities.

Net Worth

Total assets minus total liabilities, as reflected by the balance sheet. Synonymous with net book value or owner’s equity.

Networking

The exchange of information and ideas among people with a common profession or special interest, usually in an informal social setting.

Non-operating/Non-contributing Asset

An asset unnecessary to the operation of a business enterprise and the generation of its revenues. (NOTE: in Canada, the term used is “Redundant Assets.”)

Nondisclosure Agreement (NDA)

Document that requires all information about a business to be kept confidential; also referred to as a confidentiality agreement.

Normalized Earnings

Economic benefits adjusted for nonrecurring, non-economic or other unusual items to eliminate anomalies and/or facilitate comparisons.

Normalized Financial Statements

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.

Open Listing

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.

Open-Ended Contract

Contract with no expiration date.

Orderly Liquidation Value

Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received. See the contrary Forced Liquidation.

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 Total Compensation

Total of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value.

Ownership

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.

Owner’s Salary

The salary or wages paid to the owner, including related payroll burden.

Perquisites

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.

Portfolio Discount

An amount or percentage deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that do not fit well together.

Premise of Value

An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation (e.g., going concern, liquidation).

Present Value

The value, as of a specified date, of future economic benefits and/or proceeds from sale, calculated using an appropriate discount rate.

Principle of Substitution

A buyer will pay no more than that which he/she would have to to purchase an equally desirable substitute.

Private Equity

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.

Private Equity Fund

An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of available equity capital.

Profit and Loss (P L) Statement

See Income Statement.

Quality of Earnings

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.

Rate of Return

An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment.

Ratio Analysis

A ratio analysis is a quantitative analysis of information contained in a company’s financial statements used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.

Recapitalization

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.

Referring Business Broker

A business broker who provides introductory information which leads to a client relationship.

Replacement Cost New

The current cost of a similar new asset or property having the nearest equivalent utility to the asset or property being valued.

Reproduction Cost New

The current cost of an identical new asset or property.

Required Rate of Return

The minimum rate of return acceptable by investors before they will commit money to an investment at a given level of risk.

Reserve For Replacement

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.

Residual Value

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.

Return on Equity

The amount, expressed as a percentage, earned on a company’s common equity for a given period.

Return on Invested Capital

The amount, expressed as a percentage, earned on a company’s total capital for a given period.

Rollup

A process used by investors (commonly private equity firms) where multiple small companies in the same market and/or industry are acquired and merged. The principle aim of a rollup is to reduce costs through economies of scale. (also Roll-up or Roll up)

Rule of Thumb

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.

Seller Financing

When the person selling a business offers financing to a buyer instead of or, in addition to the buyer finding third-party financing.

Seller’s Discretionary Cash (SDC)

Method that addresses pricing based on what a buyer can afford to pay for the cash flow of the business.

Seller’s Discretionary Cash Flow (SDCF)

See Discretionary Earnings.

Seller’s Discretionary Earnings

See Discretionary Earnings.

Seller’s Discretionary Earnings (SDE)

See Discretionary Earnings

Small Business Administration (SBA)

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.

Special Interest Purchasers

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.

Standard of Value

The identification of the type of value being used in a specific engagement (e.g., fair market value, fair value, investment value).

Tangible Assets

Physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, etc.).

Teaser

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.

Telemarketing

Telemarketing means contacting people – usually by phone – in order to sell a product or service, gather information, or persuade people to do something.

Transaction Value

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.

Valuation

The act or process of determining the value of a business, business ownership interest or intangible asset(s) using one or more valuation methods

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. The three common valuation approaches are the market approach, the income approach and the asset approach.

Valuation Date

The specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).

Valuation Date

The specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).

Valuation Method

Within the three valuation approaches approaches, there are a number of specific methods to determine value. Each method is a specific way to determine the value of a security, business, business ownership interest or intangible assets and hence estimate its worth.

Valuation Method

Within the three valuation approaches approaches, there are a number of specific methods to determine value. Each method is a specific way to determine the value of a security, business, business ownership interest or intangible assets and hence estimate its worth.

Voting Control

De jure control of a business enterprise. De jure means Existing in law, or having formal, legitimate, moral, or rightful effect, force, or possession.

Voting Control

De jure control of a business enterprise. De jure means Existing in law, or having formal, legitimate, moral, or rightful effect, force, or possession.

Weighted Average Cost of Capital (WACC)

The cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure.

Weighted Average Cost of Capital (WACC)

The cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure.

Weighted Average Discretionary Earnings (DE)

Valuation method used to determine an average cash flow, taking into account that sales and profits may vary from year to year.

Weighted Average Discretionary Earnings (DE)

Valuation method used to determine an average cash flow, taking into account that sales and profits may vary from year to year.

Working Capital

The excess of the value of the current assets over the value of the current liabilities. This value will be negative if current liabilities exceed current assets.

Working Capital

The excess of the value of the current assets over the value of the current liabilities. This value will be negative if current liabilities exceed current assets.