THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS

GENERATIONAL.COM Acid-Test Ratio – The measurement of a firm’s ability to meet current obligations with on hand or due. The formula used by lending institutions is: current assets minus , divided by current liabilities.

Acquisition – The process by which the or assets of a corporation are transferred to a buyer, either through a purchase of stock or a purchase of assets.

Accretion – Refers to the growth of a company or other , either by internal expansion or acquisition.

Add-on Company – A business that a private firm acquires to enhance a larger platform company. The new acquisition is “added on” to the platform company to create an even larger entity in whole.

Adjusted (Recast) – The book value that results after one or more asset or liability amounts are added, deleted or changed from the respective book amounts.

Adjusted (Recast) Earnings – The earnings that result from the adjustment of historical financial statements, reflecting items that are unrelated to the ongoing business. (Also see Recasting.)

Adjusted – Normal Working Capital (see definition) excluding any in current liabilities. Synonymous with debt-free working capital.

Allocations of Purchase – The assignment of value to tangible and intangible assets of an acquired company for which a premium over historical has been paid.

Asset-Based Approach – A method of determining the value of a business using a formula based solely on the market value of the business’s assets, less the liabilities.

Asset-Based Lending – A type of financing, commonly found in leveraged buyouts, based on a percentage of some value (book, liquidation, market, and auction) of an asset. Asset-based lenders typically analyze a target company’s viability as a and its ability to service debt from flow.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 2 Asset Sale – A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and, in some cases, liabilities of a company to a purchaser. The corporate entity is not transferred.

Asset-Turnover Ratio – Ratio that measures the efficiency of asset employment. Ratio of sales to total assets.

Auction Value – The value that could be received from tangible assets if the assets were sold at auction. See Liquidation Value.

Audit – A methodical verification of the accuracy of financial statements.

Baby-Boomer Tsunami – The impact of baby-boomer business owners reaching retirement age and selling their companies for retirement. Individuals born between 1946-1964 are considered to be baby boomers. By 2011, the first set of these people reached retirement age. Starting in 2011, year after year more business owners per year will want to sell their businesses. The supply of business for sale will be the highest in history. With more businesses per year becoming for sale and more buyers also retiring, an increase in supply and a decrease in demand results, causing a buyer’s market, which results in lower prices being paid. See Buyer’s Market.

Base Year – A company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the year-to-date results and expectations of management.

Basket – A dollar amount set forth as the loss that must be experienced by the buyer before it can recover damages under the indemnity provisions.

Below-the-line Items – Nonrecurring or items that are separated in a financial statement from typical, or above-the-line, operating results and recurring items.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 3 Book Value – With respect to assets, the capitalized cost of an asset less accumulated , depletion or as it appears on the books of of the enterprise.

With respect to a business enterprise, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities of an enterprise as they appear on the . It is synonymous with net book value, net worth and shareholder’s equity.

Book Value of Invested Capital – The sum of the book value of debt and equity as presented on a company’s balance sheet.

Book Value Per Share – A corporation’s net assets divided by the number of outstanding stock shares.

Break-up/Bust-up/Topping Fees – If the deal does not close, these fees may be paid to either the seller or buyer by the other to help cover incurred during the acquisition process.

Business Enterprise – A commercial, industrial or service organization pursuing an economic activity. The business enterprise can be seen as the sum of all operating assets of the business including normal working capital, operating fixed assets, and all intangible assets related to the production of the income and cash flow stream being valued.

Business Risk – The risk that a business will fail due to the inability to compete in its market. It is different than financial risk, which takes into account the safety margin of debt service.

Business – The act or process of arriving at an opinion or determination of the economic value of a business or enterprise or an interest therein. A business valuation can be conducted for a variety of purposes, including, but not limited to, a merger or acquisition; gift, estate, or inheritance tax planning; ESOPs and other employee benefit plans; going public; buy-sell agreements; marital, partnership, and corporate dissolutions; and bankruptcy reorganizations.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 4 Buyer List – A list of prospective buyers a seller is interested in approaching with an investment opportunity.

Buyer’s Market – When market conditions are more favorable to buyers. This typically happens when there is an excess of supply over demand.

Capital Gains Tax Rate – One tax that needs to be considered when you sell a business. The IRS describes the capital gains as “the difference between the basis in the asset and the amount it is sold for.” Also called cap gains tax.

Capital Structure – The composition of a business entity’s invested capital.

Capitalization – The conversion of historic or projected income into value; the capital structure of a business enterprise; or the recognition of an expenditure as a capital asset to be depreciated over time rather than a period expense.

Capitalization Rate – Any divisor (usually expressed as a percentage) that is used to convert income into value.

Capitalizing – Determining value for a company by dividing net income by the required Return on Investment (ROI).

Cash Flow – The excess of sources of cash over uses of cash. Cash flow is used in performing the Discounted analysis.

Cash Flow Lending – A type of unsecured financing based on the timing and certainty of the borrower’s cash flow.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 5 Cash Flow Statement – An analysis of all the changes that affect the cash account during an period. These changes are segregated into operating, investing and financing categories.

Confidential Business Review (CBR) – A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement. Also referred to as Offering Memorandum.

Confidential Business Profile (CBP) – A brief profile of a business used to solicit buyer interest. The CBP does not reveal the name of the business profiled.

Confidentiality Agreement – Signed by potential buyers, it requires them to keep the information contained in the CBR and ensuing discussions confidential.

Consulting Agreement – A form of deal structure whereby the seller provides business advice and direction for a specified period of time in return for a specific amount.

Contingent Liabilities – Improbable but possible obligations. Probable obligations are real liabilities and require adjustment in accounting records. Contingent liabilities require footnote disclosure only. Some examples are pending lawsuits, purchase commitments carrying default penalties, and warranties and guaranties for which no historical basis is available for assessing the possible obligation.

Cost-Benefit Analysis – An analysis of the value given up for something in relation to estimated savings or profit.

Covenants – Provisions in purchase documents that define the obligations of the parties in respect to their conduct, the most significant of which is operating the business in the normal course.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 6 Covenant Not to Compete – A condition often found in acquisition agreements by which the seller agrees to abstain from business that would compete with the entity being sold. The restriction is usually for a specific time period and may be for a specific region.

Deal Flow – The rate of new deals being referred to a brokerage firm’s investment banking division. This could refer to proposals for new stock and bond issues, and .

Deal Killers – Issues that cannot be resolved to the satisfaction of both parties; or dissenters who believe their interests will be adversely affected by an acquisition and who work either overtly or covertly to subvert the transaction. May include executives fearing the loss of jobs, suppliers fearing the loss of an account, and irrational or prejudiced family members.

Deal Structure – The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components have tax benefits to the seller.

Dealmaker – One who facilitates mergers and acquisitions including intermediaries, finders and .

Debt- – Debt-free net income plus depreciation less provisions for working capital and capital expenditures.

Debt-Free Net Income – The income of a company presented as if the company had no debt.

Debt Ratio – Ratio that measures the percentage of total funds provided by . It is total liabilities divided by total assets. Creditors prefer a low debt ratio in the event of liquidation. Owners and managers may prefer high leverage to maintain control of the company and to show higher .

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 7 Depreciation and Amortization – A reduction in a capital account of the value of an asset over time.

Discount Rate – A rate of return used to convert a monetary sum, payment or receivable in the future into present value.

Discounted Cash Flow Value – The present value of future earnings taken out to infinity and discounted at a rate that approximates the risk.

Dry Powder – The amount of committed capital that private equity firms have in their portfolios that has yet to be invested. Also referred to as Overhang.

Due Diligence – The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased. Due diligence occurs subsequent to the Letter of Intent.

EBIT – Earnings before interest and taxes.

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

Earnout – The portion of the purchase price that is contingent on future performance. It is payable to the sellers only when certain predefined levels of sales or income are achieved.

Economic Life – The period over which tangible (real estate, equipment, etc.) and intangible (, R&D, etc.) property may be profitably used.

Employee Stock Ownership Plan (ESOP) – A qualified stock bonus plan where employees have the opportunity to purchase securities issued by their employer.

Employment Agreement – As part of a deal structure the buyer may agree to continue the seller’s employment in the business. Both the duration of the employment and the consideration are determined during negotiations.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 8 Enterprise – See Business Enterprise.

Equity/Net Worth/Book Value – See Book Value.

Evaluation Report – Document detailing and supporting the fair market value of a business entity. Note: The fair market value described in the Evaluation Report does not necessarily dictate the final price paid for any business.

Excess Cash – The amount of cash in excess of what a business enterprise needs to operate through a business cycle. In an M&A transaction, excess cash is normally retained by the seller at the close.

Exit Plan – A definitive action plan on the part of the owner(s) of the target company to strategically exit the business through the M&A process. The exit plan should take into consideration the owner’s personal and financial objectives.

FASB – Standards Board. This Board issues rulings that govern how accounting reports are prepared.

Fair Market Value – The price at which a business would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell; both parties having reasonable knowledge of the relevant facts (IRS Revenue Ruling 59-60).

Financial Buyer – A buyer interested in a target based on the financial return of the investment rather than a strategic or synergistic reason.

Fixed Interest Rate – An interest rate that does not fluctuate with general market conditions.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 9 Free Cash Flow – Cash available for distribution after taxes but before the effects of financing. Calculated as debt-free net income plus depreciation less expenditures required for working capital and capital items adjusted to remove effects of financing.

Generally Accepted Accounting Principles (GAAP) – A recognized set of accounting principles, standards and procedures for financial reporting as set by the Federal Accounting Standards Advisory Board.

Going Concern Value – The gross value of a company as an operating business.

Goodwill or Intangible Value – The amount by which the consideration paid exceeds the fair market value of the company’s operating assets.

Horizontal Integration – Purchasing similar businesses, including competitors.

Hurdle Rate – A discount rate usually set by the in a corporation that must be applied to a projected earnings stream that must be met or exceeded before an acquisition or investment will be approved.

Impairment – In the context of FASB (Financial Accounting Standards Board) Statements 141 and 142, impairment is an overstatement of the goodwill values shown on a company’s balance sheet, compared with their . FASB 142 requires that a business test for impairment on an annual basis, as well as between annual tests if an event or circumstances change that more likely than not reduce the fair value of assets, below their carrying value.

Income Approach – A method used to determine the value of a business, business ownership interest, or security wherein the value is determined based on anticipated financial benefits.

Indemnification – The action of compensating for loss or damage sustained; the compensation so made.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 10 Intangible (Hidden) Assets – The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce. Also referred to as Off Balance Sheet items.

Internal Rate of Return – The rate of return where the net present value of cash inflows and outflows equals zero, thereby indicating that the future cash flows on the investment equal the cost of the investment.

Invested Capital – The value of invested capital is equal to the value of the operating business enterprise.

Book Value of Invested Capital (BYIC) – The sum of debt and the book value of equity in an enterprise at a point in time.

Market Value of Invested Capital (MVIC) – The sum of debt and the market value of equity in an enterprise at a point in time.

Letter of Intent (LOI) – A written agreement that defines the respective preliminary understandings of the parties about to engage in contractual negotiations on a transaction. Items covered typically include price, terms and conditions.

Letter Stock – Unregistered shares in a small firm that are issued without underwriting.

Leveraged Buyout (LBO) – A transaction in which a company’s capital stock or its assets are purchased with borrowed , resulting in the company’s new capital structure being primarily debt.

Leveraged Valuation Approach – The leveraged valuation approach simulates the leveraged buyout of a business. It illustrates a typical buyout transaction with the corresponding deal structure and valuation driven by: 1) the leveragability of the target company’s balance sheet and cash flows, 2) the coverage ratios required by senior lenders, and 3) the internal rate of return sought by the equity (s).

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 11 Limited Auction – A situation where you have at least two buyers interested in purchasing your company. By creating a competitive bidding space, the interested parties will likely bid against one another, which increases the business’ value.

Liquidation Value – The value of a company assuming the assets of the company are sold piecemeal (not as part of an ongoing business enterprise) with appropriate time given for exposure to the marketplace.

Liquidity – The cash position of a business and its ability to meet maturing obligations.

M&A Advisor – Experienced professionals that assist business owners in every step of the selling process, including valuing the company, finding buyers and negotiating an optimal deal.

Management Buyout (MBO) – A leveraged buyout where the existing management team is brought in as shareholders.

Market Approach – A method of determining a value indication of a business, business ownership interest or security by comparing the company to similar businesses, business ownership interests or securities that have been sold.

Market Capitalization – The market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share.

Market Multiple – A factor that can be applied to the subject company’s financial, operating or physical data to generate an indication of value. The market multiple is derived from observed transactions in the marketplace where the value can be divided by the comparable companies’ financial, operating or physical data.

Middle Market – Definition varies according to source. Some analysts consider any company valued below $500 million in this category. A subset of this is called the “lower middle-market” and is typically comprised of companies valued below $100 million.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 12 “Multiple Buyer” Process – The process of involving multiple buyers in the purchase of a business. The process typically increases the price paid for the target and/or improves the deal structure. See Limited Auction.

Merger – The combination of one corporation with another.

Net Assets – Total assets less total liabilities.

Net Cash Flow – Cash available for distribution after taxes and after the effects of financing. Calculated as net income plus depreciation less expenditures required for working capital, capital items and debt repayment. (Also see Cash Flow.)

Net Income – Revenue less , including taxes.

Net Present Value – A value derived by discounting future cash flows at a rate appropriate for the risk associated with business being valued.

Net Operating Loss (NOL) – For tax purposes, an excess of expenses over profits. Under certain, limited circumstances a NOL may provide a tax benefit to a buyer.

Net to Owner – The amount realized by the owners of a business from a sale. Usually equal to the Business Enterprise Value of the business less debt retained in the business, plus the net of assets and liabilities not included in the sale and retained by the owners.

Nine-Year Ramp – The financial presentation of the target company that a buyer requires an intermediary to provide as part of the M&A process. Specifically, the nine-year ramp includes the latest three historical years, a base year and five pro forma years.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 13 Non-Compete Agreement – A form of deal structure whereby a portion of the purchase price is based on an agreement prohibiting a seller from operating a competing business for a specified time following the sale.

Non-Operating Assets – Assets shown on the company’s balance sheet that are not used in the operation of the business. That is, “extra” assets that are not necessary to generate the revenue and cash flow stream being valued. These should be recast when valuing the business.

Non-Recast Earnings – Historical financial statements that are not ideal for business owners to use when they approach buyers. These earnings will include items that are unrelated to ongoing business, such as discretionary expenses. See Recasting for a full description of this key process.

Normal Working Capital – The amount of working capital needed by the company to sustain operations throughout the year. Calculated as the average of current assets (which include a normal amount of necessary cash) minus current liabilities on a monthly basis over the most recent twelve months.

No-Shop Agreement – A in the Letter of Intent or purchase document that inhibits the target from soliciting or encouraging other bids.

Offering Memorandum – See Confidential Business Review.

Optimal Deal Structure – A deal structure that is most favorable. It includes three interrelated components: negotiations, forms of payment and taxes.

Optimal Time To Sell – When certain market conditions are present such as low capital gains tax rates, low interest rates and high buyer activity. An increase in buyer activity can be caused by a variety of factors, including slow organic growth, and private equity firms or corporate buyers with a large amount of capital to invest. This market situation is also referred to as a seller’s market.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 14 Overhang – The amount of committed capital that private equity firms have in their portfolios that has yet to be invested. Also referred to as Dry Powder.

Platform Company – A business that a private equity firm acquires in an industry with the goal of building that initial company into a much larger organization via future acquisitions, which are known as add-on companies or add-on deals.

Pooling of Interests – One method of accounting for a company merger, in which the balance sheets of the two companies are combined line by line without a tax impact. Only allowed under certain circumstances.

Post-Acquisition Planning – Strategic steps taken prior to the acquisition to plan for the successful integration of target and acquirer, including how to exploit synergies, merge management and support corporate culture.

Premium Value – Occurs when the value of a company is higher than the book value. Professional buyers often pay premium value when a business has valuable intangible assets. Similar to Synergistic Value.

Present Value – The value today of a future payment, or stream of payments, discounted at a risk-adjusted rate of return.

Pretax Income – The net income earned by a business prior to the provision for federal or state income taxes.

Private Equity Firm – Entities that raise capital with the goal of acquiring businesses and maximizing the value of the initial investment. Also referred to as PE firms. PE firms typically buy part or all of a company, provide the missing resources that’s preventing the company from growing at an accelerated rate, help the company grow extensively for a few years, and then sell it for a solid return on their investment.

Product/Service Extension – Adding a product or service that can be sold in the acquirer’s current geographic areas and/or to current customers.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 15 Profile Letter – A one- or two-page document that is designed to share enough information about your business to catch a potential buyer’s attention but not reveal anything confidential. The letter is structured in such a way that highlights key information so that professional buyers can quickly and efficiently find the information they need.

The letter typically includes a business’ description, location, recast financials for the past three years, five-year forecast of and earnings based on recast financials, and unique assets.

Pro Forma Statements – Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.

Purchase Accounting – An accounting method where the purchasing company treats the acquired company as an investment and adds the assets, at fair market value, to its own.

Purchase Document / Acquisition Agreement – The legal document transferring ownership from seller to buyer. Drafted by the buyer, it sets forth structure and terms; discloses legal, financial and other pertinent information about buyer and seller; obligates both parties to complete the transaction; and governs what happens if problems arise.

Quality of Earnings Report – A document, usually prepared by a third party during Due Diligence, that contains a thorough analysis of a company’s revenue and expenses The report assesses the accuracy of historical earnings and the practicability of future projections.

Quick Ratio – A measure of a company’s liquidity, used to evaluate credit worthiness. Equals quick assets divided by current liabilities.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 16 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.

Recapitalization – In a private transaction, recapitalization is used to enable the seller to retain partial ownership and participate in a second sale, hopefully at a significantly higher price.

The reconfiguration of a company’s capital structure. Typically recapitalization occurs to reduce immediate interest payments, reduce debt, reduce taxes or leverage the operation.

Recasting – Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses, and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability and allows meaningful comparisons with other investment opportunities.

Regulatory Barriers – Federal, state or local statutes or regulations in a variety of areas, including antitrust, securities, employee benefits, bulk sales, foreign ownership and the transfer of title to stock or assets.

Replacement Cost New – The current cost of a similar new item having the nearest equivalent utility as the item being valued.

Representations (Reps) and Warranties – Intended to disclose all material legal and any material financial aspects of the business to the buyer. Buyer makes similar reps about its legal and financial ability to complete the transaction.

Retained Assets – Assets personally kept by the owner(s) of a company upon the sale of the business.

Return on Equity (ROE) – A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income divided by book value, expressed as a percentage.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 17 Return on Investment (ROI) – The rate of return at which the sum of the discounted future cash flows for the five pro forma years plus the discounted residual value equals the initial cash outlay.

Reverse Triangular Merger – An acquisition by merger where the acquiring corporation forms a subsidiary to effect the merger through a stock exchange. As a result of the merger, the newly established subsidiary ceases to exist while the target survives.

S.W.O.T. Analysis – Refers to an analysis of a company’s strengths, weaknesses, opportunities and threats. A S.W.O.T. analysis is necessarily key to understanding a target company’s competitive positioning and long-term growth potential.

Secured and Unsecured Note – A form of deal structure whereby the buyer owes money for the purchase and this debt is secured by real property, equipment or other assets. In contrast, an unsecured note is not backed by the pledge of collateral.

Shareholder Value – Business Enterprise Value less the debt retained in the business and assumed by the new owners.

Situation Analysis – A general assessment of a company’s past, present and future. A situation analysis often times provides a benchmark to the business’s future growth potential.

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

Succession Planning – Process of identifying and training certain employees to fill key management positions within a business as they become available. This needs to be done prior to selling a company, since businesses that can operate smoothly in the absence of the current owner are more attractive to professional buyers.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 18 Synergistic Buyer – A buyer willing to pay a premium above economic value based on projected additional growth and profit to be achieved through the benefits of .

Synergistic Value – A premium value offered by a Synergistic Buyer above economic value, the difference being attributed to potential additional growth and profit beyond that which the target can achieve on its own and benefits the buyer brings.

Synergy – When two organizations combine to generate more revenue and profits than they could have individually.

Tangible Assets – Assets clearly having physical existence, such as cash, real estate and machinery.

Target – A company being acquired.

Tax-Free Reorganization – A stock swap. The seller accepts stock of the buyer’s company in lieu of cash, which is a nontaxable event. Only when the seller divests of the stock are taxes paid.

Tender Offer – A general publicized bid by an individual or group to buy shares of a publicly owned company at a price significantly above the current market price.

Term Sheet – A preliminary, non-binding agreement setting forth the basic terms and conditions under which an investment will be made. Generally speaking, a term sheet usually precedes the Letter of Intent.

Terminal Value – The value of the company at the end of the five-year pro forma period. Terminal value is determined by dividing the fifth year pro forma cash flow (normalized for depreciation and capital expenditures) by the required Return on Investment. Terminal value is sometimes referred to as residual value.

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 19 Terms – Details of an agreement such as price, payment schedule, interest rate and due date.

Tombstone – An advertisement, usually in financial publications such as The Wall Street Journal, announcing an acquisition, securities offering or underwriting. Also, a commemorative plaque announcing the transaction.

Valuation Approach – A general way of determining value using one or more specific valuation methods. (Also see Asset Based Approach, Leveraged Valuation Approach, Market Approach and Income Approach.)

Valuation Method – Within valuation approaches, a specific technique to determine value.

Valuation Multiple – A factor wherein a value or price serves as the numerator and financial, operating or physical data of the company being valued serve as the denominator.

Value – The consideration at which a business enterprise passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts.

Variable Interest Rate – An interest rate that moves at a pre-defined level above or below an index rate. A commonly used index is the prime rate.

Vertical Integration – A strategy to achieve economies of scale in purchasing, sales and distribution. Vertical backward integration is buying a supplier. Vertical forward integration is buying a customer.

Warranties – See Representations (Reps) and Warranties.

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

THE ULTIMATE GLOSSARY OF MUST-KNOW TERMS IF YOU’RE SELLING A BUSINESS www.generational.com 20 © 2014 Generational Equity, LLC All Rights Reserved Downloading any information and/or communication including Generational Equity’s copyrighted intellectual property does not create a business relationship with Generational Equity, and any such representations, promises or warranties, express or implied are hereby denied. You agree not to reprint this whitepaper for the purposes of distribution or publishing without the express advance permission of Generational Equity, LLC.

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