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Ultimate Glossary When Sellin 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 assets on hand or due. The formula used by lending institutions is: current assets minus inventory, divided by current liabilities. Acquisition – The process by which the stock 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 asset, either by internal expansion or acquisition. Add-on Company – A business that a private equity 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) Book Value – 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 Working Capital – Normal Working Capital (see definition) excluding any debt 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 cost 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 going concern and its ability to service debt from cash 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 revenue or expense 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 depreciation, depletion or amortization as it appears on the books of account 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 balance sheet. 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 costs 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 Valuation – 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 Net Income – 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 Cash Flow 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 accounting 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 mergers and acquisitions. 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.
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