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Business Dictionary

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Definitions of Frequently used Business Terms

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Sometimes the biggest obstacle to getting started in a new venture is overcoming the learning curve. To help those new to business buying and selling and as a refresher to the more experienced as well, Better Business Brokerage, LLC has compiled a Business Terms Dictionary for your use. We've attempted to make this resource as accessible as possible but as always if you need help please don't hesitate to contact us for assistance. You may also visit the Business Terms Dictionary by Commerce-Database.com for more Info.

Accrual Basis Accounting:

The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting, which reports income when received and expenses when paid.

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.

Asset Approach:

A way of estimating the value of a business ownership interest using one or more Valuation Methods based on the Adjusted Book Value of the company.

Asset Sale:

A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. 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.

Blue Sky:

Any intangible portion of a price, above the maximum Goodwill, that cannot be reasonably supported through the application of established Valuation Methods.

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 Capitalization Rate (investor's required ROI).

Cash Flow:

(also Discretionary Earnings). Total financial benefit to an owner working in the business enterprise. With the Cash Flow, an owner must pay himself a salary, pay his company's income taxes, pay for any capital improvements (if needed) and set aside funds for unexpected events. Calculated by adding the following expenses back into the net income:

• Interest
• Taxes
• Depreciation
• Amortization
• Owner's Compensation
• Owner's Fringe Benefits
• One-Time Expenses

Compound Interest:

Interest earned on previously accumulated interest plus the original principal. Most spreadsheets can calculate this easily for you but for the curious, the formula is C = P(1 + r/n)n, where C=compound amount, P=original principal, r=annual interest rate, n=total number of periods over which interest is compounded.

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, earn out provisions and covenants not to compete. The sale can take the form of an Asset Sale or a Stock Sale.

Debt/Equity Ratio:

A measure of a company's leverage, calculated by dividing long-term debt by shareholders' equity.

Debt Financing:

This is financing in which you get a loan from someone or somewhere and go into debt! You are obligated to repay the money at some predetermined interest rate.

Debt Service:

A series of payments of interest and principal retiring a debt over a given period of time.

Deed of Trust:

A document under seal which, when delivered, transfers a present interest in property. May be held as collateral.

Defaults:

The nonpayment of principal and/or interest on the due date as provided by the terms and conditions of the note.

Deferred Loan:

Loans whose principal and or interest installments are postponed for a specified period of time.

Depreciation:

Decrease in the value of equipment and a method by which the cost of the equipment is allocated over time. Depreciation of equipment used for business is a tax-deductible expense.

Discount Rate:

A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today's, dollars. Use of a discount rate removes the time value of money from future cash flows.

Due Diligence:

The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.

Discretionary Earnings:

See Cash Flow above.

Earn out:

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 acquisition.

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 Statement:

Also known as a financial report. Consists of a

Balance Sheet:

A report of the status of assets, liabilities and equity at a given time.

Income Statement:

A report of revenue and expense which shows the results of business operations or net income for a specified period of time.

Cash Flow:

A report which analyzes the actual or projected source and disposition of cash during a past or future accounting period.

Fixed Interest Rate:

An interest rate that does not fluctuate over the term of the loan.

Going Concern Value:

The gross value of a company as an operating business. This value may exceed or be at a discount from the Liquidation Value. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plan and the necessary licenses, systems and procedures in place.

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.

Income (Income Based) Approach:

General way of determining the value of a business, business ownership interest, security or intangible asset using one or more methods that calculate the present value of anticipated future income.

Intrinsic Value:

An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.

Investment Value:

The value to a particular investor based on individual investment requirements and expectations.

Letter of Intent:

A letter, which states an intention, willingness and ability to do business. Some letters of intent may be binding upon the parties.

Liquidation or Liquidating Value:

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

Market (Market-Based) Approach:

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.

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 (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 Profit (before taxes):

A company's earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest and other expenses. Also called pre-tax net earnings or pre-tax bottom line.

Net Worth:

Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth.)

Partnership:

A type of unincorporated business organization in which individuals, (general partners) manage the business and are equally liable for its debts; other individuals (limited partners) may invest but not be directly involved in management and are liable only to the extent of their investments. Or more generally, a legal relationship existing between two or more persons contractually associated as joint principals in a business.

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.

Recasting:

Financial recasting eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring 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.

Residual Value:

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

Return on Investment (ROI):

The rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.

S Corporation:

Formerly called a subchapter S Corporation, this entity is allowed by the IRS for most companies with 35 or fewer shareholders, which enables the company to enjoy the benefits of incorporation but be taxed as if it were a partnership.

SDC (Seller's discretionary cash flow):

The cash flow available to the Owner after deducting the cost of sales and necessary operating expenses from gross sales and before deducting for interest and taxes. It is a combined estimate of business net income, compensation to the owner, fringe benefits, interest and depreciation expense.

SIC (Standard Industrial Classification Code):

A four-digit number assigned to identify a business based on the type of business or trade involved. The first two digits correspond to major groups such as construction and manufacturing, while the last two digits correspond to subgroups such as constructing homes versus constructing highways. A business can determine its SIC number by looking it up in a directory published by the Department of Commerce, or by checking in the SIC book in the reference section of a local library. SBA size standards are based on SIC codes.

Sole Proprietorship:

The simplest (and most popular) form of business organization. The individual is personally liable for all debts of the business to the full extent of his or her property. On the other hand, the owner has complete control of the business.

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.

Uniform Commercial Code:

Codification of uniform laws concerning commercial transactions. In SBA parlance generally refers to a uniform method of recording and enforcing a security interest or charge upon existing or to be acquired personal property.

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. There are three overall approaches generally used to value a business: Asset Approach, Income Approach and Market Approach.

Valuation Method:

Under a chosen Valuation Approach, there are various specific methods to determine value.

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.

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