Accounts Payable (AP) – Amount owed on open accounts to suppliers, vendors and other creditors for goods and services.
Accounts Receivable (AR) – Money owed to a business for merchandise or services sold on open account.
Amortization – An accounting procedure that gradually reduces the cost value of a limited life or intangible asset through periodic charges to income.
Angel Investor – An investor who provide capital for business start-up.
Board Certified Business Valuation – A document that shows financial market value for a business entity. It will be prepared by a third party firm certified to perform valuations and will show substantiation for the value stated.
Business Intermediary – A person who assists buyers and sellers in the business transfer process. Other common names are business transfer specialist, business broker, Investment Banker, Merger & Acquisition agent and business consultant.
Business Potential – What a business owner wants to base his business sale price on. In actuality, it is one of the main reasons a buyer chooses a particular business.
Conventional Bank Financing – In the realm of small business transfer, it is financing provided to a buyer based on a company’s assets and the buyer’s collateral.
CPA – Certified Public Accountant
Definitive Agreement – A document that settles or describes the terms of a business transfer in a final and conclusive form.
Depreciation – Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life. Depreciation decreases taxable income but does not reduce cash.
Due Diligence – The research performed by a buyer on the company they have intent to purchase. Due diligence includes items such as review of financial statement, analyzing aging reports and speaking with vendors.
Earn-out – A method of a seller note that is based on the company’s sales and/or earnings by the new buyer. The company’s sales and/or earnings must meet a predefined level for the seller to receive full payment of the earn-out.
EBITDA – Earnings before interest, taxes, depreciation and amortization.
Escrow Company – A company used as an intermediary to perform all the legal background checks, title and lien searches and other items. They are also responsible for housing the escrow deposit that is supplied with a letter of intent of Offer to Purchase. In addition, they act as the transfer agent for the monies that come from a buyer and/or loan source to the seller.
Escrow Monies – Money that is given by a prospective buyer with an Offer to Purchase or Letter of Intent to show good faith to a seller. If the company is sold, it also acts as a down payment.
Form 4506 – A form required by SBA from the seller, which is used to obtain a certified copy of the company’s tax returns for verification purposes.
Hard Assets – Furniture, equipment, property fixtures owned by a company. This is everything that a buyer can fell, touch and see.
Highest Justifiable Price – The highest price that a willing and able buyer will pay for a company
Letter of intent – Preliminary agreement between two parties that intend to enter into a business transfer. This letter is often followed by an Offer to Purchase or Definitive Agreement.
Net Income – This is the profit of a company that is calculated by subtracting the total expenses from the total sales. This is the amount that taxes are calculated from.
Offer to Purchase – Legal contract used to purchase a business.
Owner Perks – Personal expenses tat a business owner pays through the business. This is one of the main benefits of owning a small business.
Owner (Seller) Carry Back Note – The portion of the sale price that is not paid to the owner at closing. In essence, the seller is “loaning” the buyer that amount since the buyer will pay installments to the seller on that portion.
Owner’s Discretionary Cash Flow (ODCF) – This figure is determined by adding to EBITDA, owner’s salary, owner perks (non-business related expenses) and non- recurring expenses. When determined the market value of a small company ODCF is more commonly used than EBITDA, since most small businesses afford a monetary benefit to the owner, which can limited to EBITDA. ODCF is also known as Adjusted EBITDA.
P&L – Profit and loss statement or Income Statement. This document provides a summary of a company’s sales, expenses and net income over a stated period of time.
SBA – Small Business Administration.
Seller (Owner) Carry Back Note – The portion of the sale price that is not paid to the owner at closing. In essence, the seller is “loaning” the buyer that amount since the buyer will pay installments to the seller on that portion.
Working Capital – Funds invested in a company’s cash. Working capital finances the cash conversion cycle of a business – the time required to convert raw materials info finished goods, finished goods into sales, and accounts receivables into cash.