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Glossary of Useful Terms

Adjusted Earnings: The money a business makes after adjustments for one-time or extraordinary expenses, such as excess owner compensation, discretionary expenses, and any other expenses that are not essential for the successful ongoing operation of the business. This is term is used with SDE or EBITDA, as in Adjusted SDE or Adjusted EBITDA.

Amortization: The “A” in EBITDA. It’s the money owed for something that is paid off by making regular payments over a long period of time, typically intangible in nature.

Asking Price: The price at which a business is offered for sale by an owner.

Asset Sale: A legal form of business acquisition where a buyer and seller agree to transfer all the assets from the seller’s entity to the buyer’s entity. In an asset sale, the actual corporate entity is not transferred.

Balance Sheet: One of the two main types of financial documents. The balance sheet shows the company’s assets, liabilities, and shareholder equity at a specific moment in time.

Business Broker: A professional business advisor that acts as an intermediary by facilitating the sale of a small to medium-sized business. Brokers may also be referred to as business intermediaries or transactional advisors.

Capital Structure: The mix of cash, invested equity, and debt that is used to finance the operations of a business.

Cash Flow: A measure of a company’s financial performance. It can be calculated multiple ways, however, in the arena of selling businesses, it most often refers to the amount of monetary benefit an entrepreneur receives from owning a business.  The term can be used interchangeably with Seller’s Discretionary Earnings (SDE) or Discretionary Earnings (DE), which is one of the earnings numbers that can be used to calculate a business valuation.

Customer Base: Who your customers are, how many you have, what industries they’re in, and how you find them. The wider and deeper your customer base, the better.

Deal Structure: The combination of types of payment by which the purchase of a business is accomplished. It can include cash, loans, stock, consulting agreements, earnout provisions, and non-compete agreements.

Due Diligence (DD): The process, or the period during which the process is conducted, of sharing information from the seller to the buyer of a business for the purpose of evaluation and verification of statements made by the seller and their advisors.

Earnout: The portion of the purchase price that is contingent on a future event. This could be the performance of the business at predefined specific levels of financial metrics such as sales or profit.

EBITDA: Earnings before interest, taxes, depreciation, and amortization. A financial measure that is used to determine overall business performance for the purpose of valuation. This metric can be used instead of Seller’s Discretionary Earnings for larger businesses or businesses with a management team in place.

Fair Market Value: The value for which a company would sell on the open market when a willing seller and a willing buyer come to terms when neither is under duress.

Financial Documents: The two main financial documents are the balance sheet and income statement. Other important financial documents may include tax returns and bank statements.

Financial Recasting: The process of adjusting expenses or revenue to reflect only those items which are essential and necessary in a business. Used in the valuation of small businesses when there are unnecessary, one-time, or personal expenses within the business financial documents. Also referred to as adjustments or add-backs.

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. I

Income Statement: One of the two main types of financial documents. It reports the company’s financial performance over a certain period of time and explains how revenue turns into earnings. It reveals how much overhead the company has and how much it costs to produce the goods you sell. Also called a profit and loss statement, or P&L.

Letter of Intent (LOI): A written statement, signed before the due diligence period, of the intention to enter into a formal agreement after due diligence. It lays out the basic terms of the deal.

Multiple: In the context of buying and selling businesses, a multiple is applied to a company’s earnings number (either SDE or EBITDA) to determine the valuation.

Non-Disclosure Agreement (NDA): A legal contract between two parties (the seller and the buyer) that outlines confidential information the parties wish to share with one another but not with any third parties.

Private Equity Firm: A collection of investors that may look to buy a business, combine it with other companies, grow them together, and then sell. Typically, they are interested in companies with over $1 million in annual EBITDA.

Projection: Prospective financial statements that present a business’s expected revenue, expenses, and earnings in the future.

Purchase Price: The amount of money a buyer pays for a business. It generally consists of a combination of cash, buyer financing through a bank, and seller financing, and may include an earnout or adjustable note.

Return on Investment (ROI): A profitability measure that evaluates company performance by dividing net profit by net worth. Buyers look to buy companies that will generate a reasonable ROI.

SBA Loan: A loan, given by a lender, guaranteed by the SBA (Small Business Administration).

Seller’s Discretionary Earnings (SDE): Seller’s discretionary earnings is the total benefit an owner receives from a small business. It is calculated by adding interest, depreciation and amortization, owner’s compensation, owner’s benefits, and non-recurring expenses to the net income before taxes (operating income) of the company. Can be used interchangeably with Cash Flow.

Seller Financing: A loan provided by the seller to the buyer that will be paid back over a specific time period at a specified interest rate.

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

Strategic Buyers: Businesses that look to grow by buying other, slightly smaller companies in the same or a related industry.

Transaction Value: Total consideration (or value) for a business paid from a buyer to a seller.

Valuation: What a company is worth. It is based on the financials of the company and can be calculated in a variety of ways, including discounted cash flow valuation, asset valuation, and, most popular, market method.

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

 

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