Glossary of Terms

A clause used in a note and/or security agreement which gives the lender the right to demand payment in full if a certain event occurs such as default or if the ownership of the business changes without the lender’s consent; sometimes referred to as a “due on sale” clause.

The act of accepting an offer which results in a binding contract.

When a company, entity or individual purchases a majority interest in another company.

A written instrument that adds something to a written contract.

The Book Value of a company refers to equity, After adjusting the value 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, we arrive at Adjusted Book Value.

Adjusted Earnings refers to earnings of a company after adjusting for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and other expenses that are not essential for the successful ongoing operation of the business.

Also known as an “Exclusive Agency Listing”. - A written instrument giving the agent the right to sell property for a specified time. However, the owner may sell the property himself/herself to a buyer who was not introduced to the business by the agent without the payment of a commission to the agent.

One acting under authority of a principal to do the principal’s business. The agent must use his or her best efforts and keep the principal fully informed of all material facts.

A breakdown of the purchase price usually required when a business is sold. For example, the allocation might contain a breakdown of the inventories, fixtures and equipment, leasehold improvements, goodwill, and any other purchased assets. Generally, value is placed on each component of the allocation and the buyer and seller agree on this breakdown. The IRS requires that such an allocation be a part of the buyer’s and seller’s tax return when a sale takes place; Form 8594, the “Asset Acquisition Statement”, must be filed with the buyer’s and seller’s tax return for the year in which an applicable asset acquisition takes place.

A written instrument that changes something previously agreed to. (This is different than an addendum).

1. A reduction in a debt obligation by periodic payments covering interest, and part of the principal. 2. The writing off or expensing of the cost of intangible assets over a period of time, usually in years. Amortization of intangible assets vs. depreciation of tangible assets- Intangible assets purchased, such as goodwill and covenants-not-to-compete can be written off over 15 years.

Asset purchase agreement

A gain in value due to any cause. Real estate is an asset that often appreciates in value over time

The submission of a disputed matter for resolution outside the normal judicial system. It is often speedier and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA).Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.

The total amount for which a business or an ownership interest is offered for sale.

The Asset Approach is one of 3 common approaches (along with Income Approach and Market Approach) used to value a business and estimate the value of business ownership interest. This approach uses one or more Valuation Methods based on the Adjusted Book Value of the company.

An Asset Sale is a form of acquisition whereby a selling entity transfers ownership of tangible and intangible assets to another owner without transferring the ownership structure or the corporate entity. However, Asset Sale can also refer to the sale of a business enterprise at a price based solely upon the value of the tangible assets.

A transfer in writing of an interest in property or other things of value from one person or entity to another.

One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.

The minimum rent in a lease which sometimes contains a percentage or provisions for additional rent.

The Base Year is the company’s current fiscal year. Sales and income are projected based on the expectations of management when complete financial statements are not available for the current year,

The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50). Dollar-One Basket (Tipping Basket): Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150).

A written agreement by which one person assigns or transfers his or her rights to or interest in goods and personal property to another.

Blue Sky refers to any intangible portion of a price, above the maximum Good will, that cannot be reasonably supported through the application of established Valuation Methods and which generates no economic benefit.

A pledge to pay a sum of money in the event of failure to fulfill obligations; e.g. inflicting damage, or mishandling funds - Usually written by a company for a fee. Also known as a Surety Bond.

Book Value is the value of an asset, net of depreciation, at which the asset appears on a company’s balance sheet.

Failure of a party to a contract to perform any or all of his obligations under the contract. There are four types of breaches:

A Business Broker is a Wisconsin Real Estate Licensee. A Business Broker is an intermediary serving clients and customers who desire to sell or acquire businesses. A Business Broker is committed to providing professional services in a knowledgeable, ethical and timely fashion. Typically, a Business Broker provides information and business advice to sellers and buyers, maintains communications between the parties and coordinates the negotiations and closing processes to complete desired transfers of ownership interest.

A transfer in bulk of all or substantially all of the inventory and fixtures of a business, which is not in the ordinary course of business.

Laws enacted by the states to protect creditors against secret sales of all or substantially all of a business’s goods. It requires certain notices prior to the sale and sets forth ways of voiding the sale (see Uniform Commercial Code). NOTE: No longer required in New Mexico since 7-1-92; however, each state has its own Bulk Sales laws.

A Business Broker is an intermediary dedicated to serving clients and customers who desire to sell or acquire businesses. A business broker is committed to providing professional services in a knowledgeable, ethical and timely fashion. Typically, a Business Broker provides information and business advice to sellers and buyers maintains communications between the parties and coordinates the negotiations and closing processes to complete desired transactions.

A Real Estate Licensee who acts as an agent representing buyers and sellers in the sale or acquisition of a business.

Company name by which a certain business is known.

A normal corporation for federal income tax purposes. The entity itself pays income taxes. Note that when we sell a business, the net proceeds are taxed at the "C" level, then any distributions to the shareholder(s) pay captial gains taxes on their personal level.

A clause in a lease or other contract stating the condition(s) under which the contract can be canceled or terminated by any of the parties. It may provide for simple notice or possible payment of money to cancel the contract.

Capital Structure is the mix of invested equity and debt financing of a business enterprise.

The Capitalization Rate refers to 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 is determining the value of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (investor’s required ROI).

Cash Flow is also called Discretionary Earnings. Both refer to the 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. Cash Flow is 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, Client - an entity with whom a Business Broker has a fiduciary relationship.

A check drawn on the bank’s own funds. It is often used to close a sale because there is generally no waiting for the check to clear.

“Let the buyer beware”.

Confidential Business Review.

A personal check guaranteed by the bank. The bank holds the necessary funds and will not accept any withdrawals against the certified amount. The bank also will not usually honor a stop payment on a certified check.

A chattel is an article of personal property and it includes both animate and inanimate property. U.C.C. stands for the Uniform Commercial Code which governs the granting of security agreements. A chattel search is a review of the appropriate county and Secretary of State Records in regard to any liens against chattels, tax liens and judgments.

A mortgage on personal property (not real estate). A mortgage on equipment would be a chattel mortgage.

Confidential Information Memorandum.

An entity with which a Business Broker has a fiduciary relationship.

When all the details of the business sale are completed and the money distributed to the seller

The legal documents that are part of a business closing. They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreement, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.

A statement which contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.