Glossary of Terms
Acquisition – When a company, entity or individual purchases a majority interest in another company.
Adjusted Book Value – 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 – 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.
Asking Price – The total amount for which a business or an ownership interest is offered for sale.
Asset Approach – 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.
Asset Sale – 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.
Base Year – 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,
Blue Sky – 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.
Book Value – Book Value is the value of an asset, net of depreciation, at which the asset appears on a company’s balance sheet.
Business Broker – 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.
Business Intermediary – A Wisconsin Real Estate Licensee who acts as an agent representing buyers and sellers in the sale or acquisition of a business.
Capital Structure – Capital Structure is the mix of invested equity and debt financing of a business enterprise.
Capitalization Rate- 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 – 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- 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:
- Owner’s Compensation
- Owner’s Fringe Benefits
- One-Time Expenses
Client – An entity with whom a Business Broker has a fiduciary relationship.
Co-Broke Agreement – An agreement between two or more Business Brokers for sharing services, responsibility and compensation on behalf of a client.
Co-Business Broker – A Business Broker who shares services, responsibility, and compensation on behalf of a client.
Cooperating Business Brokers – Business Brokers who share their knowledge, expertise, and skills for the benefit of the business brokerage profession, clients, customers and the public good, and share the commission.
Customer – An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker.
Deal Structure – Deal Structure can take many forms. It refers to the combination of types of payment by which the acquisition of a business is accomplished. Deal Structure can include cash, promissory notes, stock, consulting agreements, earnout provisions and covenants not to compete. The sale of a business itself can take the form of an Asset Sale or a Stock Sale.
Discount Rate – The Discount Rate is a rate of return used to calculate the present value of multiple periods (usually years) of payments.
Discretionary Earnings- The earnings of a business enterprise prior to the following items:
Nonoperating income and expenses
Nonrecurring income and expenses
Depreciation and amortization
Interest expense or income
Owner’s total compensation for those services which could be provided by a sole owner/manager. (Also see Cash Flow above)
Earn Out – The Earn Out is 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 – Fair Market Value refers to 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. Fair Market Value presumes that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.
Fixed Interest Rate – A Fixed Interest Rate is an interest rate that does not fluctuate over the term of the loan.
Going Concern Value – Going Concern Value refers to 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 is called Goodwill. Goodwill is a result of name, reputation, customer loyalty, location, products and net income.
Income (Income Based) Approach – The Income Approach is a 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. The Market Approach and Asset Approach are also commonly used methods.
Intrinsic Value – Intrinsic Value refers to an analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.
Investment Value – Investment Value refers to the value to a particular investor based on individual investment requirements and expectations.
Liquidation or Liquidating Value – Liquidating Value is the estimated value, net of liabilities, of a company based on the market value of its assets.
Market (Market-Based) Approach – A Market Approach is a 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. The Asset Approach and Income Approach are also commonly used methods.
Merger – The combining of two companies in which the stockholders of one company exchanges all of their stock for shares of another company. The company that receives the shares and issues their stock is the surviving company.
Mergers and Acquisitions (M&A) – A term that is commonly used for the mergers, acquisitions and the selling of companies. M&A is a commonly used abbreviation for this term.
Most Probable Selling Price – A term that is commonly used to describe the value, or range of values, that the broker believes that the business will bring in the current market. This is different from the terms “Evaluation,” “Valuation,” and “Appraisal,” which connote a much broader scope of work performed by competent professionals than that work prepared by a business broker. MPSP is a commonly used abbreviation for this term.
Net Book Value – Net Book Value is 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 business enterprise. With respect to a specific asset, Net Book Value is the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.
Non-operating\Noncontributing Asset – An asset unnecessary to the operation of a business enterprise and the generation of its revenues.
Owner – A generic term used in business brokerage to represent the proprietor, general partner or controlling shareholder (singular or plural as appropriate) of a business enterprise.
Owner’s Salary – The salary or wages paid to the owner, including related payroll burden.
Owner’s Total Compensation – Total of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value.
Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.
Present Value – Present Value is the value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (Discount Rate).
Pro Forma Financial Statements – Pro Forma Financial Statements are hypothetical financial statements, financial statements as they would appear if some event, such as increased sales or production, had occurred or were to occur. Pro Forma Financial Statements are also used to make projections for future years.
Projection – A Projection includes 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 is a method that eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses from financial statements, since these items 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.
Referring Business Broker – A Business Broker who provides introductory information which leads to a client relationship.
Residual Value – Residual Value refers to the estimated market value of an asset at the end of the period being considered.
Return on Investment (ROI) – Return on Investment describes the rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.
Stock Sale –A Stock Sale is a form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser, and in which the purchaser assumes all of the assets and all of the debt, both tangible and intangible.
Transaction Value – Transaction Value refers to the 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, Earn outs and future considerations.
Valuation Approach – The Valuation Approach is a general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more valuation methods. The Asset Approach, Income Approach and Market Approach are all common approaches used to value a business.
Valuation Method – Under a chosen Valuation Approach, there are various specific Valuation Methods to determine value.
Variable Interest Rate – Variable Interest Rate refers to 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 is referred to as Working Capital.