Most of the people who come to us to buy a business are first-time buyers.
And likewise, most of the business owners who contact us about selling their business have never gone through the process before. Buying or selling, there’s a lot for them to absorb.
And while we do our best to guide them each step of the way, the subject matter can be a bit daunting for those unused to the terms that come up as we help them get to their goal line.
We’ve pulled together the following “dictionary” with commonly used terms applied in buying or selling a business.
And as a further reference, we’ve tied most of them back to blogs posts where they appear in context.
Buying or Selling a Business: 35 Terms You Should Know and Understand
An asset sale is a transaction where the buyer purchases the operating assets of the business, both tangible and intangible. The purchase price must be allocated among the assets purchased including goodwill. Allocating fair market value to the assets will often result in the seller having to record a recapture of depreciation with this amount being taxable as income to the seller.
BATNA or Best Alternative to a Negotiated Agreement:
The action you will take if an agreement can’t be reached, determined before you start the negotiating process.
Business brokers are intermediaries who assist buyers and sellers of privately held small business in the buying and selling process. They typically estimate the value of the business; advertise it for sale without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale. (WIKIPEDIA)
CBO or Confidential Business Overview:
A document with detailed information about the business but only summary information about financials. Released only after signing of a confidentiality agreement.
CBP or Confidential Business Profile:
A document that includes detailed financial analysis of the business history and future projections. Provided only with the agreement of the seller after the buyer, seller and business broker meet.
Canada Small Business Loan. Provides financing for the purchase of assets, limited to a percentage of the value of Furniture, Fixtures and Equipment.
In the purchase of a business, a deferred payment that bases a portion of the valuation on actual future performance. Often requires the seller to remain with the business.
EBITDA or Earnings before interest, taxes, depreciation and amortization:
An important metric in determining the value of the business.
Exit Strategy/Exit Planning:
Preparing for the day an owner will leave their business. An exit plan will incorporate valuation, tax and estate planning, risk mitigation, stakeholder communications, due diligence and much more.
Expense that is excessive, above normal levels.
FMV or Fair Market Value:
A current and objective value, risk-adjusted.
Franchising is a business method that involves licensing of trademarks and methods of doing business. A franchise usually lasts for a fixed time period and serves a specific territory or geographical area surrounding its location. (WIKIPEDIA)
The party in a franchising agreement that is purchasing the right to use a business’s trademarks, associated brands and other proprietary knowledge in order to open a branch. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor. (Investopia)
A supplier who allows an operator, or a franchisee, to use the supplier’s trademarks and distribute the supplier’s goods. In return, the operator pays the supplier a fee. (WIKIPEDIA)
Include goodwill, patents, trademarks, database/mailing lists, licenses, permits, franchise agreements.
Includes patents, copyrights, trademarks, trade secrets, and other proprietary information used in commerce.
Lifetime Capital Gains Exemption:
A tax benefit on the sale of shares of a qualifying small business corporation. By taking advantage of the lifetime capital gains exemption (LCGE), share owners can potentially receive the capital gains tax free. The LCGE for 2016 is $824,177; it is indexed for inflation, up to $1 million, for tax years after 2014.
MPSP or Most Probable Selling Price:
The most likely selling price. Factors the true (recast) earnings past and future, risk, what the market and the seller are willing to pay.
NDA or Non-Disclosure Agreement:
An agreement that creates a legally enforceable confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets.
Usually tied to depreciation.
A one-time expense.
Offer to Purchase, Letter of Intent, Memorandum of Understanding:
A formal proposal to purchase. Documents that serve as a dated and signed offer to purchase the business with a time frame for response. Usually non-binding excepting confidentiality and perhaps exclusivity. Frequently includes a deposit.
Normalizing the financial statements of the business to provide a realistic value of the assets and liabilities and the true earning capacity of the business. Adds back expenses considered discretionary, extraordinary, non-recurring or non-cash.
SDE or Sellers Discretionary Earnings:
True earnings. Net income less interest, taxes, depreciation and amortization, owner’s compensation (including salary and discretionary expenditures). Benchmarked as a percentage of gross sales.
In a share sale, the buyer purchases the shares of the corporation. For the seller, the difference between the cost of the shares and sale proceeds is a capital gain.
SWOT or Strengths, Weaknesses, Opportunities and Threats:
A way of assessing the viability of a business. Included in the Confidential Business Overview of the business for sale.
Include furniture, leasehold improvements, vehicles, machinery etc.
Vendor Take Back:
Seller-provided financing where the seller takes back a portion of the purchase price, paid off over time. Also called a seller’s note.
Working capital (WC) is the difference between your current assets (cash, account receivables, etc.) and your current liabilities (accounts payable, accrued expenses, etc.) and as a cycle of cash flow, is required to sustain your business operations.