ACCELERATED DEPRECIATION is used to calculate (and reduce) overall
tax liability. There are various formulas
(double declining balance, sum of the years’ digits, or units of production) for the
type of accelerated depreciation used by your accountant.
All have the effect of a larger benefit in the early years of equipment
life.
ASSET ACQUISITION STATEMENT (IRS 8594) an ALLOCATION OF
PURCHASE PRICE that is filed by both parties with their annual tax returns that identifies
the exact allocation of purchase price among 5 classes of assets (cash, securities, FFE,
intangibles and goodwill). The tax treatment
of these categories is different and depends on your status as a Buyer or Seller.
ASSETsomething of value, tangible or intangible.
BALANCE SHEET is a
snap shot in time of the financial position of the company.
It shows ASSETS, LIABILITIES and OWNER’S EQUITY at a particular date.
BILL OF SALE: The
agreement that transfers specific assets of the business in exchange for defined
consideration.
BLUE SKY LAWS enacted
by the State to prevent the sale of securities that have little or no asset backing.
BOOK DEPRECIATION is noted on the Balance Sheet to reflect
the wear & tear on Fixed Assets. It is
based on actual purchase price and is applied in equal annual amounts over a STRAIGHT LINE
– based on the individual equipment life in years.
COMPARABLES – other businesses currently listed for sale
or recently sold that are similar to the subject company in industry classification, size
(revenue, profitability, employee base) and geographic region.
CONFIDENTIALITY – a formal agreement between the seller
and other parties (prospective buyers and their professional advisors) to treat all
information conveyed (including the fact that this business is for sale), confidentially. Serious financial damages would result if this
information was shared with any other party.
CONSULTING AGREEMENT- the portion of the selling price to
compensate the Seller for training and on-going advise to the Buyer.
COVENANT NOT TO
COMPETE AGREEMENT – The agreement between the Buyer and Seller that the Seller will
not start, join or invest in a directly competitive business within a prescribed geography
over a certain period of time.
CURRENT ASSETS and
LIABILITIES are categories that are easily convertible to cash (liquid) or payable within
one year.
DEBT SERVICE – on-going payments made to the seller
and/or commercial lender to pay off the balance of the purchase price over time.
DEBT SERVICE COVERAGE RATIO – banks require a minimum
cash flow (after owner’s compensation) of about 1.35 times the monthly debt service
(payments) to for loan qualification and to help ensure the new owner’s ability to
pay.
DEPRECIATION is a “non-cash” expense adjustment to
establish a replacement fund (at least in theory) for equipment as it wears out. It is an accounting adjustment that reduces tax
liability.
DOWN PAYMENT- initial payment made by the buyer at closing to
transfer ownership of the business assets.
DUE DILIGENCE is the buyer’s responsibility to request
the appropriate documents to verify the financials and other important operating
characteristics of the business. Professional
help from your Accountant and Attorney is essential.
EARN OUT – the portion of the selling price structured
and paid out based on the actual future operating performance of the company (usually
gross revenue). Often used when a Seller is
projecting significant future growth and the Buyer is skeptical and wants to pay for
performance.
EARNEST MONEY DEPOSIT – a check that accompanies an
Offer to Purchase or Letter of Intent to convey the seriousness of the Buyer’s Intent
to work toward buying this particular business. Usually
10% of the Offer.
EMPLOYMENT AGREEMENT: The
agreement between the Buyer and other key employees of the business – offering
continued employment at certain compensation and benefits.
ENTERPRISE BUSINESS is dependent on orchestrating the efforts
of an organization. The primary financial
objective is to deliver growth, often creating a marketable asset to fund future
retirement for the owner(s). The owner
typically brings substantial management experience and capital equity to such an
organization.
FFE – Furniture, Fixtures and Equipment
GOODWILL is an intangible (but real) value of the business and
represents the name recognition, reputation, established customer base and possibly
patents, trademarks and other proprietary trade secrets of the business that justify the
cash flow above and beyond the standard return on a collection of assets.
INCOME STATEMENT is a compilation of Revenue and Expenses over
some period of time to show profitability.
INTANGIBLE ASSET – something of value that does not
exist in the physical dimension. Represents
an economic or financial benefit.
LIFESTYLE BUSINESS is
highly dependent on the individual efforts of the owner.
The primarily financial objective is to deliver replacement income for the
owner/operator. You are in effect buying a
job, with more flexibility and control than available through paid employment.
LIQUIDATION VALUE is
the fair market value of specific tangible assets.
LONG TERM ASSETS and LIABILITIES are categories that are not
convertible to cash in the short term (fixed) or payable over more than one year.
NON-DISCLOSURE AGREEMENT (NDA) – see Confidentiality
Agreement above. A written promise by the
prospective buyer not to reveal any confidential information to other parties.
OWNER’S EQUITY is the net value of the business assets
over and above the direct liabilities.
PROMISSORY NOTE: The agreement that pledges security and details
the balance of payments for the transaction. Example: the Buyer agrees to pay the Seller $500,000 over 5
years at 8% in 60 equal monthly payments of $10,138.20 on the first day of the month
beginning April 1, 2003 and ending March 1, 2008.
PURCHASE AND SALE: The
formal overall agreement between Buyer and Seller to transfer the assets of the business,
including all terms and conditions.
RECASTING the
financial statements starts off with net income and “adds-back” various expense
items including: excessive owners &
family compensation, depreciation, amortization, interest and all other owner benefits
(insurance, vehicles, above market rent, etc.)
SBA – Small Business Administration is a governmental
agency that “guarantees” small business loans made by banks. These loans may require as little as 10% down (.9
LTV (Loan to Value)) and can include working capital.
VALUATION – a formal analysis and report by a licensed
professional that indicates the Fair Market Value of a business for a defined purpose and
as of a certain date. Relies on a combination
of Asset, Income and Market Based approaches to establishing a value.
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May not be transmitted in whole or in part with out the written consent of
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