Glossary of terms
Add-Backs - Allowable expenses, i.e. amortization, cost of debt service, or unusual or one-off costs that are typically added back to the net profit in order to demonstrate the "real cash flow" of the business; sometimes called "perquisites" (perks).
Allocation of Purchase Price - In some asset sale situations, value is attached to particular items that come with the business. The balance is Goodwill.
Asset Value - An estimate is produced to show the value of the "hard" or tangible assets if the company was simply wound up and the asset sold at wholesale.
Asset Sale - Purchase of certain assets and in some cases liabilities. The seller retains the corporate entity. A buyer’s accountant will in many cases advise their client to purchase using this method (see Share sale).
Contingencies to Sale - Most offers to purchase will be subject to certain contingencies, i.e. obtaining financing, interviewing with key customers or suppliers, indepth interrogation of financials and lease, etc.
Earnings Before Interest, Tax and Amortization - (EBITDA) Often used to show cash flow in a larger business. Many valuation models use this within an industry multiple approach; it can also be used to calculate a Return on Investment for a buyer.
Earn Out - Process by which a business is paid for from the income of the company over time. This is very common where the revenue is uncertain, shows fluctuation or where the business is service based and does not have a base of hard assets.
Hard Assets - Usually items that can be touched, i.e. machinery, vehicles and computers.
Intangible Assets - Items that may not be physical, i.e. licenses, trademarks, franchise agreements, leases, customer lists and unpatented technology.
Letter Of Intent - Many share transactions are triggered by the submission of a nonbinding letter of intent from the buyer to vendor. This letter will outline the basis on which the shares might be purchased, value, timing, etc.
Offer to Purchase - A formal document used to steer the purchase of a business on an "asset" basis. This document will most likely contain contingencies and representations and warranties, etc.
Recast Financials - See SDE and EBITDA. The financials are reconstructed to reflect what the income statement would be without excessive salaries, perks and allowable expenses.
ROI (ROE) - Return on Investment and Return on Equity must be greater than the cost of capital to create shareholder value.
ROI Value - The actual cash flow is used with a valuation model to act as "sanity check" on other valuation approaches, i.e., would this make sense for a buyer?
Seller Financing - The vendor will extend a note to the buyer in lieu of all cash at closing, or other debt financing that may not be available through banks.
Seller’s Discretionary Earnings - (SDE) the term used to describe cash flow prior to an owner’s compensation. Often used when marketing a smaller business.
Share Sale - Purchase of the company’s stock incorporates the assumption of all the assets and liabilities. Most sellers’ accountants will advise their client to go this route. (see Asset Sale).
Term Loan - Often provided by the vendor. A process by which the buyer will make level payments over an agreed period of time with interest, etc.
Vendor Financing - Often the only way for some businesses to achieve a sale. See Term Loan and Earn Out.
Working Capital - The difference when current liabilities are subtracted from current assets. Shows the amount of money available to grow the business in the short term.