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Glossary | Commonly Used M&A Terminology

Helpful glossary of commonly used terms for M&A transactions.

Playbook Advisory  

Business Broker

Glossary

Alphabetical Order

A

Accounts Receivable: How much money is owed to the Company from completed work orders

Angel Investors: Private Individuals that will lend money to businesses  at startup or early in lifecycle

Assets:  Assets owned by the company – Cash, AR, Autos, Deposits are examples

Accumulated Depreciation:  Investopedia Definition

Asking Price: The Price a Seller is offering the business for sale. Typically, average sales price is 85-90% of the initial listing price. Buyers should be aware of any price changes for the history of a company for sale.

B

Balance Sheet: The financial statement that shows the assets, liabilities, and owner’s equity of an entity on a particular date. This snapshot can be taken on any day of the year. Compare quarterly balance sheets from a company to get a sense of any seasonality in a business.

BizBuySell: A 3rd Party website for business sellers and buyers

BizQuest: A 3rd party website for business sellers and buyers

Book Value: The same as Net Worth. Beware of any deferred maintenance or assets under reported.

Building Type: Commercial, Retail, Industrial or Residential property.

Business Broker: A licensed professional assisting business owners and buyers  to either buy or sell a privately held business. Typically works for the seller under an exclusive listing agreement.

C

Capital Stock: The amount paid by shareholders for their ownership of a business.

Cash Flow: The amount available to the business before income tax, depreciation, interest and owner’s compensation and benefits.  Compare statements quarterly to gain a sense of seasonality or for times that the business requires additional working capital to fund inventory.

Cash Flow Valuation: Buyers purchase a business based on a multiple of cash flow. Brokers commonly use Seller Discretionary Earnings (SDE) in their offering memorandums.

Costs of Goods Sold (COGS): The expenses incurred to purchase or manufacture the merchandise sold during a period. May include labor costs for certain types of businesses. Review the COGS report.

Collateral: The assets that you provide to guarantee a loan either to the bank or the Seller.

Current Assets: Assets  owned by the business that can be turned into cash in a period of less than a year

Current Liabilities: Any debt or liabilities that is due in less than a year

 

D

Debt:  A loan or other liability owed to another party

Debt to Equity: Accounting term that shows how much leverage a business has  on its balance sheet

Depreciation: Accounting term that measures the reduction in value of a long term asset over time

Discounted Cash Flow: Valuation methodology used by an analyst in which projected future cash flows are determined based on historical results . Not commonly used for small business acquisitions.

Dividends: Distributions to owners (stockholders) of a corporation. Taxed at a different rate.

Down Payment: How much the Seller “wants” as a down-payment. If the selling price and Down Payment are the same then the business is being offered for 100% cash at closing.

Due Diligence: Once an offer is accepted a Buyer will submit a list of documents necessary to prove the business is what it is supposed to be. Common documents requested include bank statements, personnel records, contracts, leases, tax returns and sales tax reports. It’s very common for due diligence to take 60-120 days for a buyer to obtain financing and lender approval.

E

Equity: The same as Net Worth in the balance sheet. How much does the owner keep in the business?

Equity Financing: A method by which money is lent, but instead of the lender being paid back with a payment schedule, they receive a percentage of the business and they are paid back through the profits of the business

F

Fair Market Value: The realistic value at which Assets can be sold for in the short-run. Not liquidation value.

Free Cash Flow: This is the sum of Net Income, excess Owner’s Income, Interest, and Depreciation

Fiscal Year: A 12 month period that constitutes a company’s financials year and does not correspond to a calendar year

Fixed Costs:  The costs that remain constant from month to month for a business.  Ex., Lease Payments,

Fringe Benefits: The total amount of non-salary that may have been paid to the Owner, such as car allowance, health benefits, country club fees, expense allowances, bonus, etc. Commonly labeled add-backs in the SDE.

Full Time Employees: Number of employees at a company that are working full time for the business. These folks will receive W-2’s from the company at year end as well as paystubs.

G

Good Will: An Accounting Term – See Warren Buffett.

Gross Margin: The same as Gross Profit (GP)

Gross Profit: The amount obtained when deducting the Cost of Goods Sold from the Gross Sales

Gross Sales: The total revenue generated by the business includin

H

I

Income Statement: Logs of all the Income and Expenses of a business to determine if a business is profitable or losing money

Income Source: This part indicates what source was used for the figures

Inventory: The total value of the company’s inventory

Interest Expense: The costs the business incurred on certain loans

J

Jim Peddle: President, Playbook Advisory

K

L

Lease Expiration: Date the current lease terminates for a business. Determine if landlord is a 3rd party or Seller. Check for below or above market rent.

L/H Improvements: What improvements have been done on the premises and are considered as an asset

Liabilities: the obligations of the company

Listing Number: The ID that the business has been given. This number is imporatn because if it is on the broker association multiple listing services any broker can access it

Listing Agent Number: The listing agents ID number

Listing Office: The office ID of the broker’s officer who has the mandate to sell the business

Liquidation Value: When you determine what you can get for the Assets if you had to turn each into cash within 30 days

Long-Term Assets: Assets that can turn into cash

Long-Term Liabilities: Debts or other obligations that will not be paid within one year

M

Marketing: Identifying the business that your are in, pinpointing your customer and providing them with what they need in order to generate profit for the business

Market Rent: The amount a tenant pays for facility or office space that is at the prevailing market.

Multiple Listing Sheet: Listing where all the businesses are listed – similar to the one that the realtors use

Monthly Rent Expense: The monthly rental fees paid to landlord

Monthly Payment: This is the amount that you will pay per month for the number of payments to either a lender or landlord

Multiple Method: Uses the most recent year’s financial statements to establish a Cash Flow figure, then multiplies that figure by a certain factor to arrive at the value of the business

N

Negotiation: An interaction between parties with the goal of reaching a mutual understanding

Net Before Tax: The profit before taxes obtained by subtracting the Total Expenses from the Gross Profit

Net Income: The amount achieved after deducting all expenses and taxes from the Gross Margin

Net Worth: The Value of something once you deduct any money that remains owing on it. It can be calculated by deducting the liabilities from the assets

Non-Seller Financing: This will refer to the amount that you must borrow or have available in cash

Note Amount: The total amount that is to be financed, which is calculated by subtracting the down payment from the selling price

Note %: The interest rate that will be charged on the note

Non-Compete: This notes how long and for what distance the owner has agreed to not reenter a similar type of business

Non-Recourse Loan: The lender cannot come after you personally for any shortfall between the amount owing and the assets pledged

Number of Payments: number of months the note repayment is spread over

O

Owner Benefits: The total achieved by adding net before taxes + Owner’s Salary + Fringe Benefits + Interest Expense + Depreciation + Other

Owner’s Equity: Total Assets minus Total Liabilities

Owner’s Salary: What salary the business paid the owner/Seller

Organization Type: Whether it is a corporation, limited partnership, S Corporation, Public Company, etc.

P

Part-Time Employees: Some businesses may bring delivery personnel or certain types of workers in a part-time basis

P & L Statements: Another term for Income Statement and it means that the figures provided can be verified by examining the company’s financial statements

Playbook Advisory: A Chicago based Business Brokerage firm founded in 2016 by Jim Peddle

Pre-Tax Income: The amount of money that the business made prior to deducting what is owed for any and all applicable taxes

Pro Formas: A financial statement that uses historical data or trends and combines them with predictions for the future to produce financial statements of what the business may look like under certain conditions

Q

R

Reason for Sale: Why the owner has decided to sell the business (retirement, illness, relocation)

Recourse Loan: Where the business Assets are used as Collateral but you are personally responsible if the business is not able to make the payments and if the Assets provided do not cover the outstanding debt

Retained Earnings: The amount of profits held over in the company from previous Fiscal Years, which was left in the company

Revenue: All of the income that the company receives

Revision Date: If the information on the listing has been revised it will the date this was done

S

SBA Financing: Loans that are made through traditional institutions, but partially guaranteed by the U.S. Small Business Administration

Seller Financing: This situation indicates that the Seller is willing to carry a Balance of sale

Shareholder’s Equity: The difference between the company’s Assets and Liabilities

Skills Required: This section might note “management skills”, “sales skills” or even something more specific

Sq.Ft./Dim: The Size of the premises in total square feet and the dimensions

T

Tax Returns: This term refers to the fact that the numbers are right off the tax return. This is definitely the most accurate way to verify the reliability of the numbers and it is without questions the preferred way to evaluate a business

Terms and Options: A general outline of the lease terms

Tombstone: An M&A term used to highlight a transaction 

Total Expenses: Total fixed expenses incurred by the business

Total Owner Benefit: Owner’s salary and other compensation

U

V

Variable Costs: An Accounting term related to operating expenses of a business tied to sales activity

W

Working Capital: The amount remaining after subtracting the Current Liabilities from the Current Assets. An important variable in the evaluation of a business to purchase.

X

None

 Y

Years Established: Number of years the business has been active

Years Owned: Numbers of years that the Seller has owned the business

Z