Featured Clients this issue:
**Details of each client below article
- Full-Service Provider of Electronic Systems #1118
- Historic Full-Service Bar/Restaurant #1318
- Specialty Automotive Repair #618
Happy New Year. The FBB Team started the year off right with a closing on the sale of a specialty contracting business and the underlying real estate in Denver on January 2
. As you would suspect, there was some tax planning involved to make the transaction effective January 1
During our celebratory lunch, I was talking to the Seller about the timing of the transaction. The business was doing well and had prospects for continued growth, which is the right time to sell a business. As a result, we were able to negotiate an all cash transaction at a high value for the Seller. Alternatively, the Seller ran the risk of the market falling, receiving a lower value, and probably carrying back part of the purchase price in the form of a promissory note. The Seller was wise to have the business prepared to sell to take advantage of the strong business transfer market.
Our feature article this month is the first of multiple articles dealing with the vocabulary associated with business transfers. Hopefully, it will assist you in your endeavors of selling or buying a business.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
Glossary of Terms (Part One)
If you are trying to buy or sell a business, then you know that the terminology can get quite confusing. The FBB Group, Ltd. has compiled a list of terms and their respective definitions to try and clear up any questions you might have on how to buy a business or sell a business. As this list is quite extensive, we will be dividing it up into multiple parts, published in multiple eNewsletters.
- Acquisition: When a company, entity or individual purchases a majority interest in another company.
- Add-backs: Discretionary expenditures made by business owners that are "added back" to the bottom line during the recasting process.
- Add-On Acquisition: A strategic acquisition fit for an existing platform/portfolio company.
- Addendum: A written instrument that adds something to a written contract.
- Adjusted Book Value: The value that results after one or more asset(s) or liability amounts are added, deleted, or changed from their respective financial statement amounts.
- Agency Disclosure: A written explanation to be signed by a prospective buyer or seller, explaining to the client the role that the broker plays in the transaction (The purpose of disclosure is to explain whether the broker represents the buyer or seller or is a dual agent, representing both, or a subagent, an agent of the seller's broker. This allows the customer to understand to which party the broker owes loyalty.)
- Allocation of Purchase Price: Also called Purchase Price Allocation, this term refers to the manner in which the purchase price of a business is divided between seller and buyer for taxation purposes.
- Amendment: A written instrument that changes something previously agreed to.
- Amortization: The periodic expense of an amount paid for an intangible asset over a period of time.
- Arbitration: The submission of a disputed matter for resolution outside the normal judicial system. It is often faster and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA). Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.
- Asking Price: The total amount for which a business or an ownership interest is offered for sale.
- Asset Sale: A sale of a company when only the assets of the business are sold, not the stock of the corporation (This allows the new buyer to depreciate most of the assets over five or fifteen years and eventually recoup most or all of the purchase price. An asset sale also frees a buyer from any liabilities the previous owner may have incurred.)
- Assignment: A transfer in writing of an interest in property or other things of value from one person or entity to another.
- Audit: An examination of a company's financial records and the accounting systems, controls, and records that produced them.
- Balance sheet: A report listing the balances of the assets, liabilities, and equity as of a specific date.
- Basket: The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50). Dollar-One Basket (Tipping Basket): Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150).
- Benefit Stream: Any level of income, cash flow, or earnings generated by an asset, group of assets, or business enterprise. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.
- Beta: A measure of systematic risk of a security; the tendency of a security's returns to correlate with swings in the broad market.
- BILL OF SALE: A written agreement by which one person assigns or transfers his or her rights to or interest in goods and personal property to another.
- Blue-Sky: The portion of a requested price that cannot be supported through the application of established valuation methodology and which generates no economic benefit.
- Blockage Discount: An amount or percentage deducted from the current market price of a publicly traded security to reflect the decrease in the per share value of a block of those securities that is of a size that could not be sold in a reasonable period of time given normal trading volume.
- Business Broker: A Business Broker is an intermediary dedicated to 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 transactions. Related uses or terms: Business Intermediary, Investment Banker.
- Business Enterprise: A commercial, industrial, service, or investment entity, or a combination thereof, pursuing an economic activity.
- Business Intermediary: A merger and acquisition (M&A) advisor who assists buyers and sellers of privately held small businesses throughout the business transfer transaction process. An agency relationship typically exists between the intermediary and either the buyer or the seller. The intermediary offers transaction advisory services such as estimating the value of the business; advertising it for sale with or without disclosing its identity; managing the initial buyer/seller interviews, discussions, and negotiations; facilitating the progress of the due diligence investigation and generally assisting with the business sale. Intermediaries require specific skills - number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling hours. On Main Street, an intermediary is often referred to as a (business) broker. Certified Business Intermediary (CBI) is an industry designation awarded by the International Business Brokers Association (IBBA). Related uses or terms: Business Broker, Investment Banker.
- Business Type: The legal structure of the business. Types include Sole Proprietorship, Partnership, S-Corporation, C-Corporation, Limited Liability Company or Limited Liability Partnership as follows:
Sole Proprietorship: A business entity that involves just one individual who owns and operates the enterprise.
* Partnership: A business that is unincorporated and organized by two or more individuals
S-Corporation: A type of corporation that provides its owners with tax treatment that is similar to a partnership and liability protection similar to a corporation.
C-Corporation: A type of corporation, unlike an S-corporation, that is not restricted as to the types of eligible shareholders (The shareholders can include other individuals, corporations, trusts, partnerships, LLCs, and other quasi-entities. The impact of double taxation - on the corporation's income and the separate taxation on the dividends - constitutes the impact of the C-corporation treatment.)
Limited Liability Company (LLC): A flexible form of business enterprise that blends elements of a corporation and a partnership or sole proprietorship, depending on how many owners there are.
Limited Liability Partnership (LLP): A partnership in which some or all partners have limited liability (It therefore exhibits elements of partnerships and corporations.)
- Business Valuation: The act or process of determining the value of a business enterprise or ownership interest therein. See also: Valuation Approach.
This Glossary of Terms was compiled using multiple sources, to include: representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Valuers, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, Private Equity Firms, Barron's, Investopedia, Divestopedia, PitchBook, IBBA, M&A Source and merger & acquisition advisors.
Full-Service Provider of Electronic Systems #1118
This B2B service company installs and services fire alarm, security alarm, and communication systems. It is well known in the industry for providing best in class design, engineering, installation, and monitoring services throughout the state of Colorado. Thriving since its inception over 30 years ago, the company has prized relationships with many large organizations that rely on its expertise in new installations and ongoing service. Real estate, with an estimated value of $435,000 (subject to appraisal), available to purchase with the business. Sales through September of 2018 up 8.6% over the same period in 2017.
- Purchase Price...$1,585,000
- Gross Sales...$1,689,613
For more information contact Lynn Lage, email@example.com.
Historic Full-Service Bar/Restaurant #1318
This well-known southern Colorado sports bar and restaurant has consistently been voted one of the best in the city. Operating at the same location for nearly 40 years, this unique establishment has become a favorite for both locals and tourists who continue to offer great online reviews. With an experienced head chef in place and a seasoned wait staff, we believe a new owner/operator with restaurant experience or an industry buyer looking for a great location could successfully operate this proven and profitable business. Real estate is also available to purchase.
- Purchase Price...$625,000
- Real Estate (optional)...$1,120,000
- Gross Sales...$1,502,395
For more information contact Rob Amerine, firstname.lastname@example.org.
Specialty Automotive Repair #618
Providing over 55 years of quality service, this highly respected and well maintained full-service automotive repair shop primarily services high-end foreign model vehicles. With no active advertising, this business brings in customers based solely on its reputation. This business currently operates with two vehicle lifts, and there is opportunity for expansion into the adjacent property. This business has two parcels of real estate. The main parcel is to be purchased with the business. The second parcel is optionally available for purchase, but will not be sold separate from the business.
- Purchase Price...$199,500
- Real Estate...$249,000
- Real Estate (optional)...$331,000
- Gross Sales...$240,059
For more information contact Scott Densmore, email@example.com.
**Terms & Definitions
TBS (To be suggested by Purchaser) -
Seller, in his/her sole discretion, has the right to accept or reject all offers.
Seller's Discretionary Earnings (SDE):
A term used to denote a business's cash flow or the amount of pretax money a buyer can expect to earn in first-year operations.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization):
All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income (It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.)