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Glossary of Terms

Buying or selling a business can require a dictionary. Here is a list of common terms used in the businesses for sale market place.

Agreement In Principle - This is also known as a "letter of intent" and is used by two parties to outline the price of a business and some of the larger terms of the transfer of the business. It is not a contract; therefore it is not binding and will be subject to more negotiation.

Amortisation - Spreading out payments over a period of time so that a debt is gradually paid off.

Assets - Everything owned by a company, including items that are owned. Current assets include cash, investments, money due, materials and inventories. Fixed assets include land, buildings and machinery. Intangible assets include goodwill.

Asset Stripping - Buyers who will sell off only some (not all) of an acquired business with the intention of recouping their initial investment while retaining ownership of the rest of the acquired business.

Auction - Where bids are accepted for a business within a specific time period.

Audited Financial Statements – These are the financial statements of a business, showing the business's financial position and the results of its operations. These are prepared by an accountant independent of the business owner and in accordance with general accounting principles.

Business Broker - Someone dedicated to serving clients who want to buy or sell a business.

Business Plan - A written document which describes the business, its objectives, its strategies, the market in which it operates and its financial forecasts.

Balance Sheet - A statement presenting the status of the business's assets, liabilities and equity on a given date.

Business Transfer Agent - The same as a business broker - someone dedicated to serving clients who want to buy or sell a business.

Book Value/ Net Worth - The accounting value of a business or an asset according to financial records.

Capital - The total sum that an individual has invested in a business or the business's net worth.

Cash Flow - The difference between a business's cash receipts and its cash payments over a certain period of time.

Commission - Someone's fee as a percentage of the sale.

Due Diligence - A thorough investigation into the claimed performance of a business, led by the potential buyer. It involves a verification of all claims made by the business owner.

Equity - The net value of a business after all debts, claims and assets have been liquidated.

Factoring - A process whereby a company pays the business a proportion of its debts in advance in return for payment later on.

Fiscal Year or Tax Year - The annual accounting period.

Franchise - An agreement where the franchisor (a primary company) provides a market tested business package to a local business (the franchisee). The latter then operates under the franchisor's trade name, marketing goods according to an agreed contract.

Goodwill - The part of the price, not accounted for by the net value of tangible assets that covers extra qualities of the business such as the name, reputations and customer loyalty.

Intangible Asset - A non-physical, notable asset of the business, e.g. copyright.

Intermediary - A middleman that acts for the interests of either a buyer or seller of a business - such as an agent, broker or advisor.

Inventory - All goods ready for sale, goods already on the production line and raw material in the business's possession.

Lease - An agreement for the rent of a particular, tangible asset.

Liabilities - Any outstanding claims against a business, including accounts and salaries, tax, mortgage bonds, bank loans etc.

Liquid Assets - Assets like receivables and saving accounts that are easily convertible into cash, as well as cash itself.

M & A firm - A professional mergers and acquisitions advisor that usually deals with larger businesses for sale.

Mark-up - The difference between wholesale and retail price.

Memorandum - A document that outlines the description of the business, including its history, products, services, mission statement, competitive analysis and financial statements. It can also be used as a document to outline a plan for a future business.

Net Income - For any given period, the remainder of total revenue once the total expenses have been subtracted.

Net Profit - Gross profit minus operating expenses.

Obsolescence - The loss of value of a fixed asset owing to it being replaced by an improved asset.

Overhead - The general expenses of a business as distinct from the direct cost of manufacturing a product or offering a service.

Representations and Warranties - The declarations of the seller stating the facts for the business (e.g. that all contracts have been disclosed to the purchaser).

Residual Value - The estimated price that a tangible asset would be worth at resale.

Revenue/ Sales - A business's gross income.

SAV - Stock at valuation. This is the value of any stock a business has at the time of valuation.

Seller Financing - The buyer promises to pay the seller of the business (once a down payment is made) certain sums over a specified period of time. In this way, the seller lends to the buyer to facilitate the purchase.

SIC Codes - This stands for Standard Industrial Classifications categorising and indexing business types and sectors.

Solvency - A business's ability to meet its long term financial obligations.

Subsidiary Operations - Business operations that are separately accounted for in financial statements.

Taxable Income - Gross income minus exemptions and personal deductions.

Turnover - The amount of money a company makes in sales.

Venture Capitalist - A person or firm investing funds in a business venture, expecting financial returns.

Working Capital - Readily accessible capital required for the day to day running of a business. In accounting reports this is calculated as the current assets minus current liabilities.

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