background logo

Business Brokerage Glossary

A practical guide to understanding the terms used to sell a business. Written for humans.

Amortization

Often confused with depreciation, amortization is a technique used by accountants to lower the value of an intangible asset over a period of time. While amortization is an 'expense' you do not pay for it out of pocket. Therefore, it is removed to calculate EBITDA.

Asset Sale

The Buyer acquires all or part of the company’s assets; while the Seller retains the ownership of the company entity (Shares).

Debt Servicing

The cash required to cover the repayment of interest and principal on a debt for a particular period. A majority of buyers do not fund an acquisition using 100% cash. Instead, they will take out a loan to fund the purchase. As a result, there will be a monthly/quarterly/annual amount they will need to pay back to the lender.

Capital Expenditures (CAPEX)

Funds used by a company to acquire or upgrade physical assets such as property, plant or equipment. This investment is made by companies to maintain or increase the scope of their operations.

Cash Flow from Operation (CFO)

CFO represents the cash generated from the operations of a company. Cash flow is also often used to identify the company’s earnings. Often equated with SDE.

Earnings

Not to be confused with revenue. Earnings are synonymous with the profit of the business.

EBITDA

Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is an indicator of a company’s financial performance. Could be normalized or not. When normalized it is net of any discretionary, non-recurring and non-operational expenses or income. In essence, it is the net profit of the business plus interest on long term debt plus taxes plus depreciation and amortization.

EBIT

Earnings before Interest and Taxes. It is the net profit of the business plus interest on long term debt plus taxes.

Fair Market Value (FMV)

The price at which the business and/or property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts

Goodwill

The collection of intangible assets represented in dollars by the difference between the total purchase price for the business and the net value of the tangible assets being purchased.

Gross Margin

A company’s total sales revenue minus cost of goods sold, divided by the total sales revenue, expressed as a percentage. Gross margin is an important measure of a company’s profitability.

Letter of Intent (LOI)

A letter of intent (LOI) is a document that outlines the high-level details of a business deal between two or more parties. In business transactions, an LOI is used by the parties lawyers to draft the definitive Purchase and Sale Agreement (PSA). LOIs are also referred to as term sheets.

NAICS Code

North American Industry Classification System code.

Net Book Value (NBV)

NBV is the value at which an asset is carried on a balance sheet. It is the historical cost of an asset minus accumulated depreciation.

Normalized Financial Statements

Normalized financial statements are financial statements that have been adjusted to eliminate non-recurring and non-business related items

Pro Forma

A method of calculating financial results emphasizing projected figures.

Purchase Price

This often represents the total money paid for the business including all assets plus any inventory or other working capital.

ROI – Return on Investment

In this document, this value is calculated as follows: (SDE – Manager/Owner’s Salary) divided by the Purchase Price.

ROIC – Return on Invested Capital

In this document, this value is calculated as follows: (SDE – Manager/Owner’s Salary – Debt Servicing) divided by the Purchase Price.

Regression Analysis

In general, regression analysis is a measure of the relationship between two variables (for example sales and costs). It is used to find the line that best represents the relationships in a given dataset. Regression Analysis is sometimes used to calculate forward-looking projections.

Seller's Discretionary Earnings

Business owners often try to optimize the taxes they pay each year. As a result, it is not uncommon for a company to appear to make less money, "on paper." For example, a company's profits are reduced if the owner takes a salary from their business, as that wage appears is an expense. However, this is money in the pocket of the business owner.

Therefore, we use Seller's Discretionary Earnings (SDE) as a better way to show the profitability of an owner/operator business. To calculate SDE we add back all the benefits the owner receives from the business to Net Income (owner salaries, depreciation/amortization, etc.) But don't worry - we can help calculate SDE for you with PriceBuilder.

SIC Code

Standard Industrial Classification code.

Stock/Share Sale

The Buyer acquires all or part of the company’s stock/shares and the ownership of the company or specific shares/stocks is/are transferred to the Buyer. Since the assets of the business are owned by the company and the company is an independent entity and its ownership is represented by the shares/stock, purchasing the shares includes the assets and liabilities of the company unless otherwise specifically excluded.

VTB - Vendor Take Back Loan

A VTB is the portion of the Purchase Price that is loaned to a buyer by the seller. Terms for VTBs vary, however, they are usually 10-15% of the purchase price. The loan is paid back by the profits of the business over the next 12-48 months.

Working Capital

Also called Net Working Capital, is traditionally calculated as Total Current Assets minus Total Current Liabilities, excluding interest-bearing debt. Working Capital is necessary to maintain the company’s daily operations. For small business acquisitions, this is often funded by inventory and accounts receivable. Working Capital is a measure of both a company’s efficiency and its short-term financial health.
Start planning the exit of your business
Paratus demystifies the business-for-sale process, making it easy for owners to value, grow, and exit their businesses.
Get started