• Luke Middnedorf

The ABCs of Business Selling: A Guide to Understanding Key Terms


The ABCs of Business Selling: A Guide to Understanding Key Terms

When you're selling a business, it's essential to understand the terminology used in the process. This blog post will cover some common terms used in business buying and selling. As a result, you'll be able to make informed decisions about your business sale!


Common Terms Used in the Process of Selling a Business:


-Add backs: These are expenses added back to the business's profitability. Add backs can be used to adjust the EBITA for a more accurate measure of profitability.


-Amortization: This is the process of spreading the cost of an intangible asset over its useful life. Amortization is often used for items such as patents, copyrights, and goodwill.


-Asking price: This is the price that the seller is asking for the business. It is important to note that the asking price is not always the same as the final sale price.


-Asset Sale: This is a type of business sale where the buyer is only purchasing the business's assets, not the company itself.


-Business Broker: This is an individual or company that helps facilitate the sale of a business. Business brokers can provide valuable assistance throughout the process. If you're looking for help in California, contact Sacramento Business Brokers.


-Business Valuation: This is the process of determining how much a business is worth. This is an essential step when determining the asking price of your business.


-Cash Flow: This is the amount of money coming in and out of the business every month.


-Closing: This is the final step in the business sale process. Once the closing is complete, ownership of the business will be transferred to the new owner.


-Confidential Business Review (CBR): This document is provided to potential buyers that outlines the business's financial details. The CBR is necessary for due diligence purposes and should be reviewed carefully.


-Depreciation: This is the process of allocating the cost of a physical asset over its useful life. Depreciation is often used for items such as buildings, machinery, and vehicles.


-Discretionary Earnings: This is a measure of the business's profitability that considers the owner's salaries, benefits, and personal expenses.


-Due diligence: This is the process of investigating a potential purchase, usually through financial and legal means. Due diligence is critical to ensure that you get what you expect from the deal.


-EBITA: This stands for Earnings Before Interest, Taxes, and Depreciation. EBITA is a measure of profitability that can be used to compare businesses.


-Escrow: This is a type of account where funds are held during the business sale process. Escrow is used to ensure that both buyers and sellers are protected in the event of a dispute.


-Fair Market Value: This is the price that a willing buyer and seller would agree to for the sale of the business. Fair market value is often used in asset sales.


-Furniture, fixtures, and equipment (FF&E): This is the physical property of the business being sold. FF&E can include items such as machinery, inventory, and office furniture.


-Goodwill: This is the value of the business that is not attributable to its physical assets or intangible assets. Goodwill can be based on factors such as reputation and customer relationships.


-Intangible assets: These are non-physical assets being sold with the business. Intangible assets can include things like patents, copyrights, and customer lists.


-Investment Banker: This is an individual or company that helps raise capital for businesses. Investment bankers can also help to facilitate the sale of a business.


-Lease and Sale Comparables: These are businesses that have been recently sold similar to the business being sold. Lease and sale comparables can be used to value a business.


-Letter of intent (LOI): This document outlines the terms of a potential sale. It is not binding, but it can help solidify the deal's details.


-Liabilities: These are the debts and obligations of the business. Liabilities can include things like loans, accounts payable, and leases.


-Net Profit (Net Income; Net Earnings): This is the measure of profitability that includes all income and expenses, including taxes.


-Non-compete clause: This is a clause in a contract that prohibits the seller from competing with the buyer after the sale. Non-compete clauses are used to protect the buyer's investment in the business.


-Non-disclosure agreement (NDA): This is a document that is used to protect confidential information. Both parties should sign an NDA before any sensitive data is exchanged.


-Operating Cash Flow: This is the measure of the cash generated by the business from its operations. Operating cash flow can be used to assess the health of a business.


-Owner Financing: This is when the owner of the business provides financing for the buyer. Owner financing can be an attractive option for buyers who may not qualify for traditional loans.


-Owner's Draw: This is the portion of the business's profits paid to the owner. The owner's draw can cover personal expenses or reinvest in the business.


-Pro Forma: This is a financial statement that projects the future income and expenses of the business. Pro forma statements can assess the feasibility of a proposed business sale. It typically includes a balance sheet, income statement, and cash flow statement.


-Sale agreement: This is the final document that outlines the terms of the sale. This document is binding, and it will be used to transfer ownership of the business.


-Seller's Discretionary Earnings (SDE): This measure of profitability includes additional factors such as the owner's salary and benefits. A seller's discretionary earnings can be used to value a business.


-SBA Loan: This is a loan guaranteed by the Small Business Administration. SBA loans can be used to finance the purchase of a business.


-Term Sheet: This is a document that outlines the terms of a deal. A term sheet is often used as the basis for a sale agreement.


-Third-Party Financing: This is when a lender provides financing for the purchase of a business. Third-party financing can be an attractive option for buyers who may not qualify for traditional loans.


While this isn't exhaustive, it's some of the common terms you'll come across when selling a business. Understanding these terms is helpful in understanding the business sale process. If you have questions, feel free to give us a call for a free consultation.


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