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Amortization - The payoff of debt through regularly timed payments of principal and interest.
Balance Sheet - The balance sheet includes a list of business assets and liabilities - the essence of the capital structure.
Benchmark Value - Benchmark indicators of value - those best suited to the entrepreneur's buying and selling activity - are derived from factors intrinsic to the business. These are cash flow, assets, returns on investment, and sales revenues.
Book Value - It is constructed from assets and liabilities. Book value appears in every financial statement.
Business Liquidation Value - This is at the low end of the value range and is purely market driven. This value is the price at which the property can be sold at auction.
Capitalizing Income - A 'market approach' to estimating business value. That's because capitalizing business income relies on comparable capitalization rates of return that might be available from other business opportunities. Three variables are used: income, cap rate, and value.
Capitalization Rate - The rate at which a stream of future payments converts into a present value. The concept is also called the 'cap rate' or simply 'CAP'. It is expressed as a rate, like interest.
Cash Flow - EBITDA plus additional adjustments related to the future use of the business. Cash flow is earnings available to ownership following the expected change in business strategy or ownership
Comparable Sales - As in residential real estate, useful device to determine business value in the buying and selling of a business.
Cost of Goods - Cost of Goods represents the total wholesale cost of merchandise purchased or produced for resale.
Debt Coverage Ratio (DCR) - A DCR is used to discount the amount of free cash flow that can be applied to payment of debt requested. The Cash Flow is divided by the OCR which is usually 1.00 to 1.5.
Due Diligence - Buyer's opinion of what needs to be researched during the escrow period of a business purchase.
Earnings Reconstruction - An Earnings Reconstruction ERCON - will help resolve discrepancies between apparent and actual business earnings.
EBITDA - "Earnings Before Interest, Taxes, Depreciation & Amortization".
Equity Set-Aside - To determine the buyer's equity set-aside "deduct the same percent [as a buyer's down payment as a percent of the total price] from Free Cash Flow. Next, capitalize the free cash flow set-aside at the capitalization rate selected earlier for use in the capitalization of income indicator of value.
Financial Leverage - Leverage in action is called levering. In business ownership it is a way to acquire a business without increasing ownership's investment or equity, and usually for much less 'out of pocket' money. Levering is usually accomplished by borrowing money.
Franchise Value One case in which a business might not even exist but can attract a value for goodwill is the franchise. There are thousands of franchise companies operating in the United States. They utilize imitative entrepreneurship to create the goodwill they sell. Their record of success confirms this fact.
Franchisers - Sell a plan of success that includes a method of business operation and a uniform identity. The price paid for these benefits is a "franchise fee."
Goodwill - Some of the excess of purchase price paid for a business over the market value of its tangible assets. It can represent customer and supplier loyalty, as well as name recognition.
Gross Profit - Gross profit is revenue left after cost of goods has been subtracted.
Gross Revenue - Created by the sale of a business's products or services. Gross income does not include revenue from sources unrelated to the principal business activity, e.g. interest on bank deposits owned by the business.
Intangible Assets - Typically, intangible assets are not included in the asset variable used to value the business. Intangibles differ because they cannot be touched or directly felt. Goodwill, as an example.
Levering Cash Flow - Using business cash flow to pay; 1) Management Compensation, 2) Return on Equity, and 3) Financing created to acquire the business. The result is the value indicated by levering the cash flow into these investment criteria.
Loan-To-Value Ratio (LTV) - The LTV ties the amount that can be borrowed to the fair market value of assets available for collateral. For example a 90% LTV means a lender would loan up to 90% of the fair market value of collateral assets."
Momentum Value - At the upper limits of the value range one finds another market driven example: momentum value. Momentum value may follow on the heels of a popular business concept, stimulating new technologies, impressive earnings forecasts, or media attention that electrifies investors. When momentum driven, the perception of value becomes greater than the value determined from financial results.
Multiple of Excess Earnings - Excess earnings are business free cash flow less a return on the market value, or cost, of tangible business assets. The resulting amount is inferred to be cash generated from business goodwill. Multiply excess earnings by the RPM and add back the value of tangible assets. This is the value indicated with the multiple of excess earnings approach.
Net Profit - Subtracting operating expenses from gross profit.
Non-Disclosure Agreements (NDA) - Written promises not to disclose confidential information about a business making such disclosures.
Non-Negotiable Items - An entrepreneur believes cannot do without because to do so makes failure a near certainty.
Operating Expenses - All the costs of running a business are the business operating expenses. They include things like insurance, payroll, depreciation, interest.
Owner's Benefits - See "Perks" below.
Perks - Owner's Benefits. Several types of expenses that may be added in part or entirely to earnings. Not directly tied to the operating expenses of the business. That trip last year to Hawaii, for instance! Could be personal automobile or a handful of expenses not directly related to the requirements of operating the business.
Plows - Expenses the business does not have prior to a transition but will incur afterward that will reduce net profit or cash flow. Example: Seller's wife performed the accounting functions, but without pay.
Profit and Loss Statement - Describes business revenue, expenses, and profit or loss created from operations.
Revenue - Created by the sale of a business's products or services. Includes sources unrelated to the principal business activity, e.g. interest on bank deposits owned by the business.
Risk Price Multiple (RPM) - An RPM is a way to measure the risk and value of a business.
SDE - Seller's Discretionary Earnings. Generally the same as EBITDA but subtracting Owner's Salary.
Small Business Administration (SBA) - The U.S. Small Business Administration is a branch of government established to assist entrepreneurs in most aspects of business start-up, expansion, or acquisition. Small business valuation emphasizes financing. Providing services to meet this need is at the core of the SBA's mission.
Tangibles Assets - Assets listed in a financial statement one can touch and feel.
Target Buyers - The most frequently encountered small business buyer will be owner/operators. They are buying a job. The second is the industrialist who is expanding in a similar business. The third is an investor or financial buyer.
Trailing Earnings - Earnings recorded during previous years of business operations.
Valuation Variables - Calculating indicators of business value is not possible without key variables, and selecting accurate variables determines the quality of the result more than any 'tricks' that might be employed in the math equation.
Value Range - The value range is the spread of results created by calculating several indicators of value. "If similar results are created by using several techniques to indicate value, then we can be more confident of our conclusions."
"More Than A Business Broker"
Gary McAuley
Financing * Acquisitions * Mergers
Exit Strategies * Evaluations
www.sun-west.biz
gary@sun-west.biz