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It is inevitable that at some point in time, some business establishments will change ownership. Anyone who has a business for sale will find it wise to consider hiring a business broker because the process of selling a business can be very demanding and tiresome. It can eat up a lot of valuable time which [...]More info
Like any industry, business sales can involve a lot of jargon that you may be unfamiliar with. Here is a list of common business sales terminology that you may come across in your business sale or purchase.
SAV- Stock at Value. The Asking Price for many businesses is advertised as $price plus SAV which means the buyer is required to buy the stock held by the business at settlement. The price paid for the stock is the landed invoice cost.
WIWO- Walk In Walk Out. Condition of sale which relates to a handover of business with no funds related to the transfer of stock.
TOL-Take Over Leases. Refers to a contract condition that requires the Buyer of the business to take over existing Leases held by the Seller.
WIP (Work in progress)- Products, services or contracts partially completed at a specified time. Can be included in stock/inventory in the balance sheet and usually valued at cost of direct inputs.
COGS- Cost of Goods Sold- An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers.
Financial Adjustments- Also known as addbacks, Are the normalisation of financial accounts to reflect the operational profit of a business. The most common normalisation adjustments include depreciation, interest and private motor vehicle expenses.
Non-recurring Adjustments – The company’s financial statements may be affected by events that are not expected to recur, such as the loss on the sale of an asset, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the expectations of future performance.
Capitalisation Rate - The capitalisation rate directly determines the result of the selling/purchase price of a business. The capitalisation rate must be a rate which represents a reasonable return to an investor in the business, commensurate with the degree of risk.
Goodwill- The value that derives from the ability of a business to earn more than a normal rate of return on its physical assets; represented by the total value of a business less plant and equipment and inventory.
Going Concern–Is a business that functions without the intention or threat of liquidation for the foreseeable future.
Due diligence- In business sales relates to a purchaser’s process of checking and verifying accounting, legal and operational details contained in information provided by the owners on a business.
Amortisation- Amortisation is the process of decreasing, or accounting for, an amount over a period. Amortization is generally known as depreciation of intangible assets of a business.
Information Memorandum – A booklet that describes a businesses operations and its financial performance. This document is prepared as sell-side advisory engagement, which should not mislead and is distributed to potential financial and strategic buyers after the execution of a confidentiality agreement.
Confidentiality Agreement (CA) – is a legal contract between at least two parties that outlines confidential materials or knowledge the parties wish to share with one another for certain purposes, but wish to restrict access to. It is a contract through which the parties agree not to disclose information covered by the agreement. It is also known as a non-disclosure agreement (NDA).
Requisitions- An authoritive or formal demand to have a matter rectified. In the sale of business this may be related to a piece of machinery operational or having a business up to appropriate health standards before it changes hands.
Intangible assets- Non-material assets such as technical expertise, trademarks, brand names, patents, copyrights and goodwill.
Types Of Net Profit – There are many types and ways to show net profit including:
EBITDA – Earnings before Interest, Tax, Depreciation and Amortisation. This refers to businesses profit after all Depreciation and Amortisation are added back. These are non-cash expenses or allowances for the reduction in the value of assets held.
EBIT – Earnings before Interest and Tax. EBIT is considered a reasonable representation of the Adjusted Earnings of a business available to a business owner after all costs and operation expenses as well as reasonable commercial wages for the owners contribution to the business.
PEBIT – Proprietors Earnings before Interest and Tax. PEBIT is considered a reasonable representation of the Adjusted Earnings of a business available to one full time working owner after all cost of goods and operating expenses have been accounted for.