Business Sales Terminology

The following definitions are regularly used in business sales transactions in Australia.

Acceptance

The act of taking something that is offered with approval.

Asking Price

Is a price a seller of a good is willing to accept for that particular property. It is also the price a seller is hoping to achieve for a particular property.

Book Value Method

It is the equity of a company which is arrived at after the values of assets and liabilities are adjusted. It represents the estimated market value.

Business

Is a legally recognised organisation designed to provide goods and/or services to consumers. There are many types of businesses entities including:

  1. Sole Trader – A type of business enterprise or proprietorship which is owned by one person who is fully liable for the company’s debts and fulfilment of contracts with their personal wealth.
  2. Partnership – A type of business enterprise or proprietorship which is owned by two or more people who are fully liable for the company’s debts and fulfilment of contracts with their personal wealth.
  3. Proprietary Limited Company (Pty. Ltd.) – private company limited by shares.
  4. Proprietary Limited Company As Trustee For A Trust (Pty. Ltd. ATF) – In Australia companies can act as a trustee for a trust.

Business Profile

A booklet that describes a business 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.

Buyer

A person who contracts to acquire an asset in return for some form of consideration.

Information Brief

A booklet that describes a business 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.

Capitalisation Rate Multiple

Is a measure of the ratio between the net profit income produced by an asset and its current market value. There are different capitalisation rates used for different net profit types.

Comparability Adjustments

An adjustment made to a financial statement to facilitate a comparison between the subject company and other businesses in the same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and the way that the subject company’s data is presented in its financial statements.

Competitors

A business relationship in which two or more parties compete for customers.

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), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement).

Consideration

Is a concept of legal value in contract law. It is a promised action, or omission of action, that the promisee did not already have a pre-existing duty to abide by. It can take the form of money, physical objects, services, or a forbearance of action. Both parties to a contract must pass consideration to the other party for there to be a valid contract.

Contract

Is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal agreement. For a contract to exist it must satisfy the following concepts: Offer, acceptance, consideration, estoppel and intention to be legally bound.

Contractual Terms

Is any provision forming part of a contract. Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract. For a list of common terms please read the standard terms and conditions of a contract.

Discretionary Adjustments

The owners of private companies may be paid at variance from the market level of compensation that similar executives in the industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinised.

Earnings Capitalisation Method

A common income-based valuation method that establishes the business value by multiplying the expected business economic benefit, such as the EBITDA, by the capitalisation rate multiple.

Estoppel

Is a legal doctrine at common law, where a party is barred from claiming or denying an argument on an equitable ground. An example of which is, a seller might inform a buyer that a vehicle is included in the purchase of a business. If the buyer relies on this notice, the seller could be estopped from not including the vehicle in the transaction.

Exit Strategy

A method a business owner intends to use to get out of a particular investment.

Fair Market Value

A reasonable price for securities based on supply and demand.

Financial Adjustments

Are the normalisation of financial accounts to reflect the operational profit of a business. The most common normalisation adjustments fall into the following four categories:

GAPP

Are generally accepted accounting principles.

Going Concern

Is a business that functions without the intention or threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.

Incorporated (Inc.)

Restricted to non-profit associations.

Information Memorandum

A booklet that describes a business 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.

Intention To Be Legally Bound

There is a presumption for commercial agreements that parties intend to be legally bound. There are some parties that can not be legally bound they include people under the age of 18 (except under very specific circumstances) and mentally ill individuals.

Intrinsic Value

Inherent value of a business independent of its operational worth.

Legal Entity

Any individual, partnership, proprietorship, corporation, association or other organisation that has, in the eyes of the law, the capacity to make a contract or an agreement and the abilities to assume an obligation and to pay off its debts. A legal entity, under the law, is responsible for its actions and can be sued for damages.

Limited (Ltd.)

Private companies limited by guarantee, such as a charity or university.

Limited Partnership

Similar to a partnership except the partners are liable only to the extent of their original investment.

Market Analysis

A systematic investigation of the growth and the composition of a market.

Market price

The price at which a product, financial instrument, service or other tradable item can be bought and sold at an open market.

Mislead

To lead someone to wrong information or to give someone wrong information through action or inaction.

Negotiation

Is dialogue intended to resolve disputes, to produce an agreement upon courses of action, to bargain for individual or collective advantage, or to craft outcomes to satisfy various interests. It is the primary method of alternative dispute resolution.

Negotiators

A professional that engages in negotiation. These professionals are often specialized in a particular field and may work under other titles such as diplomats, legislators or brokers.

No Liability (NL)

A type of mining company with no right to call up the unpaid issue price of shares.

Non-Operating Adjustments

If a business were sold in a hypothetical sales transaction, the seller would retain any assets, which were not related to the production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated from the balance sheet.

Non-Recurring Adjustments

The company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of assets, 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.

Offer

An invitation to enter into a binding contract communicated to another party which contains terms sufficiently definite to create an enforceable contract if the other party accepts the invitation.

Owner

The individual or legal entity in legal possession (ownership) of a property.

Ownership

Is the state or fact of exclusive rights and control over property, which may be an object, land/real estate, business, intellectual property or some other kind of property. It is embodied in an ownership right also referred to as title.

Process

Is a collection of interrelated tasks, which accomplish a particular goal.

Professional

A professional is a person in a profession which requires certain types of skilled work requiring formal training or education. They include but are not limited to bankers, financial and business advisors, accountants, business and finance brokers, solicitors/lawyers and bookkeepers.

Selling Memorandum

A booklet that describes a business 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.

Strategy

Are a plan of action designed to achieve a particular goal.

Qualification

Is the initial process to verify that a potential buyer has fulfilled enough requirements to purchase a business. Qualification is not an approval because it does not include verification.

Risk

The probability of incurring loss or misfortune.

Rule Of Thumb Method

Is a principle with broad application that is not intended to be strictly accurate or reliable for every situation.

Trust

A type of company that acts in the interest of its trusties to disperse income for tax benefit.

Types Of Net Profit

There are many types and ways to show net profit including:

From a management point of view – (including when an owner is a manger).

  1. EBITDA – Earnings before interest, tax, depreciations and amortisation.
  2. EBITD – Earnings before interest, tax and depreciation.
  3. EBIT – Earnings before interest and tax.

From a proprietors point of view – when the owner is operationally involved in the business.

  1. PEBITDA – Proprietors earnings before interest, tax, depreciation and amortisation.
  2. PEBITD – Earnings before interest, tax and depreciation.
  3. PEBIT – Earnings before interest and tax.

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