Business Transaction Terms

The following glossary of terms was approved by the Board of Directors of the International Business Brokers Association in November, 1997.

Source: IBBA Journal, Volume VIII, Number 1, Page 11-12, (Fall/Winter 1998)

ASKING PRICE. The total amount for which a business or an ownership interest is offered for sale.

ASSET SALE. This term has two definitions. The proper definition depends on its usage:

A. The means by which a business owner transfers ownership of tangible and intangible assets to another owner without transferring the ownership structure.

B. The sale of a business enterprise at a price based solely upon the value of the tangible assets.

BLUE SKY. That portion of a requested price that cannot be supported through the application of established valuation methodology and which generates no economic benefit.

BUSINESS BROKER. A Business Broker is an intermediary dedicated to serving clients and customers who desire to sell or acquire businesses. A business broker is committed to providing professional services in a knowledgeable, ethical and timely fashion. Typically, a Business Broker provides information and business advice to sellers and buyers, maintains communications between the parties, and coordinates the negotiations and closing processes to complete desired transactions.

CLIENT. An entity with whom a Business Broker has a fiduciary relationship.

CO-BROKERAGE. An agreement between two or more Business Brokers for sharing services, responsibility and compensation on behalf of the client.

CO-BUSINESS BROKER. A Business Broker who shares services, responsibility and compensation on behalf of a client.

COOPERATING BUSINESS BROKERS. Business Brokers who share their knowledge, expertise and skills for the benefit of the business brokerage profession, clients, customers and the public good.

CUSTOMER. An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker.

DISCRETIONARY EARNINGS . The earnings of a business enterprise prior to the following items:

• Income taxes

• Nonoperating income and expenses

• Nonrecurring income and expenses

• Depreciation and amortization

• Interest expense or income

• Owner’s total compensation for those services which could be provided by a sole owner/manager.

FINDERS FEE. An amount paid to another party for locating and referring a client or customer.

NONOPERATING/NONCONTRIBUTING ASSET. An asset unnecessary to the operation of a business enterprise and the generation of its revenues.

OWNER. A generic term used in business brokerage to represent the proprietor, general partner or controlling shareholder (singular or plural as appropriate) of a business enterprise.

OWNER’S SALARY. The salary or wages paid to the owner, including related payroll burden.

OWNER’S TOTAL COMPENSATION. Total of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value.

PERQUISITES. Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

REFERRING BUSINESS BROKER. A Business Broker who provides introductory information that leads to a client relationship.

TRANSACTION VALUE. The total of all consideration passed at any time between the Buyer and Seller for an ownership interest in a business enterprise and may include, but not be limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, noncompetition agreements, employment and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemptions, real estate, leases, royalties, earn-outs and future considerations

THE FOLLOWING ARE ADDITIONAL TERMS COMMON IN BUSINESS TRANSACTIONS:

ACCELERATION CLAUSE. A clause used in a note and/or security agreement that gives the lender the right to demand payment in full if a certain event occurs such as default or if the ownership of the business changes without the lender’s consent. Sometimes referred to as a “due on sale” clause.

ACCEPTANCE. The act of accepting an offer, which results in a binding contract.

ACKNOWLEDGMENT. A declaration, by a person qualified by law to administer oaths, that the person signing a document or a deed is the person they claim to be.

ADDENDUM. A written instrument that adds something to a written contract.

AGENCY LISTING. Also known as an “Exclusive Agency Listing”. A written instrument giving the agent the right to sell property for a specified time. However, the owner may sell the property himself/herself to a buyer who was not introduced to the business by the agent without the payment of a commission to the agent.

AGENT. One acting under authority of a principal to do the principal’s business. The agent must use his or her best efforts and keep the principal fully informed of all material facts.

ALLOCATION. A breakdown of the purchase price usually required when a business is sold. For example, the allocation might contain a breakdown of the inventories, fixtures and equipment, leasehold improvements, goodwill, and any other purchased assets. Generally, value is placed on each component of the allocation and the buyer and seller agree on this breakdown. The IRS requires that such an allocation be a part of the buyer’s and seller’s tax return when a sale takes place; Form 8594, the “Asset Acquisition Statement,” must be filed with the buyer’s and seller’s tax return for the year in which an applicable asset acquisition takes place.

AMENDMENT. A written instrument that changes something previously agreed to. (This is different than an addendum).

AMORTIZATION. 1. A reduction in a debt obligation by periodic payments covering interest and part of the principal. 2. The writing off or expensing of the cost of intangible assets over a period of time, usually in years. Amortization of intangible assets vs depreciation of tangible assets. Intangible assets purchased, such as goodwill and covenants-not-to-compete, can be written off over 15 years.

APPRECIATION. A gain in value due to any cause. Real estate is an asset that often appreciates in value over time.

ARBITRATION. The submission of a disputed matter for resolution outside the normal judicial system. It is often speedier and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA). Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.

ASSET SALE. A sale of a business in which the buyer acquires only specific assets (and possibly assumes some liabilities). Unlike a stock sale, the buyer obtains the assets usually free and clear of any liabilities of the seller. The buyer also gets the advantage of a “step-up” in basis on the assets purchased based on their allocated fair market values.

ASSIGNMENT. A transfer in writing of an interest in property or other things of value from one person or entity to another.

ATTORNEY-IN-FACT. One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.

BASE RENT. The minimum rent in a lease that sometimes contains a percentage or provisions for additional rent.

BILL OF SALE. A written agreement by which one person assigns or transfers his or her rights to, or interest in, goods and personal property to another.

BLUE-SKY. An expression sometimes used to label the intangible assets (e.g. goodwill) in the purchase of a business enterprise.

BOND. A pledge to pay a sum of money in the event of failure to fulfill obligations; e.g. inflicting damage, or mishandling funds; usually written by a company for a fee; also known as a Surety Bond.

BREACH OF CONTRACT. Failure of a party to a contract to perform any or all of his obligations under the contract.

BROKER. One who acts as an agent for another (his/her principal) when negotiating with third parties on behalf of the principal. This arrangement falls under “agency” law applicable in the state in which the principal-agent arrangements arises.

BULK SALE. A transfer in bulk of all or substantially all of the inventory and fixtures of a business that is not in the ordinary course of business.

BULK SALES ACT. Laws enacted by the states to protect creditors against secret sales of all or substantially all of a business’s goods. It requires certain notices prior to the sale and sets forth ways of voiding the sale (see Uniform Commercial Code). NOTE: No longer required in New Mexico since 7-1-92; however, each state has its own Bulk Sales laws.

BUSINESS TRADE NAME. Company name by which a certain business is known.

CANCELLATION CLAUSE. A clause in a lease or other contract stating the condition(s) under which the contract can be cancelled or terminated by any of the parties. It may provide for simple notice or possible payment of money to cancel the contract.

CASHIER’S CHECK. A check drawn on the bank’s own funds. It is often used to close a sale because there is generally no waiting for the check to clear.

CAVEAT EMPTOR. “Let the buyer beware.”

CERTIFIED CHECK. A personal check guaranteed by the bank. The bank holds the necessary funds and will not accept any withdrawals against the certified amount. The bank also will not usually honor a stop payment on a certified check.

CHATTEL (U.C.C.) SEARCH. A chattel is an article of personal property and it includes both animate and inanimate property. U.C.C. stands for the Uniform Commercial Code which governs the granting of security agreements. A chattel search is a review of the appropriate county and Secretary of State records in regard to any liens against chattels, tax liens and judgments.

CHATTEL MORTGAGE. A mortgage on personal property (not real estate). A mortgage on equipment would be a chattel mortgage.

CONSIDERATION. Something of value that induces a person to enter into a contract. The promise to do something must be in exchange for some act or thing of value which is the consideration. This is a necessary element in a contract.

CONTRACT. A voluntary and lawful agreement between two or more parties to do, or not to do, something. Elements of an enforceable contract include: (a) an offer to be bound to do or refrain from doing something, which has been accepted, (b) sufficient consideration, (c) a valid subject matter, (d) legal capacity of the parties, and (e) for those contracts to which the Statute of Fraud applies, its requirements must be met.

CONVEYANCE. A transfer of title.

CORPORATION. An entity created by or under the authority of the laws of a state, composed of individuals united under a common name, and which for certain legal purposes is considered a natural person. Characteristics of a corporation include: (a) continuity of life, (b) centralization of management, (c) limited liability, and (d) free transferability of interest.

C CORPORATION. A normal corporation for federal income tax purposes. The entity itself pays income taxes.

CLOSING. When all the details of the business sale are completed and the money distributed to the seller, seller’s agents, creditors and others.

CLOSING DOCUMENTS. The legal documents that are part of a business closing. They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreements, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.

CLOSING STATEMENT. A statement that contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.

CO-MINGLING. When an agent mixes the funds of a buyer or seller with his/her own in a “trust account”. This is against the law in most areas and in most states. Licensed brokers may lose their license because of co-mingling.

CONDITIONAL SALES CONTRACT. This is different than a chattel mortgage. Title to the goods, fixtures and equipment or the business itself is not transferred to the buyer, and remains with the seller, until the terms of the contract have been met. This generally means when all the payments have been made.

CONTINGENCY. A clause in a agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event. For example, the sale of the business is contingent upon the buyer obtaining financing.

COVENANT-NOT-TO-COMPETE. An agreement made part of a purchase contract, in which the seller promises not to enter into a similar or competing business for a specified period of time, within a designated area.

CREDITOR. A person to whom a debt is owed by another person who is called the debtor.

DBA. “doing business as” - an identification of the trade name of the business, which may differ from the legal corporate name.

DEMAND NOTE. A promissory note that has no set time period for repayment and can be called due by the holder at any time.

DIRECTORS. Those who are elected by the stockholders to manage the affairs of a corporation. Shareholders elect directors; directors elect officers; officers manage the day-to-day affairs of a corporation.

DISCLAIMER. A statement that attempts to limit liability in the event information is inaccurate.

DURESS. Unlawful constraint exercised upon a person whereby he/she is forced to do some act against his will.

EARNEST MONEY. A sum of money given to bind an agreement or an offer.

ECONOMIC LIFE. The “profitable” life of fixtures and equipment or any improvement; this life could be greater or less than the depreciable life for income tax purposes.

ESCALATION CLAUSE. A clause, generally in a lease, that provides for an increase in the rent at a specified time.

ESCROW. A deed, a bond, money or other piece of property delivered to a third person to be delivered by him/her to the grantee only upon the fulfillment of a condition.

EXCLUSIVE RIGHT TO SELL LISTING. When a business owner gives one Broker or Agent the authority to sell his/her business. The Broker or Agent receives commission no matter who sells the business - even if the seller finds the buyer during the listing period. (See Agency Listing)

EXECUTE. To complete, to make, to perform, to do, to follow through; to execute a contract; to make a contract: especially signing, sealing and delivery.

FICTITIOUS NAME. The name of a business. In most areas, this name is filed with a state county or local government agency to be legally effective.

FIDUCIARY. Acting in a relationship or position of trust, usually regarding financial matters or transactions.

FINANCING STATEMENT. A recorded document filed generally in the secretary of state’s office of the state and shows that there is a lien against the fixtures and equipment (personal property) of the business.

FRANCHISE. The right or license granted to an individual or group (franchisee) to market a company’s (franchiser’s) goods or services in a particular geographic territory.

GRADUATED LEASE. A lease that calls for periodic increases in the rent.

HARD ASSETS. (Also referred to as “Tangible Assets”) Those assets that are material or physical (e.g. inventory, equipment, tools, vehicles, real estate, leasehold improvements).

INDEMNITY. Payment that compensates for an incurred loss or damage.

INSTRUMENT. A written legal document created to affect the rights of the parties.

INTANGIBLE ASSET. That which has no physical existence but represents value, such as goodwill, going concern value, business trade name. (See Blue-Sky)

IRREVOCABLE. Incapable of being recalled or canceled; unchangeable.

JOINT TENANCY. Same as Tenancy in Common, but if one party dies, his or her title passes to the other surviving joint tenant(s), and not to the heirs of the decedent.

JOINT VENTURE. A business arrangement between two or more persons. Similar to a partnership except that it exists to undertake a single project.

LEASE. A written legal document in which possession of a property is given by the owner (lessor) to a second party (lessee) for a specified time and for a specified rent, and setting forth the conditions upon which the lessee may use and/or occupy the property.

LEASE WITH OPTION TO PURCHASE. A lease in which the lessee has the right to purchase the property for a stipulated price at or within a stipulated time.

LEASEHOLD. A property held under tenure of lease; a property consisting of the right of use and occupancy by virtue of a lease agreement; the lessee’s (tenant’s) interest in a lease.

LEASEHOLD IMPROVEMENTS. Any article or fixture that is attached to land or buildings.

LEGAL DESCRIPTION. The legal identification of real property.

LESSEE. A tenant; one who has a right to occupy the premises by virtue of a lease.

LESSOR. A landlord; one who grants a right to the Lessee to occupy the premises by virtue of a lease.

LETTER OF INTENT (LOI). A description of the key points in a potential acquisition of a business. Drafted to see if the parties are in general agreement on key issues before proceeding further in negotiations, and is generally designed not to be legally binding on either party. Sometimes buyers or sellers will use a more informal Memorandum of Understanding to identify the key points of a potential business purchase.

NOTE: Key points that buyers and sellers want to come to a general agreement on often include: stock or asset purchase, purchase price, down payment, seller financing terms, liabilities assumed, covenant-not-to-compete terms, consulting/employment agreement terms and real estate lease terms.

LIEN. A claim or charge upon real or personal property for the satisfaction of some debt or duty which can arise either by agreement or by operation of law.

LIMITED PARTNERSHIP. A partnership composed of some partners whose contributions and liabilities are limited. A limited partnership requires at least one general partner and one limited partner. The general partner(s) is responsible for the management and liability for its debts. A limited partner has no right in management and his/her liability is limited to amount of investment.

MERGER. Any combination that forms one company from two or more previously existing companies.

MISREPRESENTATION. A statement contrary to fact. If the statement or action is made with intent to deceive, it may be deemed to be fraudulent.

MORTGAGE. A written instrument recognized by law by which real property is pledged to secure a debt or obligation; a lien on real property.

NEGLIGENCE. Failure to act like a reasonably prudent person to protect the interest or safety of others.

NEGOTIABLE. Capable of being negotiated; assignable or transferable in the ordinary course of business.

NET-NET-NET LEASE (Triple Net Lease). A lease in which the tenant (lessee) pays a prorata share of normal property expenses such as real estate taxes, insurance, maintenance, etc., thereby assuring the landlord (lessor) of a fixed income.

NET LISTING. A price that must be expressly agreed upon, below which the owner (principal) will not sell the property and at which price the agent will not receive a commission; the agent receives the excess over and above the net listing as his/her commission. This type of commission is unlawful in some states.

OFFSET (SET-OFF). A deduction by one against a claim of another; e.g. unknown claims against the assets purchased by a buyer may be “offset” against the obligation the buyer owes to the seller (seller financing).

OPEN LISTING. A listing which is non-exclusive; may be given to any number of agencies without obligation to compensate any of them except the one who first secures a Buyer ready, willing and able to meet the terms of the listing, or who secures the acceptance by the Seller of a satisfactory offer.

OPTION. A written agreement granting to a party the exclusive right, during a stated period of time, to buy or obtain control of property or assets on specified terms, but without any obligation of such party actually to exercise such option.

PARTNERSHIP. A business relationship between two or more persons who join together to contribute to the capital and/or operations of an enterprise and share the profits and losses (also, see Limited Partnership). Partnerships must lack two or more of the four corporate characteristics (see Corporations) to be taxed as such.

PERSONAL PROPERTY. Any property which is not real property; that which is not permanently affixed to the land.

POINTS. In the language of the loan business, a point is one percent of the amount of the loan.

POWER OF ATTORNEY. An instrument authorizing a person to act as the agent of the person granting it. A general power of attorney authorized the agent to act generally on behalf of his/her principal; a special power of attorney limits the agent to a specific or particular act.

PRINCIPAL. The employer of an agent. Also, a sum of money owed excluding any accrued interest.

PROMISSORY NOTE. A signed, written instrument which acknowledges a debt, with the promise to pay the debt on specified terms (i.e. payment amount, payment date(s), interest rate).

PRORATION. The division of money obligations according to some formula. In a business closing, a seller may have paid for certain benefits into the future that are assumed by the buyer. The cost of these benefits are “prorated” between the seller and the buyer as part of the closing statement (e.g. prepaid rent, prepaid advertising, security deposits).

PURCHASE AGREEMENT. The agreement setting out the terms for the purchase of a business. A purchase agreement is the “road map” followed by the buyer and the seller in a business transaction. It would include items such as a description of what is being purchased, the down payment and repayment terms, buyer and seller representations, warranties, and indemnification’s and so on.

RELEASE. The relinquishment of some right or benefit by a person or entity who already has some interest or right therein.

S CORPORATION. A small business corporation that is treated differently than a C Corporation for income tax purposes. Normally, it can be used by a corporation with 75 or fewer domestic shareholders when the corporation has only one class of stock. Individuals, another S Corporation, estates, certain trusts, certain financial institutions and tax exempt organizations may own shares in an S Corporation. An S Corporation may own 100% of a C Corporation. If all the statutory requirements are met, the shareholders can elect to have most of the corporation’s income and deductions flow through to the shareholders in a manner similar to the taxation of a partnership.

SECURITY AGREEMENT. The agreement given by a debtor to a creditor giving the creditor a resource to look to in case the debtor fails to pay the principal obligation.

SIMPLE INTEREST. The interest on principal only as compared to compound interest, which is interest on both principal and accumulated interest.

SOLE PROPRIETORSHIP. A business owned by one person or married persons. The owner is personally liable for the debts of the business. The business is not incorporated.

STATUTE OF FRAUDS. State law which provides that certain contracts must be in writing in order to be enforceable by law; e.g. the sale of real property, a lease of real property for more than one year, broker’s authorization to act as an agent on behalf of his/her principal.

STOCK SALE. The buyer purchases the stock in a corporation so the corporation is acquired in whole, and the buyer obtains all assets and liability. Buyer gets no step up in basis in the underlying assets in the corporation (unless a not often used tax election is made).

SYNERGY. The post-acquisition performance, in which the profitability of the continued entity is greater than the sum of the profitability of the individual entities before the acquisition.

SUBLEASE. A lease where the lessee can be the lessor, in effect, on a subsequent lease. The owner of the property often must approve, in writing, the tenant’s right to sublease to a new tenant. This is different from a “master lease,” where the lessee has greater control over subletting the property.

SUBORDINATION. The act of making an encumbrance secondary or junior to another lien.

TENANCY IN COMMON. Two or more persons holding an undivided interest in the same property. Each tenant can dispose of his/her undivided interest by deed or by will; upon death, the interest descends to the heirs. (see Joint Tenancy)

TITLE. Evidence that the person or entity claiming to be the owner of the property is in fact the lawful owner thereof; an instrument evidencing such ownership.

TITLE INSURANCE. Insures the interest of the buyer or mortgagee in real estate.

UNIFORM COMMERCIAL CODE (U.C.C.). State laws which regulate the transfer of personal property. Article Nine of the U.C.C. deals with transactions that are intended to create a security interest in personal property.

VALID. Legally binding.

VOID. To have no force or effect; that which is unenforceable.

WAIVE. To relinquish or abandon; to forego a right to enforce or require anything.

WARRANT OR WARRANTY. To legally assure or a legal or binding promise.

WITHOUT RECOURSE. The lender can only look to the security for the debt and can not go after the buyer personally in the case of default. Often bank loans to closely-held businesses require “personal guarantees” of the business owner(s).