Commercial Real Estate Services, Worldwide

Edmonton Business Brokerage Office

other frequently asked questions

GLOSSARY OF COMMONLY USED TERMS

Acquisition - assuming ownership of another business. The acquisition can be made through a direct purchase or through a merger agreement that involves the exchange of assets.

Divestiture - disposition or sale of a company.

Due Diligence – is the process whereby a potential buyer inspects a company’s operations and assets and reviews all of its financial records. This is done to satisfy buyers that the company they plan to acquire has been accurately and fairly presented to them.

Earnout – is an arrangement in which sellers of a business receive additional future payment, usually based on future earnings.

EBIT – Earnings Before Interest on long-term debt, and Taxes

EBITDA– stands for Earnings Before Interest, Tax, Depreciation and Amortization. To calculate your company's EBITDA take your net profit after tax from your last set of financial statements and add back the taxes you deducted, the depreciation and/or amortization and any interest on long term debt that was deducted. This figure is commonly used in purchase transaction, whereby a purchaser would take your company’s EBITDA and multiply it by a number (referred to as the multiple) that reflects his analysis of your businesses worth. Typical multiples of EBITDA are in the range of 2 to 5 for a private company.

Letter of Intent – is a non-binding document that establishes the basic purchase parameters and terms of the purchase transaction. The letter of intent precedes the legally binding purchase agreement and use as a tool to negotiate and solidify key terms.

Non-Disclosure Agreement – is a confidentiality agreement that sets out the terms in which information will be provided by parties in a transaction. The document serves to protect parties in the exchange of confidential information.

Normalization – is a process to standardize the actual profit a company generates by removing personal or extraordinary items to reflect the true profitability of the company.

Personal Expenses – are expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

Purchase Price – is the total consideration paid for a company. This includes items such as cash, shares, lease agreements, earn-outs, etc.

Redundant Asset – is an asset unnecessary to the operation of a business enterprise and the generation of its revenues.

SDC – stands for Seller's Discretionary Cashflow.    This figure represents earnings before any owner's compensation and/or personal benefits, and before Interest on long-term debt, tax, depreciation and amortization.  This figure is often used in smaller purchase transactions, whereby a purchaser is anticipating working full-time in the business and is interested in the total cashflow available for their discretionary use as income or for other purposes such as debt repayment.  When using SDC as an earnings base, typical multiples are in the range of 1 to 3 for most smaller businesses.

Transaction Value – is 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 is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition 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, future considerations, and goodwill.

Working Capital – is the current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.

 Email: info@naiedmbiz.com