If it's your first time involved in buying or selling a business, there may be some terms with which you're not familiar. Some of them are very important and having an understanding of what they mean will be very helpful.
So, with that in mind, we prepared a short lexicon of common terms used in business buying and selling that helps to explain how these terms are used.
EBITDA or earnings before interest, taxes, depreciation, and amortization, shows a company's current operating profitability by calculating its net earnings before the deduction of interest expenses, taxes, depreciation, and amortization. Despite not being a generally accepted accounting principle, EBITDA is widely used to assess a company's performance with its present assets and under its current operational environment.
Furniture, fixtures, and equipment (FF&E) are the tangible long-term assets that the company has for use in its daily operations. FF&E includes manufacturing equipment, computers, office furniture, display fixtures, and any other durable item that is useful in the company’s day-to-day activities.
The book value of FF&E assets is not always an accurate representation of its true value since aggressive depreciation is often applied so that business owners can recover costs more quickly. In fact, these assets may have a far greater service life that extends beyond their full depreciation. So, for valuing a business, it's best to arrive at an accurate value of assets based on their true potential rather than book value.
In real estate, comparables (or comps) are properties with similar characteristics and features to the one currently under consideration used for comparative purposes. This form of market analysis is usually best performed by a real estate agent or a qualified appraiser or surveyor.
When you are looking to buy a business, lease or sale comparables can be very useful to determine if the real estate included in the business sale is valued appropriately.
A non-disclosure agreement, or NDA, is one of the common terms used in business buying and selling that everyone should know. An NDA is a contractual agreement that serves to protect sensitive or confidential information disclosed by the seller to the buyer. Data, such as the company's financials, strategies, client list, supplier information, and employee information can be crucial to a potential buyer in assessing the opportunity. However, if such information fell into the hands of the company's competition, it could prove to be damaging.
An NDA details what information is considered confidential, how and with whom it can be shared, and how long it will be in effect. With an NDA in place, sellers will be more comfortable sharing confidential and sensitive information with prospective buyers.
Owner financing, or seller financing, is a situation where the current business owner provides a loan to the buyer to finance a portion of the business purchase price. The remaining amount is covered by the down payment and other sources of financing, if necessary.
Owner financing is becoming increasingly more common when you want to buy a business. It's beneficial to the seller because it helps to attract buyers who may not have the means to cover the full purchase price. It's also advantageous for the buyer because having owner financing in place makes it more attractive to a bank or other financial institution to provide additional financing.
While the terms of seller financing may vary from one case to the next, generally speaking, it covers between 30 and 60% of the purchase price for a term of 5 to 7 years with interest rates between 6 and 10%.
SDE, or seller's discretionary earnings, is the net income before the deduction of the owner's compensation and benefits, other discretionary income or expenses, and depreciation, interest, and taxes. SDE is also sometimes referred to as the owner's cash flow and is arrived at using data from tax returns, income statements, and other financial documents.
SDE is the portion of the business’ income that includes the owner’s compensation and discretionary expenses and perks, like meals and entertainment, the owner’s company car, personal travel, and the owner’s health insurance. For a prospective buyer, the SDE represents the funds available to pay off debt, to use as operating capital and to use as a personal income.
With a better understanding of some of these key terms, you'll be better equipped when it comes time for you to buy a business. Find some exciting business opportunities by browsing through our current business listings.