ACCEPTANCE – The act of accepting an offer which results in a binding contract.
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.
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.
APA – Asset purchase agreement.
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 – This term has two definitions. The proper definition depends on its usage: How a business owner transfers ownership of tangible and intangible assets to another owner without transferring the ownership structure. The sale of a business enterprise at a price based solely upon the value of the tangible assets. 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” based on the assets purchased and 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; sometimes contains a percentage or provisions for additional rent.
BASKET – The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50.) Dollar-One Basket (Tipping Basket): Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150.)
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.
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. There are four types of breaches: minor breaches, material breaches, actual breaches, and anticipatory breaches.
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 arise.
BULK SALE – A transfer in bulk of all or substantially all of the inventory and fixtures of a business, which 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 before the sale and sets forth ways of voiding the sale (see Uniform Commercial Code.) NOTE: No longer required in New Mexico since 7/1/1992; however, each state has its own Bulk Sales laws.
BUSINESS BROKER – 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.
BUSINESS TRADE NAME – Company name by which a certain business is known.
C CORPORATION – A normal corporation for federal income tax purposes. The entity itself pays income taxes. Note that when we sell a business, the net proceeds are taxed at the “C” level, and then any distributions to the shareholder(s) pay capital gains taxes on their personal level.
CANCELLATION CLAUSE – A clause in a lease or other contract stating the condition(s) under which the contract can be canceled 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.”
CBR – Confidential Business Review.
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 regarding any liens against chattels, tax liens, and judgments.
CHATTEL MORTGAGE – A mortgage on personal property (not real estate.) A mortgage on equipment would also be a chattel mortgage.
CIM – Confidential Information Memorandum.
CLIENT – An entity with which a business broker has a fiduciary relationship.
CLOSING – When all the details of the business sale are completed and the money is 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 statements.
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.
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 most states. Licensed brokers may lose their license because of co-mingling.
COE – Close of escrow.
COLLAR – The ceiling and floor of the price fluctuation on an underlying asset. For example, the price fluctuation where stock is part of the consideration; or, the fluctuation in the amount of trued-up working capital compared to estimated working capital.
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.
CONDITIONS TO CLOSING – Certain obligations that must be fulfilled to legally require the other party to close the transaction. Other than conditions to closing relating to corporate approvals and governmental filings and approvals, compliance with a particular condition to closing may be waived by the party that benefits from the condition.
CONSIDERATION – Something of value which 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.
CONTINGENCY – A clause in an 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.
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.
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.
COP – Change of possession.
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.
COVENANT-NOT-TO-COMPETE – An agreement made as 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.
COVENANTS – Negative covenants restrict the seller from taking certain actions before the closing without the buyer’s prior consent. Negative covenants protect the buyer from the seller taking actions before the closing that change the business that the buyer expects to buy at the closing. Affirmative covenants obligate the seller or the buyer to take certain actions before the closing.
CREDITOR – A person or company to whom money is owed by another person.
CUSTOMER – A person or organization that buys goods or services from a store or business.
DBA – Stands for “doing business as.” It is an identification of the trade name of the business, which may differ from the legal corporate name. Also known as a “fictitious name.”
DEMAND NOTE – A promissory note that has no set time 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.
DISCRETIONARY EARNINGS – The earnings of a business enterprise before the following items: Income taxes; Non-operating 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.
DURESS – Unlawful constraint exercised upon a person whereby he/she is forced to do some act against his will.
EARN-OUTS – An agreement in the sale of a company where the buyer agrees to pay the seller consideration in the future (typically cash or stock) based upon certain future events or performance of the business post-close. Because earn-out payments are contingent on the future performance of the acquired company, they are not included in the purchase price.
EARNEST MONEY – A sum of money given to bind an agreement or an offer. It is usually refundable but might be non-refundable or partially refundable.
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. A portion of the consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) is to be applied toward future indemnification claims by the buyer. After a specified period of time, any consideration remaining in the escrow or holdback account is released to the seller.
ESCROW PERIOD –The length of time (in months) after the closing date that the escrow is held before being released to the seller.
EXCLUSIVE LISTING WITH A CARVE-OUT OR PARTIAL CARVE-OUT – The business broker has the sole right to represent the seller in the sale of the business. However, if the seller sells the business to one or more named buyer prospects, the business broker receives:
– No commission if that buyer prospect was fully carved out.
– Partial commission if that buyer was partially carved out; that is the broker assists the seller and buyer to complete the transaction, but the fee is reduced or a fixed fee is stipulated in the listing agreement.
This listing is taken when the seller is convinced that a specific person will buy their business and won’t list because of that. Most of the time the person who was carved out doesn’t buy the business. The business Broker should try to limit the time that the buyer is excluded (e.g., 30 days.)
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 a 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 generally filed in the Secretary of State’s office and shows that there is a lien against the fixtures and equipment (personal property) of the business.
FINDER’S FEE – An amount paid to another party for locating and referring a client or customer. If this is for debt or the sale of equity, then a business broker must meet the SEC’s legal definition to be paid a commission.
FRANCHISE – The right or license granted to an individual or group (franchisee) to market a company’s (franchisor’s) goods or services in a particular geographic territory.
GRADUATE 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.)
INDEMNIFICATION – Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.
INDEMNITY – A 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, or business trade name. (See Blue-Sky.)
IOI – Indication of interest (letter from buyer prospect.)
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 a specified rent, 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 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.
