Glossary of Business Terms
A DEFINITIVE GUIDE TO BUSINESS TERMINOLOGY
Key Terms Explained
A
APA (Asset Purchase Agreement)
APA is a legally binding bilateral contract signed between a seller and a buyer. It usually consists of terms and conditions of the sale of assets; whereby the buyer promises to buy and the seller agrees to sell by execution and delivery of the deed. APA is also signed to avoid liability issues from the sellers to the buyers.
Add Backs
An add back, is an expense that is added back to the profits. For instance, if you spent $10,000 to fly to Hong Kong to attend a business conference, this expense will not be considered as an actual operational expense.
Asset Sale
Sale of business assets without changing the ownership structure of parent company; that may comprise of the domain name, customers lists, tools etc. The purpose of an asset sale is generally to increase the cash flow and liquidation.
B
Balance Sheet
It is a statement that shows the nature of the business assets, liabilities, expenditure, equity, etc. Balance sheet depicts the financial condition of the business from the starting date to present date.
Business Appraisal
An estimated value of any business. Unlike Valuation, Business Appraisal no legal standing and is used only as a temporary valuation.
(For example, the business appraisal determined that the classified listing website had an estimated value of 12 million dollars.)
Bill of Sale
A written instrument issued by a seller to the buyer after the completion of the sale, which acts as a proof of the transfer of ownership, assets or the money.
C
Cash Flow
Net operating income minus the expenditure. Cash flow is calculated by deducing expenses such as salary, interest, taxes, subscriptions etc from his net revenue.
Closing Statement
Closing statement is issued once all necessary documents are signed by all parties involved, and the buyer had taken charge of the new business, and the money has been distributed to the seller.
Copyright
It is an exclusive privilege of an individual or a business that ensures legal protection to the original creator of work involving content, literature, art, performance, sound, film, or music.
Commission
The agreed fee paid to the broker for facilitating the sale of a business. It is often determined as the percentage of the total asset sale value.
Covenant
It is a promise made in an agreement. For example- A Covenant was made between buyer and seller not to disclose the deal price to the public.
D
Due Diligence
Due Diligence is a systematic scrutiny performed by a potential buyer about the business. Due Diligence is usually performed to verify claimed financials, books, records, user-base, traffic, etc.
At BSE, due-diligence is performed at 2 stages:
1. By “BSE”, before listing the business.
2. By “Potential Buyer”, after signing the LOI and before signing the APA agreement.
Deal Flow
It is the number of deals happening through a broker at any instant of time. Small brokers will tend to have low deal flow while large brokers have higher deal flow.
E
Earnest Money Deposit
A refundable token money provided by a potential buyer to a seller to represent serious intentions to negotiate on the part of the potential buyer.
Escrow
Here a neutral third party holds the financial instrument, money or an asset on the behalf of two other parties involved in the process of completing a transaction
For BSE, Money is usually held at a third party service named escrow.com until business assets are handed over to the seller. Once assets are transferred to the buyer and confirmed by escrow.com’s team, money is released to the seller from escrow’s account.
Exclusivity
It is a contract that gives the broker an exclusive right to receive a commission when the business gets sold by anyone including the seller during the exclusivity period. A seller is legally bound to not to list his business for sale with any other broker during the exclusivity period. Exclusivity clause is usually determined in “Representation Agreement” by most brokers.
F
FBA (Fulfilled by Amazon)
Fulfilled by Amazon means that inventory is completely fulfilled by Amazon. In FBA, the seller keeps the items in Amazon warehouse and allows Amazon to handle packing, delivery and returns.
H
Hours to Manage
Number of hours required per week to manage the online business effectively. It is an important consideration to determine the business valuation.
L
Listing Price
Price at which your online business is listed at our marketplace for sale.
LOI (Letter of Intent)
Letter of Intent is an agreement made between buyer and seller which outlines the manner in which buyer wishes to buy the business. LOI acts as a roadmap to both buyer and seller involved in the transaction. It covers all terms, conditions, price, due-diligence period, and any other baseline condition required to close the deal.
Once LOI is signed, Due Diligence period can begin.
N
NDA (Non-Disclosure Agreement)
Sometimes referred to as Confidentiality Agreement is a legal contract between 2 parties that outlines confidentiality of the business. The signing parties agree not to disclose confidential information that they have shared with each other.
At BSE, A potential buyer is required to sign an NDA before seeking any details of the business listing. This guards the business owners against giving out any ideas to competitors that could help in competition.
Non-Compete Agreement
It is a legally binding agreement signed between buyer and seller. In this agreement, a seller agrees to not to compete with the buyer in the same business for a certain duration or a certain geographical location. Most Non-Compete agreements have 2 or 3 years duration.
P
Partnership
A legal form of business structure between two or more individuals.
P&L Statement (Profit & Loss Statement)
P&L statement also known as income statement is the summation of the financial performance of a business for a specific period of time. P&L statement depicts the present and past performance of the business and aids in the preparation of the business appraisal.
S
SAAS (Software as a Service)
Software application usually hosted over the internet and licensed on a subscription basis, unlike traditional desktop installation. Example: Shopify, Dropbox.
T
TM (Trailing Twelve Months)
The measurement of the company’s financial report calculated for the twelve months period immediately from the date of the report. Sometimes it is also referred to as LTM (Last Twelve Months).
V
Valuation
Valuation is the estimated price for which your business is listed on our marketplace. Business valuation is dependent on many factors including but not limited to:
- Business Trend (Upward/ downward / stable)
- Net Profit during TTM
- Amount of Traffic
- Source of Traffic
- Lifetime of the business
- Size of the customer base
- Complexity to manage the business
A manual human valuation is usually recommended to receive the correct valuation instead of relying on automated tools.