Dig Deeper into Exit Planning

The Business Brokerage and Exit Planning industries, like many other industries, has developed terminology and jargon that is unique to itself and can be quite confusing to the general public and more importantly, to business owners.

Presented here is an abbreviated glossary of terms to help you work your way through the course of selling your company or planning your exit.

Accrual Basis Accounting: A method of accounting wherein income and expenses are recognized, within the statements, when the business first acquires the right to receive the income, or the obligation to pay the expense. Companies with inventories are required to use the accrual method for tax purposes. (Also see Cash Basis Accounting.)

Add-backs: All or a portion of expenses that are added back to net income in an effort to place the figures as close as possible to the economic earnings that were actually derived from the business.

Advisory Board
An advisory board is a body that provides non-binding strategic advice to the management of an enterprise. Unlike a formal board of directors, an advisory board does not have the authority to vote on corporate or fiduciary matters.

Asset Sale
A form of acquisition where the individual selling a business agrees to sell all or certain assets and, in some cases, liabilities to a purchaser. The corporate entity itself is not transferred. 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, and possibly some liabilities, to another owner without transferring the ownership entity; B) the sale of a business enterprise that is no longer a viable ongoing concern at a price based solely upon the value of the tangible assets.

Business Continuity
Business continuity is a blueprint to help ensure that business processes can continue during a time of critical transition, emergency, or disaster. Such events might include a change of leadership or any other case where business is not able to occur under normal conditions.

Business Broker: A professional 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 Valuation
The act or process of arriving at an opinion or determination of the economic value of a business or enterprise, or an interest therein. A business valuation can be conducted for a variety of purposes, including, but not limited to, a merger or acquisition; gift, estate, or inheritance tax planning; ESOPs and other employee benefit plans; going public; buy-sell agreements; marital, partnership, and corporate dissolutions; and bankruptcy reorganizations.

Closing: The final steps in the sale of the business. The closing entails execution of all necessary legal documents and funding to consummate the transaction.

Confidential Business Review (CBR)
A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement. Also referred to as an Offering Memorandum.

Deal Structure
The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components offer tax benefits to the seller.

Discretionary Earnings (DE)
The earnings of a business enterprise prior to the following items: income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business. Seller’s Discretionary Earnings (SDE) and Seller’s Discretionary Cash Flow (SDCF) and Adjusted Net are other terms used.

Documented Exit Plan
A documented exit plan is a clearly stated set of business and personal goals that a business owner wishes to achieve in his or her exit. It should be documented in writing and include the tactics and steps required to effectively realize those goals.

Due Diligence
The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased. Due diligence occurs after the Letter of Intent is agreed. Due Diligence: A process where a buyer inspects a potential transaction. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.

Earnout
The portion of a purchase price in an M&A transaction that is contingent on future performance. It is payable to the sellers only when certain predefined levels of sales or income are achieved.

EBIT: Earnings of a business prior to interest expense or income, and prior to corporate income taxes paid. This definition recognizes interest as a cost of capital, and not as an operating expense.

EBITDA: Earnings of a business prior to interest (expense or income), income taxes, depreciation and amortization expenses.

Employment Agreement: The traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period.

Estate Planning
Estate planning is the planning and naming of whom you want to receive the things you own after you die. It is the preparation of tasks that serve to manage a person’s assets in the event of their incapacitation or death. This includes the bequest of assets to heirs and the settlement of estate taxes.

Exit Options to Consider

• Keep Ownership “In the Family”
• Sell to Other Shareholders
• Sell to Management (MBO or Mgmt Buyout)
• Employee Stock Ownership Plan (ESOP)
• Sell to a Third Party
• Recapitalize (Refinanace)
• Go Public
• Liquidate

Exit Plan: A strategy to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for the time when that business owner is no longer involved in the operation of the company. Examples of unplanned exits include death, divorce, management disputes, influx of competition, technological obsolescence, loss of a major customer, or other unforeseen economic events.

Fair Market Value: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Family Council
A Family Council is the body that represents family members related to an enterprise. The council functions as an official forum for communicating important issues with family members, such as training, remuneration, or challenges related to the coexistence of the family and the business, among others.

Family Employment Policy
A family employment policy is designed to help family members understand their relationship to the business. The purpose is to define the criteria and procedures governing how Family Members enter the company as career employees. The plan should provide transparency and contribute to the long-term success of the family and the company (i.e. family remuneration).

Goodwill: A) Those elements of a business that cause customers to return in sufficient volume to generate profit in excess of a reasonable return on tangible assets. B) That intangible asset that arises as a result of name, reputation, customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits.

Governance
Governance refers to the process of planning, developing, and implementing policies and structures within a business. For example, an advisory council is a governance instrument that provides non-binding strategic advice to the management of an enterprise or foundation.

Holding Company
A holding company is a corporation that owns enough voting stock in another corporation, limited liability company, or partnership to control its management and policies.

Intangible (Hidden) Assets
The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce. Also referred to as Off Balance Sheet items.

Key Person Discount: An amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.

Legacy
Creating an honorable effect and memory around the family enterprise that will live on.

Limited Auction
A situation where you have at least two buyers interested in purchasing your company. By creating a competitive bidding space, the interested parties will likely bid against one another, which increases the business’s value.

Management Buy-out: A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund/group (PEG). Management buy-outs (MBO) are generally pursued by management teams that have little or no ownership in a business and want to obtain more ownership but lack the financial resources to buy the company from the current owners. In these circumstances, a PEG can provide the financing necessary to facilitate the purchase of the business. The PEG also gives the management team a large equity stake to cement their commitment to continue running the business.

Multiple: Also known as Enterprise Value (EV) Multiple, is the inverse of the capitalization rate. It is usually the ratio of the price to earnings, particularly for public companies. It can also be the ratio of selling price to discretionary earnings (DE) for a small business. A multiple can be used to estimate the value of a company. Most often, however, a multiple is a generated value as an outgrowth of the valuation of a business.

Nondisclosure Agreement (NDA): Document that requires all information about a business to be kept confidential; also referred to as a confidentiality agreement.

Private Equity Firm
Entities that raise capital with the goal of acquiring businesses and maximizing the value of the initial investment. Also referred to as PE firms. PE firms typically buy part or all of a company, provide the missing resources currently preventing the company from growing at an accelerated rate, help the company grow extensively for a few years, and then sell it for a solid return on their investment.

Pro Forma Statements
Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.

Recapitalization: A financing transaction that allows owners to harvest some of the value they have created in their company while retaining a large ownership stake in the business going forward. For example, recapitalization can involve exchanging one type of financing for another – debt for equity or equity for debt – or when a company issues debt to buy back its equity shares.

Recasting
Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses, and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability and allows meaningful comparisons with other investment opportunities.

Rule of Thumb: A mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay or a combination of these; usually industry specific. A rule of thumb is a common procedure or practice to empirically value a business. These procedures are based on past valuation experiences and estimates in that industry, rather than using more complex calculations.

Seller Financing: When the person selling a business offers financing to a buyer instead of or, in addition to the buyer finding third-party financing.

Seller’s Discretionary Cash Flow (SDCF): See Discretionary Earnings. 

Seller’s Discretionary Earnings (SDE): See Discretionary Earnings.

Shareholders' Agreement
A shareholders’ agreement is a document for the shareholders in a business (and the underlying business itself) to prevent disputes in the event that the number of shareholders increases as the next generation becomes involved in the business. The agreement is a contract between shareholders and provides protection around ownership and sets out procedures to be taken in relation to certain decisions, for example, provisions relating to the composition of a board of directors.

Shareholder Liquidity
Shareholder liquidity refers to the cash readily available to a shareholder in a company. Periodically shareholders in family-owned companies need some liquidity. Such needs do not necessarily require the sale of the business. However, friction can emerge as a result of the capital requirements of a growing company and the liquidity needs of its shareholders.

Stock Sale
A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

Strategic Plan
A strategic plan or strategic planning is a systematic process of envisioning a desired future, and translating that vision into broadly defined objectives and a sequence of steps to achieve them. Strategic planning begins with the desired end and works backward to the current status.

Succession Planning
Process of identifying and training certain employees and/or family members to fill key management positions within a business as these become available. This needs to be done prior to selling a company, since businesses that can operate smoothly in the absence of the current owner are more attractive to professional buyers. a strategy for passing on leadership roles - often the ownership of a company - to an employee or group of employees. Also known as "replacement planning," it ensures that businesses continue to run smoothly after a company's most important people move on to new opportunities, retire, or pass away.

Transitioning Ownership and Leadership
The process of incorporating the next generation into the enterprise to shift the responsibility of ownership and/or leadership. This is an important step in ensuring the business is successful in growing through life-cycles. It is essentially the execution of the succession plan developed.

A Trust
A trust is a fiduciary relationship in which one party (the trustor or person who creates the trust), gives another party (the trustee or person in charge of the trust), the right to hold title to assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, for example, to avoid or reduce inheritance or estate taxes.