Business Sale Terminology | GMO Buy a Business

BUSINESS SALE TERMINOLOGY

ADD BACKS: Add backs are expenses charged to a business which would not be incurred by an incoming owner. For example, the existing owner may have personal expenses being funded by the business or may have overdrafts or loans which would not apply to the new ownership. Therefore, these expenses are “added back” to reflect the profit the business would make without those expenses. In this way the profit is ‘normalised” for potential buyers to examine and consider.

BAS (BUSINESS ACTIVITY STATEMENT): Is the quarterly return of sales and GST reported by business owners to the ATO (Australian Taxation Office)

CASH FLOW: Cash which is generated by a business enterprise. “Positive cash flow” suggests the business does not need extra working capital because the business is able to collect its inwards cash from its customers in a lesser time than it is required to pay its suppliers.

CPI: Stands for the “cost price index” which reflects the annual rate of inflation in Australia.

EBITDA: Is the Earnings of the business before interest, tax, depreciation and amortisation of goodwill. This profit is reflective of management costs being included in the profit of the business. EBITDA and EBIT are common profit description methods for larger privately-owned businesses and also for corporate businesses.

ENCUMBRANCES: Are the obligations to third parties which the business has involving items of plant and equipment or in contractual commitments. Buyers need to be informed by the seller as to the exact nature of encumbrances, so they can make informed decisions about the business.

FAIR MARKET VALUE: Is the price at which a business would change hands between a hypothetical willing and able buyer and 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 full knowledge of the relevant facts.

GOING CONCERN VALUE: The value of a business enterprise which is expected to continue into the future.

GOODWILL: Is the expectation that a business’s clients will continue to patronise the business after the ownership has changed.

IAS (INSTALMENT ACTIVITY STATEMENT) Is a monthly report of sales activity reported to the ATO.

INTELLECTUAL PROPERTY: Is the documented technical knowledge, systems, dies and patents, trademarks, formulae and recipes of the business which make it unique.

PEBITDA: Is the proprietor’s earnings before interest, tax, depreciation and amortisation. This profit is used commonly for small and medium businesses and is indicative of the profit a business makes BEFORE the owner pays himself a management wage.

PSAV (PLUS STOCK AT VALUATION) Is a purchase term which infers the buyer will pay the seller for the saleable stock of the business on settlement, when that stock has been counted and valued by an independent stock-taker.

RESTRAINT OF TRADE: A written promise by a seller not to compete against the business they have sold for a certain period of time and within a certain geographic area.

ROI (RETURN ON FUNDS INVESTED): Is a business term which suggests a yield on the total investment. The formula is “Profit divided by total purchase price and expressed as percentage”.

WIWO (WALK IN WALK OUT): Is a purchase term which suggests an all up-purchase price where the goodwill, plant and stock are bundled into one price. The stock in these circumstances would not be counted by an independent stock taker and it is implied that the outgoing seller will leave adequate and normal levels of stock for the incoming buyer.