The following business terms are frequently used in business sales transactions.  We recommend you familiarize yourself with these terms that you will hear often in buy/sell discussions.

PRICE refers to the asking price of the business.

DOWN refers to the suggested down payment whether it is commercial, SBA or owner financing.

ADJUSTED NET refers to the total of net income from the business; owner(s) salary; benefits such as health and life insurance, car allowances or 401K; interest payments that would not be ongoing for a new owner; and depreciation expense (non-cash expense).  All of the foregoing are referred to as addbacks; that is they are added back to the net income of the business to arrive at the total OWNER BENEFIT.

OWNER BENEFIT refers to the total pre-tax cash compensation that an owner can expect to receive from the business that they purchase.  Some buyers discount owner benefit by subtracting depreciation, as this will vary after purchase.  It should also be subtracted when using a multiple of owner benefit to determine value.  Sellers and intermediaries usually calculate owner benefit from tax returns or P&L statements.  When you see “owner to prove” or “owner estimate” these are typically the least reliable calculations of owner benefit because they are only partially verifiable. OWNER BENEFIT, BOTH HISTORIC NUMBERS AND FUTURE POTENTIAL IS THE SINGLE MOST IMPORTANT INDICATOR OF A SUCCESSFUL BUSINESS.  (See ADJUSTED NET and CASH FLOW)

DUE DILIGENCE is a systematic and methodical process of reviewing the past, present and future of a company by analyzing its financials, employees, management, marketing, sales, licenses, insurance requirements, exposure levels, condition of assets, and other key variables.  Legal issues of the business are also part of due diligence and handled by an attorney.

ASSET SALE refers to a non-cash producing business or marginal cash flow business that has value primarily in the assets.  These are typically opportunistic buys for persons experienced in the target business that can utilize these assets to produce new cash flow streams.

EBIT refers to Earnings Before Interest and Taxes, with Earnings typically meaning net income from the business.

EBITD refers to Earnings Before Interest, Taxes and Depreciation, with Earnings typically meaning net income from the business.

EBITDA refers to Earnings Before Interest, Taxes, Depreciation and Amortization with Earnings typically meaning net income from the business.  A strong EBITDA together with a strong owner salary and benefits equation is a sign of a healthy business.

MULTIPLES refer to multiples of gross revenue, net income, owner benefit or EBITDA.  Example: if a business has a net income of $250,000 and other businesses are selling for 3 times net income, the estimated worth of the business is $750,000.  Multiples are used loosely to refer to value but must be dissected carefully to estimate value with any precision.  A professional business appraisal is always best to determine value. Note: the high multiples of the past mergers and acquisitions era are all but past.  Neither individuals or corporations are paying wild multiples or premiums for anything except the most premier and strategic businesses on the market.  In addition, for most small business opportunities under $3 million dollars asking price, heavy in goodwill and light in income-producing tangible assets, buyers are paying no more than 3 times bonafide and provable owner benefit or EBITDA plus owner’s salary; and this typically represents top-end price.  Multiples that utilize the EBITDA formula are typically the most reliable multipliers.

RULES OF THUMB are used by “Mainstreet business brokers” and refer to general multiples of cash flow or owner benefit that small businesses can be expected to sell at, in an active market, over a reasonable listing period.

CASH FLOW can refer to several different calculations.  Cash flow (net of all business expenses) can be the cash on a monthly and annual basis that the owner can use for personal earnings, reinvestment in the business, month to month cushion or other variables.  Not every business will have positive month to month cash flow but if it does, it is an indication of overall health.  When a buyer is purchasing a business they should look at the cash flow or owner benefit and THEN DEDUCT THE DEBT SERVICE to arrive at a net/net pre-tax cash flow for disposable earnings for themselves.

SDCF refers to Seller’s Discretionary Cash Flow and is also referred to as Pre-Tax Operating Profit (Loss) or EBT (Earnings Before Taxes )  Typically this consists of owner’s salary, other family salaries, health and life insurance, owner payroll taxes, owner T&E, donations and non-essential telephone.  Add to this depreciation and amortization, interest expense, extraordinary and non-recurring expense, and rent adjustments to arrive at SDCF.  This provides an acceptable measurement of annual cash flow that should also be analyzed monthly in certain instances.

SDE is the same as SDCF and refers to Seller’s Discretionary Earnings.

NET INCOME usually refers to the pre-tax net income of the business (gross revenues minus cost of goods sold, minus G&A expenses).  However persons may use it loosely to refer to owner benefit, cash flow or other formulas.

WORKING CAPITAL refers to the amount of money needed, month by month, to fund the basic operations of the business, most importantly payroll.  Buyers should factor an initial amount of working capital into their purchase equation.

DEBT SERVICE refers to the amount of money that will be spent to pay down (amortize or retire) the debt over a period of time.  Unless you buy a business in cash there will always be debt service attached to the purchase.

FUTURE POTENTIAL is extremely important and refers to the probability, over 3 to 5 years, of the business’s ability so sustain and increase the current owner benefit, cash flow, EBITDA or other calculation.

MERGERS AND ACQUISITIONS or M&A refers to the intermediary activities of professionals who engage in larger scale, corporate buying and selling.  Florida Business Advisors’ staff has more than 100 years of corporate M&A activity serving businesses from $3 million in sales to $1 billion in sales.  The professionalism of the M&A approach is brought to bear on every transaction with our Buyers and Sellers.

VALUE refers to the estimated value of a business, or the price range that is expected to sell at. Value should always be looked at in a range, not a specific number.  The truest calculation of value for businesses under $3 million dollars is expressed as a multiple of gross revenue or EBITDA and typically does not exceed one times gross or three times EBITDA, both expressed with a high and low number, to provide a range of value.  VALUE IS AN EXTREMELY IMPORTANT PART OF A BUSINESS DEAL AND SHOULD ALWAYS BE ANALYZED CLOSELY.