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Glossary of Terms

Asset Approach
A way of estimating the value of a business ownership interest using one or more methods based on the value of the adjusted book value of the company.

Adjusted Book Value
The book value on a company’s balance sheet after assets and liabilities are adjusted to market value.

Adjusted Earnings
The earnings of a business after adjustment for one-time or extraordinary expenses, excess owner compensation, and discretionary expenses or other expenses that is not essential for the successful ongoing operation of the business.

Asset Sale
A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity does not transfer.

Buyout
The purchase of controlling interest in one corporation by another corporation, in order to take over assets and/or operations

Buy-Sell Agreement
An agreement used by businesses to sell the interests of a deceased owner to the remaining partners at a predetermined price or formula.

Capitalization of Earnings Valuation
Uses forecasted cash flow for the next period, which is converted to present value using an appropriate capitalization rate equal to a discount rate less than expected growth rate in perpetuity. Capitalization process is more of a default forecast which assumes a normalized rate of growth from the base year. It is somewhat of a shortcut in the valuation process.

Capitalization Rate
The discount rate used to determine the present value of a stream of future earnings. Equals normalized earnings after taxes divided by present value, expressed as a percent.

Cash Flow Statement
The summary of a company’s cash flow over a given period of time.

Confidentiality Agreement
Ag agreement designed to protect trade secrets and expertise from being misused by those who have learned of them.

Covenant Not To Compete
It may be obvious that a seller is planning to get out of the business if he or she transfers ownership of the practice, but it would be prudent to get this in writing to ensure that the seller does not recruit the best clients away from the practice after leaving. A non-compete agreement has to be reasonable and enforceable and should have a limited duration and a well defined geographic scope and definition of what business activity is strictly prohibited.

Deal Structure
The combination of types of payment by which the purchase of a business is accomplished. It can include cash, notes, stock, consulting agreements, earn out provisions, and covenant not to compete. The sale can take the form of an asset sale or a stock sale.

Direct Expenses
Is the portion of expense that is directly expended in providing a product or service for sale and is included in the calculation of costs of goods sold. E.G.: Labor and Inventory

Discretionary Earnings
Earnings of a business enterprise prior to these expenses:
Income Taxes
Non-Operating income and expenses
Non-Recurring incomes and expenses
Depreciation and amortization
Interest expense or income
A single owner’s total compensation and benefits

Discount Rate
The interest rate used in discounting future cash flow.

Discounted Cash Flow Evaluation
A method of evaluating an investment by estimating future cash flows and taking into consideration the time value of money.

Earn out
An arrangement in which sellers of a business receive additional future payments, usually based on future earnings.

EBIT- Earnings Before Interest and Taxes
A financial measure defined as revenues less cost of goods sold and selling, general and administrative expenses. Operating and non-operating profit before the deduction of interest and income taxes.

Employment Agreement
An agreement that sets forth the rights and obligations of employees and employers. Typical employment agreements oblige employees to keep trade secrets confidential and to not solicit other employees after their departure.

Ensemble Firm
Comprehensive platform for rapidly building strategic compliance solutions that can monitor a business in real-time and rapidly integrate existing applications and reports. Usually two or more senior professionals that generate at least $1 million in annual revenues.

Enterprise Value
The total value of the stock of the business, plus the face value of all interest bearing debt owned by the business.

Escrow Agreement
A certificate provided by an approved bank that guarantees the indicated securities are deposited at that particular bank.

Fair Market Value
The price that an interested, but not desperate buyer would be willing to pay and an interested, but not desperate seller would be willing to accept on the open market assuming a reasonable period of time for an agreement to arise.

Going Concern Value
The value of a company as an operating venture. The difference between the liquidation values of intangibles associated with the running of the business, such as goodwill and intellectual property.
Liquidation Value
The estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business. If the liquidation value per share for a company is less than the current share price, then it usually means that the company should go out of business (or that the market is misevaluating the stock) although this is uncommon.

Goodwill
An intangible asset which provides a competitive advantage, such as strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.

Gross Revenues
Revenues minus the cost of goods.

Gross Profit Margin
What remains from sales after a company pays out the cost of goods sold. To obtain gross profit margin, divide gross profit by sales. Gross profit is expressed by percentages.

Income Approach
General way of determining the value of a business, business ownership interest, security, or intangible asset using one or more methods that calculate the present value of anticipated future income.

Intrinsic Value
An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.

Letter of Intent (LOI)
An agreement, usually nonbinding, that documents the general terms of a proposed business relationship. Often used as a prelude to a binding, definitive agreement.

Market Approach
General way of determining a value indication of a business, business ownership interest, security, intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.

Net Book Value
The net value of an asset, equal to its original cost (its book value) minus depreciation and amortization.

Net Income
In business, that remains after subtracting all the costs (namely business, depreciation, interest, and taxes) from a company’s revenues.

Operating Expenses
An expense arising in the normal course of running a business, such as an office electricity bill.

Operating Income
A measure of a company’s earning power from ongoing operations, equal to earnings, before deduction of interest payments and income taxes.

Present Value
The current value of one or more future cash payments, discounted at some appropriate interest rate.

Pro Form Financial Statements
Description of financial statements that have one or more assumptions or hypothetical conditions built in to the data. Often used with balance sheets and income.

Promissory Note
A document signed by a borrower promising to repay a loan under agreed upon terms.

Purchase Agreement
A legal agreement detailing a sale of property, including price and terms.

Return on Investment (ROI)
The rate of return at which the sum of the discounted future cash flows plus the discounted future residual value equals the initial cash outlay

Roll-Up Firms
Firms positioned as consolidators in the low end of the investment management and financial advisory business. A roll-up is a technique used to consolidate a number of small companies in a fragmented market.

Silo Firm
A firm where each merging partner brings a specialized aspect of his/her practice to the new/merged firm and continues to operate as though he/she where still independent.

Solo Firms
Firms that have one owner/professional. These firms are an extension of the personal skills and time of the principal. Lifestyle preference, strategic focus, or income needs of the firm owner determine whether the firm will aspire to become an ensemble or choose to remain solo.

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

Subject Practice Risk Premium
Additional risk premium taken into account when calculating the discount rate. Under certain situations it is appropriate to add an additional risk premium for the specific financial advisory practice being valued.

Total Revenue
Total sales and other revenues for the period shown.

Valuation Approach
A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more valuation methods. There are three approaches generally used to value a business: Asset Approach, Income Approach, and Market Approach.

Working Capital
Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.