GLOSSARY

DEFINITIONS

  • Balance Sheet: company’s assets and liabilities at a specific point in time

  • Book Value: value of an asset or liability at the time it was acquired

  • Cash Flow Statement: represents company’s sources and uses of cash over a period of time; Operating CF + Investing CF + Financial CF = Net Change in Cash Flow (CF)

  • Cost of Goods Sold (COGS): the costs of creating the product or service sold by a company

  • Current Asset: any asset that is expected to be liquidated within one year or one operating cycle, whichever is longer (i.e. cash, accounts receivable, inventory)

  • Disclosure: anything material needs to be disclosed to the buyer prior to due diligence (i.e. lawsuits, criminal activity, weakened customer relationships)

  • Due Diligence: investigation of a potential investment prior to signing a contract

  • Gross Profit = Net Revenue - COGS

  • Growth: sustained increases of revenue, gross profit, and profit

  • Income Statement: represents revenues and expenses over a period of time; Revenue - Expenses = Net Income

  • Internal Rate of Return (IRR): rate at which net present value of costs equal the net present value of the benefits of an investment

  • Investor Protection Clauses: outlines consent rights, rights to board representation, and noncompete restrictions

  • Letter of Intent (LOI): legal document drafted by the buyer, informing the seller of the terms under which they intend to buy the business and the associated conditions that must be met over a specific period of time in order to close the deal

  • Net Income = Revenue - Expenses

  • Net Working Capital = Current Assets - Current Liabilities

  • Non-Owner Management: current employees with significant day-to-day responsibilities and knowledge of the business who do not have an ownership stake in the company and intend to stay on post-sale

  • Normalized Capital Expenditures: annual money spent to keep the business going at its current growth trajectory

  • Off-Balance-Sheet Items: disclosures not present on the Balance Sheet, but which still have substantial impact on finances

  • Offering Memorandum (OM): seller disclosure of products, services, financials, risk factors, competitors

  • On-Site Visit: buyer visits seller's location(s) of business, conducting off-site discussions and facility tours over 1 to 3 days prior to signing LOI

  • Operating Depreciation: actual depreciation of the workable life of an asset

  • Operating Profit/EBIT: Earnings before interest and taxes

  • Return on Invested Capital (ROIC): Net Operating Profit After Taxes/Invested Capital

  • Tax Depreciation: maximum depreciation that can be listed as an expense on a tax return for a given reporting period under the applicable tax laws

  • Term Sheet: non-binding document outlining terms, including conditions precedent

  • Usable Inventory: inventory that can be sold within a short period of time

ACRONYMS

  • COGS: Cost of Goods Sold

  • D/E: Debt-to-Equity

  • DCF: Discounted Cash Flow

  • EBIT: Earnings before Interest and Taxes; a.k.a. Operating Profit

  • EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization

  • FYE: Fiscal Year Ending/Ended

  • GPM: Gross Profit Margin

  • IRR: Internal Rate of Return

  • LOI: Letter of Intent

  • OM: Offering Memorandum

  • P/E: Price-to-Earnings

  • ROIC: Return on Invested Capital

  • SDE: Seller’s Discretionary Earnings