Terminology / Glossary
(Business Sales and Business Brokerage related terms)
The following glossary outlines some common terminology used in businesses and in the sale process.
AmortisationSometimes referred to as depreciation
Many fixed assets are recognised as having a useful working life that extends to more than one year. Examples of these assets include motor vehicles, plant and machinery, technology, tools of trade and other assets. These items that have a useful working life that extends over more than one year can be expensed (or amortised or depreciated) over a number of years that they are used to earn income, instead of writing them off as a single cost at the time of purchase. Different types of assets have different working life expectancies.
The Australian Tax Office provides guidance on depreciation and how it may be applied.
Amortisation ScheduleSometimes called a Depreciation Schedule
A tabular presentation of the reduction in value of assets being depreciated or amortised.
Everything a company/business owns or is owed to it. Includes current assets such as cash, money due, materials, and inventory. Also includes fixed assets such as land and buildings (real estate), machinery. Also includes intangible assets such as goodwill, patents etc.
A statement showing the nature and amount of a company/business’s assets, liabilities and equity. A Balance Sheet shows these on a given date.
This is the point at which a business is neither making a loss or a profit. At the break-even point the revenue for the business equals the costs.
Business Appraisals provide a guide to pricing your business for sale. A Business Appraisal is an estimate of an appropriate business sale price and they are not definitive and have no legal standing. When preparing a Business Appraisal, Amplify Business take into account the local area, recent sale prices, the type of business, the value of the assets of the business and other relevant factors in determining a sale price.
There is a difference between a Business Valuation and a Business Appraisal.
A formal Business Valuation can only be conducted by a qualified BusinessValuer who has undertaken specific training and education to ensure that they take into account all features and issues relating to a particular business. Valuing a business is a complex task and will take some time to complete and can be a costly exercise. The client will ordinarily receive a written Business Valuation report. Valuations are required when a definitive value is required.
The agreed fee, which is sometimes expressed as a percentage of the purchase and sale price of the total business asset value, earned by the business broker for facilitating the sale of a business.
Confidentiality AgreementSometimes known as a Non-Disclosure Document or Non Disclosure Agreement (NDA)
During the process of purchasing a business the prospective purchaser will ordinarily need to sign a Confidentiality Agreement. This legal contract between the parties outlines confidential information that the parties wish to share with one another solely for the purpose of evaluating the potential of the business. It is a contract through which the parties agree not to disclose this information and creates a confidential relationship between the parties designed to protect the proprietary information or trade secrets of the business.
Cost of Goods SoldSometimes referred to as COGS
Cost of Goods Sold is the costs that go into creating the products that a company sells. The only costs included in the measure of Cost of Goods Sold are those that are directly tied to the production of the products. For example, the Cost of Goods Sold for a bicycle retailer include the material costs of the bicycles they sell, or if they assemble the bikes themselves, the costs of all the parts that go into making a bike. Costs like the electricity needed to turn the lights on, the labour costs for staff that sell the bikes are examples of costs that are excluded from the Cost Of Goods Sold. The exact costs included in the COGS calculation will differ from one type of business to another.
A Disclosure Document is a prescribed document under the Franchising Code of Conduct that contains information for the Franchisor that helps the prospective franchisee make an informed choice about entering a franchise.
There is a legal requirement under the Franchising Code of Conduct for an Australian franchisor to give you a disclosure document at least 14 days before you enter into a franchise agreement.
When you are considering buying a business, conducting due diligence ensures you know exactly what you're buying. This is the best way for you to assess the value of a business and the risks associated with buying it.
Through the due diligence process, you thoroughly investigate all aspects of a business for sale. You look at the business's operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details, often within a time period specified in a Letter of Intent.
You usually conduct due diligence after you and the seller have agreed in principle to a deal, but before signing a binding contract.
Earnings Before Interest, Tax, Depreciation and AmortisationOften referred to as EBITDA
The EBITDA is an approximate measure of a business’ cash-flow based on data from the Income Statement or Profit & Loss Statement. The EBITDA is calculated as below:
EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortisation)
ExpensesSometimes referred to as Running Expenses, Running Costs
Apart from the Cost Of Goods Sold there are numerous other costs (or Expenses) relating to the daily running of the business. Examples include Rental costs, Electricity, Gas, Insurance, Staff wages, Superannuation, Workers Compensation and travel costs just to name a few.
Franchising is a business relationship in which the franchisor (the owner of the business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor's goods or service, and to use the business name for a fixed period of time. For further information on Franchising visit the Franchise Council of Australia website at www.franchise.org.au
The franchise agreement is a legally binding document spelling out the rights and responsibilities of both the franchisor and franchisee.
Before signing the franchise agreement, you should obtain as much information about the franchise as possible. To help you with this, the Franchising Code of Conduct (Franchising Code) requires that franchisors give you, the prospective franchisee, a copy of the Franchising Code, a disclosure document and a copy of the franchise agreement in its final form. These three documents need to be provided to you at least 14 days before you start, renew or extend a franchise agreement or pay a non-refundable deposit.
As a prospective franchisee, it’s important to understand what is being offered and your rights and obligations under the Franchising Code.
Franchising Code of ConductSometimes referred to as The Franchising Code
The ACCC regulates the Franchising Code of Conduct, which is a mandatory industry code that applies to the parties to a franchise agreement.
The Franchising Code requires franchisors to provide prospective franchisees with the following documents at least 14 days before they sign an agreement or hand over non-refundable monies:
- A disclosure document (sets out key information about the franchise that the prospective franchisee may not otherwise be able to obtain)
- A copy of the franchise agreement in its final form
- A copy of the Franchising Code
Hours of Operation
The hours of operation are an important consideration for any purchaser of a business. The hours of operation should also include or make reference to any preparation time or after hours work that is required.
Many businesses will require, or it may be recommended that they have, insurances arranged prior to the completion date. These insurances may include Business Insurance, Professional Indemnity Insurance, Public Liability Insurance and other insurances related to the operation of the business.
LeaseSometimes referred to a Lease Agreement. Related terms: lessee, lessor, tenancy,
A lease is a contractual arrangement which requires the lessee (person or entity that uses the asset) to pay the lessor (the ultimate owner of the asset) for use of the asset.
A typical business may have a number of lease agreements in place, including lease of the premises they occupy (property lease), lease of computer, printers, and other equipment (equipment leases), and leases for vehicles (vehicle lease or lease purchase/ chattel mortgage).
Property Leases often contain information about the permitted use for the premises, the size, and the term of the lease. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease).
Letter of IntentSometimes referred to as a Heads of Agreement
The Letter of Intent is the outline of the sale agreement and usually contains the following information: seller and buyer details; details on what is being bought; a timetable for the sale; the price or consideration; the obligations of the seller if any; the structure of any payments; that the agreement is subject to due diligence and sometimes subject to funding.
Permits & Licences
Businesses may require certain permits to operate within the laws. These permits often include council regulations allowing the business to trade, and may be relevant to the premises from which the business operates. You may need to ensure that all permits and licences are transferred to the new owner by the settlement or Completion date.
Profit & Loss StatementAlso known as the Income Statement or P&L
The Profit & LossStatement is a summary of the financial performance of a business over a specified period (monthly or annually is most common). It reflects the past performance of the business and is the report most often used by business owners to track how their business is performing.
A Profit and Loss Statement summarises the income for a period and subtracts the expenses incurred for the same period to calculate the profit or loss for the business
Restraint of Trade / Restriction of Trade
Restraints of Trade are contractual terms which restrict the free exercise of trade or business. Such clauses generally refer to specific geographic areas, a specified time period and the defined restricted activity.
The Restraint of Trade provisions will ordinarily be set out on the Sale of Business Agreement/Contract For Sale of Business. The intent of these restrictions are to allow the new owner of the business to operate the business in the area, without fear of the previous owners competing directly with them.
Sale of Business AgreementSometimes referred to as Contract for Sale of Business
A Business Sale Agreement helps you define and agree to the terms of the sale. This includes the purchase price, the assets that will be sold, details of leases and other terms and details of the transaction. The Sale of Business Agreement details all this information in writing can help you get started in running a successful business.
Stock at ValueSometimes referred to SAV or Stock at Valuation
When purchasing a business, the stock at the time of the sale is sometimes calculated and then paid in addition to the agreed business sale price. The abbreviation SAV often appears in advertisements or sales particulars immediately after the price, for example ‘Sale Price $120,000 plus SAV’.
The calculation for Stock at Value is normally determined on the Day of Completion. For small businesses this calculation is made an agreed between the two parties. For larger businesses or businesses with high levels of stock, these calculations may be undertaken by a qualified valuer or professional stock-taker.
TurnoverSometimes referred to as Sales Turnover / Turnover / Total Sales / Total Revenue / Total Income
The turnover refers to the total income or revenue received by the business from its normal business activities, for example from the sale of products and services to customers.
Turnover can be represented in a weekly, monthly or annual figure.
Businesses are required to keep records of their turnover as part of their record keeping responsibilities.
The amount of money (or readily convertible capital) needed to fund the normal, day to day operations of your business. It ensures you have enough cash to pay your debts and expenses as they fall due, particularly during your start-up period.