Written on the 8 December 2021 by General Knowledge Edited By Noel Currie
TERMINOLOGY
Please read through the following definitions, which are regularly used in business transactions.
DEFINITIONS
Information Brief – A booklet that describes a business and its financial performance. This document is prepared as sell-side advisory engagement,
which should not mislead and is distributed to potential financial and strategic buyers after the execution of a confidentiality agreement.
Information Memorandum – A booklet that describes a business and its financial performance. This document is prepared as sell-side advisory engagement,
which should not mislead and is distributed to potential financial and strategic buyers after the execution of a confidentiality agreement.
Selling Memorandum – A booklet that describes a business and its financial performance. This document is prepared as sell-side advisory engagement,
which should not mislead and is distributed to potential financial and strategic buyers after the execution of a confidentiality agreement.
Business Profile – A booklet that describes a business and its financial performance. This document is prepared as sell-side advisory engagement,
which should not mislead and is distributed to potential financial and strategic buyers after the execution of a confidentiality agreement.
Professional – A professional is a person in a profession which requires certain types of skilled work requiring formal training or education.
They include but are not limited to bankers, financial and business advisors, accountants, business and finance brokers, solicitors/lawyers and bookkeepers.
Negotiators – A professional that engages in negotiation. These professionals are often specialized in a particular field and may work under other
titles such as diplomats, legislators or brokers.
Negotiation – is dialogue intended to resolve disputes, to produce an agreement upon courses of action, to bargain for individual or collective advantage,
or to craft outcomes to satisfy various interests. It is the primary method of alternative dispute resolution.
Owner – The individual or legal entity in legal possession (ownership) of a property.
Ownership – is the state or fact of exclusive rights and control over property, which may be an object, land/real estate, business, intellectual property
or some other kind of property. It is embodied in an ownership right also referred to as title.
Legal Entity – Any individual, partnership, proprietorship, corporation, association or other organization that has, in the eyes of the law, the capacity
to make a contract or an agreement and the abilities to assume an obligation and to pay off its debts. A legal entity, under the law, is responsible for
its actions and can be sued for damages.
Buyer – A person who contracts to acquire an asset in return for some form of consideration.
Contract – Is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a
binding legal agreement. For a contract to exist it must satisfy the following concepts: Offer, acceptance, consideration, estoppel and intention to be
legally bound.
Offer – An invitation to enter into a binding contract communicated to another party which contains terms sufficiently definite to create an enforceable
contract if the other party accepts the invitation.
Acceptance – The act of taking something that is offered with approval.
Consideration – Is a concept of legal value in contract law. It is a promised action, or omission of action, that the promisee did not already have a
pre-existing duty to abide by. It can take the form of money, physical objects, services, or a forbearance of action. Both parties to a contract must
pass consideration to the other party for there to be a valid contract.
Estoppel – Is a legal doctrine at common law, where a party is barred from claiming or denying an argument on an equitable ground. An example of which is,
a seller might inform a buyer that a vehicle is included in the purchase of a business. If the buyer relies on this notice, the seller could be estopped
from not including the vehicle in the transaction.
Intention to be legally bound – There is a presumption for commercial agreements that parties intend to be legally bound. There are some parties that can
not be legally bound they include people under the age of 18 (except under very specific circumstances) and mentally ill individuals.
Market price – The price at which a product, financial instrument, service or other tradable item can be bought and sold at an open market.
Fair market value – A reasonable price for securities based on supply and demand.
Asking Price – is a price a seller of a good is willing to accept for that particular property. It is also the price a seller is hoping to achieve for a
particular property.
Contractual Terms – is any provision forming part of a contract. Each term gives rise to a contractual obligation, breach of which can give rise to
litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract. For a
list of common terms please read the standard terms and conditions of a contract.
Strategy - Are a plan of action designed to achieve a particular goal.
Exit strategy – A method a business owner intends to use to get out of a particular investment.
Process – is a collection of interrelated tasks, which accomplish a particular goal.
Business –is a legally recognized organization designed to provide goods and/or services to consumers. There are many types of businesses entities
including:
Sole Trader - A type of business enterprise or proprietorship which is owned by one person who is fully liable for the company's debts and fulfillment of
contracts with their personal wealth.
Partnership – A type of business enterprise or proprietorship which is owned by two or more people who are fully liable for the company's debts and
fulfillment of contracts with their personal wealth.
Limited Partnership – Similar to a partnership except the partners are liable only to the extent of their original investment.
Incorporated (Inc.) - restricted to non-profit associations.
Limited (Ltd.) – private companies limited by guarantee, such as a charity or university.
Proprietary Limited Company (Pty. Ltd.) – private company limited by shares.
No liability (NL) – a type of mining company with no right to call up the unpaid issue price of shares.
Trust – a type of company that acts in the interest of its trusties to disperse income for tax benefit.
Proprietary Limited Company As Trustee For A Trust (Pty. Ltd. ATF) - In Australia companies can act as a trustee for a trust.
Valuation – Is the process of estimating the potential market value of a financial asset or liability using accepted techniques and methodologies.
Market Expectations – Any hope or belief held by the market for the future state of assets, organizational processes or information systems in regards
to all available information.
Asset – Anything of monetary value that is owned by a person. Assets include real property, personal property and enforceable claims against others.
Financial Information – Is information relating to and including financial statements which provide an overview of a business' financial condition in
both short and long term. It includes Balance Sheets, Income Statements, Retained Earning Statements and Cash Flows.
Representative – A person who is authorized to act on another’s behalf.
Verified – a concept that relates to the confirmation of truth.
Profitability – The making of gain in a business for the benefit of the owners. They are four main types of profit quoted by a business:
Gross profit - This is the difference between sales income and the direct costs of making those products. Gross profit is used as a performance indicator
to help the business make decisions over its pricing policies and use of materials.
Net profit - Net profit represents gross profit less all expenses associated with the normal running of the business. Net profit shows how well the
business performs under its normal trading circumstances.
Net profit after interest and taxation - This is the profit available for the shareholders. Net profit after interest and taxation is all due to the owners
of the business. They can choose to take out, in the form of dividends, all, some or none of this.
Retained profit - Retained profit is the profit left over after the shareholders have been paid their dividends. Retained profit is normally reinvested
in the business.
Types Of Net Profit – There are many types and ways to show net profit including:
From a management point of view – (including when an owner is a manger).
EBITDA – Earnings before interest, tax, depreciations and amortisation.
EBITD – Earnings before interest, tax and depreciation.
EBIT – Earnings before interest and tax.
From a proprietors point of view – when the owner is operationally involved in the business.
PEBITDA – Proprietors earnings before interest, tax, depreciation and amortisation.
PEBITD – Earnings before interest, tax and depreciation.
PEBIT – Earnings before interest and tax.
GAPP – Are generally accepted accounting principles.
Competitors – a business relationship in which two or more parties compete for customers.
Market Analysis – A systematic investigation of the growth and the composition of a market.
Qualification – is the initial process to verify that a potential buyer has fulfilled enough requirements to purchase a business. Qualification is not an
approval because it does not include verification.
Intrinsic value – Inherent value of a business independent of its operational worth.
Risk – the probability of incurring loss or misfortune.
Rule Of Thumb Method – Is a principle with broad application that is not intended to be strictly accurate or reliable for every situation.
Book value method – It is the equity of a company which is arrived at after the values of assets and liabilities are adjusted. It represents the estimated
market value.
Earnings capitalization method – A common income-based valuation method that establishes the business value by multiplying the expected business economic
benefit, such as the EBITDA, by the capitalization rate multiple.
Capitalization Rate Multiple – is a measure of the ratio between the net profit income produced by an asset and its current market value. There are
different capitalization rates used for different net profit types.
Financial Adjustments – Are the normalization of financial accounts to reflect the operational profit of a business. The most common normalization
adjustments fall into the following four categories:
Comparability Adjustments - An adjustment made to a financial statement to facilitate a comparison between the subject company and other businesses in the
same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and
the way that the subject company’s data is presented in its financial statements.
Non-operating Adjustments - If a business were sold in a hypothetical sales transaction, the seller would retain any assets, which were not related to the
production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated
from the balance sheet.
Non-recurring Adjustments – The company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of
assets, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the expectations of future performance.
Discretionary Adjustments – The owners of private companies may be paid at variance from the market level of compensation that similar executives in the
industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinized.
Confidentiality Agreement (CA) – is a legal contractbetween at least two partiesthat outlines confidential materials or knowledge the parties wish to share
with one another for certain purposes, but wish to restrict access to. It is a contract through which the parties agree not to disclose information covered by the agreement. (It is also known as a non-disclosure agreement (NDA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement).
Mislead – to lead someone to wrong information or to give someone wrong information through action or inaction.
Going Concern –Is a business that functions without the intention or threat of liquidation for the foreseeable future, usually regarded as at least within
12 months.
