VALUATION BASICS
This financial statement shows how much money a business makes and spends over a period of time.
What is a Profit & Loss Statement (Income Statement)?
Before buying a business, you should always do this investigation process to verify financials and operations.
What is Due Diligence?
Before listing a business for sale, financial records should be clean and up to this standard.
What is Organized (or Up-to-Date)?
This is the final document that officially transfers ownership of the business.
What is a Purchase Agreement?
Money left over after all expenses are paid is called this.
What is Net Profit?
This term refers to the total revenue a business brings in before expenses are deducted.
What is Gross Revenue (or Gross Sales)?
This document outlines the general terms of a deal before the final purchase agreement is signed.
What is a Letter of Intent (LOI)?
This professional helps confidentially market and sell a business.
What is a Business Broker?
This part of the deal outlines how and when payments will be made.
What are Payment Terms?
This ratio measures how much profit a business makes compared to its revenue.
What is Profit Margin?
This common valuation method multiplies a business’s annual earnings by a number based on risk and industry.
What is the Multiple of Earnings method?
This type of purchase involves buying assets rather than the legal entity itself.
What is an Asset Purchase?
This agreement allows a broker to represent a seller exclusively for a set period of time.
What is a Listing Agreement?
This type of deal structure allows the seller to receive additional payments based on future performance.
What is an Earnout?
This number represents the value of a company’s assets minus its liabilities.
What is Equity?
This adjusted earnings figure adds back discretionary or non-recurring expenses to show true owner benefit.
What is Seller’s Discretionary Earnings (SDE)?
This is the amount of money a buyer typically contributes upfront when purchasing a business.
What is a Down Payment (or Equity Injection)?
This legal document protects confidential information when buyers review business details.
What is a Non-Disclosure Agreement (NDA)?
This allocation divides the purchase price among assets for tax purposes.
What is Purchase Price Allocation?
This term refers to recurring income that can be expected to continue in the future.
What is Recurring Revenue?
This valuation method estimates value based on expected future cash flow adjusted to today’s dollars.
What is Discounted Cash Flow (DCF)?
In many transactions, this government entity is commonly used to back small business acquisitions.
What is the SBA (Small Business Administration)?
This strategy allows a seller to finance part of the purchase price to help close the deal.
What is Seller Financing?
This structure may allow a buyer to step into existing contracts and liabilities of the business entity.
What is a Stock Purchase?
This financial metric measures the business’s ability to cover debt payments.
What is Debt Service Coverage Ratio (DSCR)?