Below are just a few of some basic terms that many First Time Business Buyers and Seller will see repeatedly during the process search for and selling a small business.
- Adjusted Net, Discretionary Earnings (DE) Seller’s Discretionary Earnings (SDE), and Seller’s Discretionary Cash Flow (SDCF), all mean the same thing. The earnings of a business enterprise prior to the following items: income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business.
- Add-backs, All or a portion of expenses that are added back to net income in an effort to place the figures as close as possible to the economic earnings that were actually derived from the business. Think in terms of Discretionary Expenses Officers (Owners) Salary, one business can have a lower Officers Salary and higher profits and another can have a higher officer’s salary and a lower net profit. The amount of the officer’s salary is discretionary.
- Due Diligence, this refers to your inspection of not only the Business Books, Records, Bank Statements but also includes business contracts, lease review, licensing, legal use of premises just to name a few. This needs to be done with the Help of a Licensed Experienced CPA and a Licensed Attorney should complete the contracts review for you as well. If you purchased a Home or Commercial Building, you would hire an Inspector to Inspect the property, your Attorney and your CPA are you inspectors for the business you are buying.
- Accrual Basis Accounting, accounting method that recognizes income and expenses, when the business first acquires the right to receive the income, or the obligation to pay the expense. Companies with inventories are required to use the accrual method for tax purposes. Income is added when the Invoice goes out, (not when the check clears) and expenses are deducted when the bill comes in (not when the bill is paid).
- Cash Basis Accounting, A method of accounting wherein income and expenses are recognized, within the statements, when the business receives the income, or pays the expense.
- Depreciation, Depreciation is a method of spreading the cost of an asset over a specified period of time, typically the asset’s useful life.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)