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).

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.

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.

the terms and conditions for the Purchase of the Business Assets. This could include but is not limited to equipment, fixtures, furniture, licenses, trade secrets, trade names, phone numbers, social media and many many more.

a financial statement that includes Business Assets and Liabilities for a Certain Date.

a method of spreading the cost of an asset over a specified period of time, typically the asset’s useful life. This will often show up on P&Ls as an expense that is added back as part of SDE or EBITDA

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 experienced in Business Sales and Acquisitions 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.

Earnings before Interest, Taxes, Depreciation, and Amortization. The way to Calculate this is to simply add those items from the financial statements. This method assumes a “Passive” (not working in the business) owner and investor for example.This is what Family Offices, Private Equity Group (PEG) and absentee investors are looking at when they do their evaluation of a Business for sale.

Furniture Fixtures and Equipment that are needed for operation of and owned by the Business.

This agreement comes from the landlord and assigns the Sellers lease rights to the buyer at the time of the sale. The new Business owner takes on all the rights and responsibilities that the old owner had. The Buyers pay for the application fee and the legal expenses for the new lease assignment. Buyer will typically negotiate with landlord at this time for lease extensions that go beyond seller’s current term.

This is an initial offer from the Buyer to the Seller to clarify price, terms, non compete, how much inventory is included, training and familiarization period, due diligence period and may have other terms to still be negotiated. This is a commitment from the Buyer to start the Due Diligence Process (at the Buyers cost).

A Non-Disclosure Agreement (NDA) is a legally binding contract that protects confidential information when a third party is interested in purchasing a business. It's also known as a confidentiality agreement (CA).

in a Business Purchase and Sale agreement protects the Buyer from the Seller competing with the buyer for a specific period of time and distance from the Sold Business. The Agreement is for the legal entity selling the business, as well as the Sellers individually of the business. This is needed to protect the buyer's ownership interest and goodwill.

AKA Sellers Discretionary Cash Flow, Adjusted Net and a few other similar sounding names. This Metric includes all of the EBITDA items listed above but also Assumes a Full-Time working owner and includes the Seller's Discretionary Expenses “add backs''. Examples include a retirement plan for the owner of the business, one time Legal or Moving expenses just to name a few.

this refers to P&L’s and Balance Sheets that only show the latest 12 months of financials for the business. The purpose of these reports is to show a more accurate picture of the business while taking out any seasonality.

in Business Sales this is the total value of the materials and labor for unfinished projects. In example, a customer orders and puts a $5k deposit on a Custom Sign from a Sign Business on Dec 1st to be completed on Jan 15th. The Business Sells and the new owner takes over Jan 1st. The new owner has to complete the job but the seller needs to be compensated for their Labor and Materials and the buyer may need to get some of the deposit credited to balance things out. This will be different on every deal. Another example would be gift cards sold but not redeemed or pre-paid services. Orders paid for but not delivered.

How calculate Working Capital for a small / owner operated business. Working Capital = Current Assets - Current Liabilities. Current assets are all the assets that can be converted to cash within 12 months. Examples would be Cash, Receivables, Inventory just to name a few. Current Liabilities are Obligations that need to be paid within 12 Months such as Accounts Payable, short-term debt, accrued expenses and unearned revenue. This should give you an idea is the business has enough short term liquidity to cover day to day operations.