| Term | Definition |
|---|---|
| Accountant’s fees | Accounting Fees means the fees that become payable and the expenses and disbursements that are reimbursable to any accounting firm for services rendered in connection with the Statement on Auditing Standards (SAS) 100, Interim Financial Information (“SAS 100”), review of the Company interim financial statements as contemplated by Section 5.20 hereof or in connection with the FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), review and analysis conducted pursuant to Section 5.13 hereof. |
| Add-Backs | After completing any add-backs, it is critical that you take into consideration the future capital requirements of the business as well as debt-service expenses. |
| Appraisal fees | The appraisal fee is a payment for the appraiser who assesses the value of the property you are looking to buy. The lender uses the appraisal report to determine how large of a mortgage to grant you. |
| Attorney’s fees | Attorney’s Fees/Attorneys’ Fees, or Attorney fees are the amounts billed to a client for legal services performed on their behalf. Attorney fees may be hourly, contingent, flat, or hybrid. Nonrefundable fees are prohibited in some states. |
| Back Depreciation | Depreciation is an expense that allows a business to deduct a certain amount of money each year from an asset so that its purchase value is reduced by its overall useful life. |
| Business Broker | Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held businesses in the buying and selling process. |
| Business Credit Score | If you already own a business, lenders will also review your business credit score. Your business credit score is determined through five main factors: Payment history Amounts owed Length of credit history Types of credit used Your new credit Payment history is the most significant of these factors, so it’s critical to always make debt payments on time, both personally and for your business. |
| Business Plan | Along with other pieces of your business loan application, you’ll want to submit a detailed business plan for your new business explaining the history of your business’s current strategy, plans you might have to make changes or add value in the future, and a plan for transitioning to your new strategy. With this business plan, you’ll want to be sure to include future financial projections—providing some thoroughly researched data-based sales projections for the next two years. These projections should derive from the business’s historical sales records, while also taking into account your strategy for moving forward. While it’s okay to be confident here, know that your projections won’t be taken at face value, and will need to be backed up with verifiable data. And even with the data on your side, lenders will downgrade your projections by about 10% as standard practice. |
| Business Valuation | To determine a fair price for your business acquisition (and therefore a smart amount for your loan), your lender might ask for a formal business valuation performed by an independent valuation firm. Through this process, the consultant will look at both tangible and intangible aspects of the business, as well as outside factors, to determine a monetary value under various scenarios. |
| Capitalized Value | The capitalized value is found by dividing the annual profit by the specified rate of return expressed as a decimal. |
| Cash Flow | The cash flow of your existing business acts as a snapshot of its financial health and an indication of whether your existing business can support the debt and the uncertainty of a business acquisition. If you exhibit positive cash flow, that’s a sign that you’re managing your business finances well, and a strong profit margin gives you the necessary buffer to make payments on your acquisition alone—even if your newly acquired business isn’t immediately profitable. Almost all lenders agree that an acquisition is not a realistic way to “save” a business facing cash flow issues or operating at a loss, so don’t expect to be approved for a business acquisition loan if your current business is struggling financially. |
| Cash to fund credit sales | Cash is collected when the sale is made and the goods or services are delivered to the customer. Credit sales: Customers are given a period of time after the sale is made to pay the seller |
| Collateral | |
| Collateral and Balance Sheet | Business acquisition loans that require no collateral might be possible, as the business you’re purchasing acts as collateral (or, the lender will put a lien on the business you’re purchasing). On the other hand, the lender may require that you put up some other form of personal or business collateral, beyond the assets included in the new business you’re purchasing. To understand what collateral you have to offer, you may submit an appraisal of your fixed assets. Or, you might simply use your balance sheet to give a lender a sense of your capacity to offer valuable fixed assets as collateral. The more fixed assets you have on your balance sheet, the easier time you’ll have getting a loan to buy a business. |
| Correction of code violation(s) | Local, state, and federal governments create rules, called codes, around the design, erection, alteration, and maintenance of buildings. Codes protect the safety of occupants, integrity of the structure, prevent fire and other natural disasters, and conserve energy. Any time homeowners modify a home, it’s their responsibility to ensure the contractor maintains compliance with current building codes. Unfortunately, code violations occur often because codes change from year to year as building safety techniques improve. |
| Debt service coverage ratio | This ratio will reveal how much cash flow is available to pay your company’s current expenses. Saucedo says banks usually want to see a debt service coverage ratio of at least 1.5. |
| Franchise license agreement transfer fee | A transfer fee is the fee a franchisor charges to the franchisee if the franchisee sells the business or shares in the company operating the franchise. |
| Franchise training fee | Franchise royalties are usually collected by your franchisor on a monthly basis. Like marketing fees, these fees are based on a percentage of your revenue. But there’s one major difference; the percentages are higher. Franchise royalties range from 4% of your revenue all the way up to 12% or more. |
| Goodwill | The assets most commonly purchased in a small business buy-sell transaction are merchandise inventory, sales and office supplies, fixtures and equipment, and goodwill. From the accounting point of view, goodwill is the ability of a business to realize above-normal profits as a result of these factors. |
| Income Capitalization | Income capitalization is a valuation method that appraisers and real estate investors use to estimate the value of income-producing real estate. It is based on the expectation of future benefits. This method of valuation relates value to the market rent that a property can be expected to earn and to the resale value. |
| Income Multiple | To put it simply, income multiples are figures based on a multiple of your annual salary that lenders use to determine the size of the mortgage they can offer you. Historically, most lenders used a mortgage income multiple to calculate how much you’d be able to borrow. |
| Intellectual Capital | The intellectual capital assists in creating wealth and in the production of other high valued assets. Intellectual capital in a business includes the wealth of the ideas and the ability for innovation which highly determines the future of the firm. |
| Landlord lease deposit | A security deposit is any money a landlord takes from a tenant other than the advance payment of rent. The security deposit serves to protect the landlord if the tenant breaks or violates the terms of the lease or rental agreement. It may be used to cover damage to the property, cleaning, key replacement, or back rent. |
| Legal filings & recording fees | Recording fees are charged by state and local agencies for registering a property’s transfer of ownership. These fees are a part of the bundle of expenses that are typically referred to as closing costs. |
| Leveraged buyout | |
| Losing costs & escrow fees | Escrow fees are a portion of the closing costs that come with buying a home. These costs are paid directly to an escrow company, real estate attorney or title company to conduct the closing and distribute funds to the third parties involved in the real estate transaction. Escrow fees can cover paperwork, distribution of funds and other fees related to the real estate transaction. |
| Maintenance expenses | The term maintenance expense refers to any cost incurred by an individual or business to keep their assets in good working condition. These costs may be spent for the general maintenance of items like running anti-virus software on computer systems or they may be used for repairs such as fixing a car or machinery. |
| Manufacturer’s inventory. | When a manufacturing company is being exchanged, the raw materials inventory is taken and priced like the merchandise inventory of a distributive business. |
| Online Term Loans | If you need funding faster, can’t qualify for a bank or SBA loan, or you’re a new entrepreneur looking to buy an existing business, online term loans might be the best option for you. Online medium-term loans from alternative lenders will be easier to qualify for than bank or SBA loans (and faster to fund), but they’ll still be able to offer the funding you need to buy a business. Although the interest rates with these loans will likely be higher than with a bank or SBA loan, you can still find relatively low rates, especially if you have strong qualifications. |
| Operating cash / working capital | Working capital is a measure of liquidity and is calculated as current assets less current liabilities. Operating working capital focuses on the operating short term assets and liabilities required to run a business’s operations and is calculated as operating current assets less operating current liabilities. |
| Owner Benefits | Owner Benefits amount is the total dollars that you can expect to extract or have available from the business based upon what the business has generated in the past. The theory behind the Owner Benefit number is to take the business’s profits plus the owner’s salary and benefits and then to add back the non-cash expenses |
| Personal Credit Score | If you’re looking for a startup loan to acquire a business, lenders see your personal credit score as a significant factor in your likelihood of making your loan repayments after taking on business acquisition funding. If your credit score is 700 or above, you’re in great shape, and will likely have excellent small business lending options available to meet your business acquisition needs. |
| Personal-property assets. | The buyer may feel that he knows going values of the personal property and decide not to retain an independent appraiser. In addition, many individuals believe that cost or book value is a good place to begin negotiations for personal property. |
| Property liability premiums | Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy. |
| Related Experience | In addition to your business financials and plan, the lender will consider how your work experience as a business owner will contribute to the future of the business post-acquisition. If you have relatively little experience in the industry of your desired business, that could be seen as a red flag to the lender. |
| Sales tax on equipment purchased | Purchases of machinery or machine tools and parts thereof are exempt from state sales and use tax when the machinery will be used in manufacturing. |
| SBA 7(a) loan | The SBA 7(a) loan is a government-backed loan provided by financial institutions like banks and credit unions. The SBA doesn’t lend directly, but they insure these loans in case a borrower defaults. This makes the SBA 7(a) loan an attractive option for lenders, since it reduces some of the risk involved. If you don’t qualify for a bank term loan, SBA loans will be your next best option for low-interest rates and long terms. These business acquisition loans are slightly easier to qualify for than bank loans, as the SBA’s partial guarantee means the bank lender takes on less risk when working with you. The SBA offers two loan programs that are suitable for business acquisitions: the 7(a) loan program and the CDC/504 loan program. The CDC/504 loan program is meant specifically for major fixed asset purchases—which encompasses a business acquisition. It’s a very specific type of financing, and generally a more complicated process that’s harder to qualify for. SBA 7(a) loans, on the other hand, are the more traditional and common SBA financing option, and one that might be suited for a smaller business acquisition. In either case, these loans will offer long terms (up to 25 years), low interest rates (generally about 6% to 8%), and large loan amounts (up to $5 million). It’s important to remember that although SBA loans are easier to qualify for than bank loans, you’ll still need to meet top requirements. Plus, like bank loans, SBA loans are slow to fund—taking anywhere from a few weeks to a month or more. |
| Secured Loan | Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren’t sufficient to qualify for an unsecured loan. |
| Seller Financing | Seller financing essentially works as it sounds: instead of getting financing from the bank or another third-party lender, you’re getting a loan from the seller of the business itself. The seller takes part of the business’s purchase price in cash, and the remainder in the form of a promissory note that you, as the buyer, will pay back with interest over a period of time—typically three to five years. Seller financing is often used in conjunction with traditional commercial lending as the funds don’t usually cover the entire cost of buying a business. All in all, seller financing is a great option if you can’t qualify for other types of business acquisition loans, especially since rates and terms are typically competitive with other financing products. Of course, for this type of funding to be a viable option, the owner of the business you’re purchasing will have to be willing to offer it. |
| Seller’s Discretionary Cash Flow | |
| Traditional Term Loans | If you’re looking for business acquisition loans with a fixed interest rate and predictable monthly payments, a traditional business term loan will fit you well. It’s the easiest to understand because it’s probably what you naturally think of when you think of a business loan. The terms are pretty simple for this type of business acquisition loan—you borrow a fixed amount of money, usually for a specifically stated business purpose, and pay back the loan over a fixed term and typically at a fixed interest rate. Term loans are the most common loan type for business acquisition since they fit in well with the typical cost and the long-term nature of purchasing an existing business. However, bank lenders will have high standards for your business acquisition deal in order to fund your term loan, and you might not qualify on your first try (or at all)—so prepare for one or several lengthy loan applications to secure a term loan for your business acquisition. |
| Unsecured Loan | An unsecured loan is a loan that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness. Examples of unsecured loans include personal loans, stu |
| Value Add | Lenders will also be looking to answer one fundamental question: What value do you add to the business that will make it better and more successful than before you acquired it? That might be a new strategy, a piece of equipment, a customer base, or any number of tangible or intangible contributions. If you can provide a strong, provable answer to that question, there’s a good chance that lenders will see your business acquisition as a good, fundable deal. |
| Value of Assets | Asset valuation is the process of determining the fair market value of an asset. Asset valuation often consists of both subjective and objective measurements. Net asset value is the book value of tangible assets, less intangible assets and liabilities. |
| Value of Liquidation | Liquidation value is the total worth of a company’s physical assets if it were to go out of business and its assets sold. Liquidation value is determined a company’s assets such as real estate, fixtures, equipment, and inventory. Intangible assets are excluded from a company’s liquidation value. |
| Vehicle registration & licensing fees | Every state requires motor vehicles to be registered and titled with the state’s transportation agency or department of motor vehicles. A vehicle registration plate often called the license plate, is attached to motor vehicles for identification purposes. The vehicle title is a legal document that establishes a person as the legal owner of the vehicle. Motor vehicles may not be driven legally if they have never been registered or if the registration has expired. The method of calculating the amount of motor vehicle registration and title fees varies widely among states. Typically, a title fee is a one-time fee assessed when the title is acquired by each owner. |
| Workers compensation insurance premiums | Workers’ comp insurance premiums are calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification. The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code. |