Glossary of Business Terms

AGENT

One acting under authority of a principal to do the principal’s business. The agent must use his or her best efforts and keep the principal fully informed of all material facts.

AMORTIZATION

1. A reduction in a debt obligation by periodic payments covering interest, and part of the principal.

2. The writing off or expensing of the cost of intangible assets over a period of time, usually in years. Amortization of intangible assets vs. depreciation of tangible assets. Intangible assets purchased, such as goodwill and covenants-not-to-compete, can be written off over 15 years.

APPRECIATION

A gain in value due to any cause. Real estate is an asset that often appreciates in value over time

ASSET SALE

This term has two definitions: The means by which a business owner transfers ownership of tangible and intangible assets to another owner without transferring the ownership structure; the sale of a business enterprise at a price based solely upon the value of the tangible assets.

ATTORNEY-IN-FACT

One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.

BILL OF SALE

A written agreement by which one person assigns or transfers his or her rights to or interest in goods and personal property to another.

BROKER

One who acts as an agent for another (his/her principal) when negotiating with third parties on behalf of the principal. This arrangement falls under “agency” law applicable in the state in which the principal – agent arrangements arises.

BUSINESS BROKER

An intermediary dedicated to serving clients and customers who desire to sell or acquire businesses. A business broker is committed to providing professional services in a knowledgeable, ethical and timely fashion. Typically, a Business Broker provides information and business advice to sellers and buyers, maintains communications between the parties and coordinates the negotiations and closing processes to complete desired transactions.

CANCELLATION CLAUSE

A clause in a lease or other contract stating the condition(s) under which the contract can be canceled or terminated by any of the parties. It may provide for simple notice or possible payment of money to cancel the contract.

CLOSING STATEMENT

A written accounting of funds to seller and buyer at passing of papers.

CONSIDERATION

Something of value which induces a person to enter into a contract. The promise to do something must be in exchange for some act or thing of value which is the consideration. This is a necessary element in a contract.

CONTRACT

A voluntary and lawful agreement between two or more parties to do, or not to do, something. Elements of an enforceable contract include: (a) an offer to be bound to do or refrain from doing something, which has been accepted, (b) sufficient consideration, (c) a valid subject matter, (d) legal capacity of the parties, and (e) for those contracts to which the Statute of Fraud applies, its requirements must be met.

CONTINGENCY

A clause in an agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event.

DISCRETIONARY EARNINGS

The earnings of a business enterprise prior to the following items: income taxes, nonoperating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, owner’s total compensation for those services which could be provided by a sole owner/manager.

EARNEST MONEY

A sum of money given to bind an agreement or an offer.

EXCLUSIVE RIGHT TO SELL LISTING

When a business owner gives one Broker or Agent the authority to sell his/her business. The Broker or Agent receives commission no matter who sells the business – even if the seller finds the buyer during the listing period.

FIDUCIARY

Acting in a relationship or position of trust, usually regarding financial matters or transactions.

FINDERS FEE

An amount paid to another party for locating and referring a client or customer.

INDEMNITY

Payment that compensates for an incurred loss or damage.

IRREVOCABLE

Incapable of being recalled or canceled; unchangeable.

LEASE

A written legal document in which possession of a property is given by the owner (lessor) to second party (lessee) for a specified time and for a specified rent, and setting forth the conditions upon which the lessee may use and/or occupy the property.

LEASE WITH OPTION TO PURCHASE

A lease in which the lessee has the right to purchase the property for a stipulated price at or within a stipulated time.

LEASEHOLD

A property held under tenure of lease; a property consisting of the right of use and occupancy by virtue of a lease agreement; the lessee’s (tenant’s) interest in a lease.

LETTER OF INTENT (LOI)

A document agreement between a buyer and a seller used in connection with the acquisition of a company. The letter of intent describes the basic terms and conditions of the transaction between the buyer and the seller, including price, due diligence periods, exclusivity or no-shops, and the basic conditions to closing the deal. Customarily presented before a definitive purchase agreement is entered into, the letter of intent provides a road map for the parties involved in the transaction.

LIEN

A claim or charge upon real or personal property for the satisfaction of some debt or duty which can arise either by agreement or by operation of law.

NET-NET-NET LEASE(TRIPLE NET LEASE)

A lease in which the tenant (lessee) pays a prorata share of normal property expenses such as real estate taxes, insurance, maintenance, etc., thereby assuring the landlord (lessor) of a fixed income.

OPTION

A written agreement granting to a party the exclusive right, during a stated period of time, to buy or obtain control of property or assets on specified terms, but without any obligation of such party actually to exercise such option.

PRORATION

The division of money obligations according to some formula. In a business closing, a seller may have paid for certain benefits into the future which are assumed by the buyer. The costs of these benefits are “prorated” between the seller and the buyer as part of the closing statement (e.g. prepaid rent, prepaid advertising, security deposits).

PURCHASE AGREEMENT

The agreement setting out the terms for the purchase of a business. A purchase agreement is the “road map” followed by the buyer and the seller in a business transaction. It would include items such as a description of what is being purchased, the down payment and repayment terms, contingencies to be satisfied, buyer and seller representations, warranties, and indemnificationâs, and so on.

SUBLEASE

A lease where the lessee can be the lessor, in effect, on a subsequent lease. The owner of the property often must approve in writing the tenantâs right to sublease to a new tenant. This is different from a amaster leaseä where the lessee has greater control over subletting the property.

SUBORDINATION

The act of making an encumbrance secondary or junior to another lien.

TITLE

Evidence that the person or entity claiming to be the owner of the property is in fact the lawful owner thereof; an instrument evidencing such ownership.

TRANSACTION VALUE

The total of all consideration passed at any time between the Buyer and Seller for an ownership interest in a business enterprise and may include, but not be limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non competition agreements, employment and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemptions, real estate, leases, royalties, earn-outs and future considerations.

Allen & Young
Tucson and Southern Arizona Business Brokerage
Mergers, Acquisitions, Businesses for Sale, Tucson Business Investments

2007 Business Broker of the Year