Acceleration Clause – A clause used in a note and/or security agreement which gives the lender the right to demand payment in full if a certain event occurs such as default or if the ownership of the business changes without the lender’s consent; sometimes referred to as a “due on sale” clause.

Acceptance – The act of accepting an offer which results in a binding contract.

Addendum – A written instrument that adds something to a written contract.

Agency Listing – Also known as an “Exclusive Agency Listing”. – A written instrument giving the agent the right to sell property for a specified time. However, the owner may sell the property himself/herself to a buyer who was not introduced to the business by the agent without the payment of a commission to the agent.

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.

Allocation – A breakdown of the purchase price usually required when a business is sold. For example, the allocation might contain a breakdown of the inventories, fixtures and equipment, leasehold improvements, goodwill, and any other purchased assets. Generally, value is placed on each component of the allocation and the buyer and seller agree on this breakdown. The IRS requires that such an allocation be a part of the buyer’s and seller’s tax return when a sale takes place; Form 8594, the “Asset Acquisition Statement”, must be filed with the buyer’s and seller’s tax return for the year in which an applicable asset acquisition takes place.

Amendment – A written instrument that changes something previously agreed to. (This is different than an addendum).

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.

APA – Asset purchase agreement

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

Arbitration – The submission of a disputed matter for resolution outside the normal judicial system. It is often speedier and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA).Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.

Asking Price – The total amount for which a business or an ownership interest is offered for sale.

Asset Sale – This term has two definitions. The proper definition depends on its usage: 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. A sale of a business in which the buyer acquires only specific assets (and possibly assumes some liabilities). Unlike a stock sale, the buyer obtains the assets usually free and clear of any liabilities of the seller. The buyer also gets the advantage of a “step-up” in basis on the assets purchased based on their allocated fair market values.

Assignment – A transfer in writing of an interest in property or other things of value from one person or entity to another.

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.

Base Rent – The minimum rent in a lease which sometimes contains a percentage or provisions for additional rent.

Basket – The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions. Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is made then the seller must pay $50). Dollar-One Basket (Tipping Basket): Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100, if a claim of $150 is made then the seller must pay $150).

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.

Blue-Sky – An expression sometimes used to label the intangible assets (e.g. goodwill) in the purchase of a business enterprise. That portion of a requested price that cannot be supported through the application of established valuation methodology, and which generates no economic benefit.

Bond – A pledge to pay a sum of money in the event of failure to fulfill obligations; e.g. inflicting damage, or mishandling funds – Usually written by a company for a fee. Also known as a Surety Bond.

Breach of Contract – Failure of a party to a contract to perform any or all of his obligations under the contract. There are four types of breaches:

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.

Bulk Sale – A transfer in bulk of all or substantially all of the inventory and fixtures of a business, which is not in the ordinary course of business.

Bulk Sales Act – Laws enacted by the states to protect creditors against secret sales of all or substantially all of a business’s goods. It requires certain notices prior to the sale and sets forth ways of voiding the sale (see Uniform Commercial Code). NOTE: No longer required in New Mexico since 7-1-92; however, each state has its own Bulk Sales laws.

Business Broker – A Business Broker is 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.

Business Trade Name – Company name by which a certain business is known.

C Corporation – A normal corporation for federal income tax purposes. The entity itself pays income taxes. Note that when we sell a business, the net proceeds are taxed at the “C” level, then any distributions to the shareholder(s) pay captial gains taxes on their personal level.

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.

Cashier’s Check – A check drawn on the bank’s own funds. It is often used to close a sale because there is generally no waiting for the check to clear.

Caveat Emptor – “Let the buyer beware”.

CBR – Confidential Business Review.

Certified Check – A personal check guaranteed by the bank. The bank holds the necessary funds and will not accept any withdrawals against the certified amount. The bank also will not usually honor a stop payment on a certified check.

Chattel (U.C.C.) Search – A chattel is an article of personal property and it includes both animate and inanimate property. U.C.C. stands for the Uniform Commercial Code which governs the granting of security agreements. A chattel search is a review of the appropriate county and Secretary of State Records in regard to any liens against chattels, tax liens and judgments.

Chattel Mortgage – A mortgage on personal property (not real estate). A mortgage on equipment would be a chattel mortgage.

CIM – Confidential Information Memorandum.

Client – An entity with which a Business Broker has a fiduciary relationship.

Closing – When all the details of the business sale are completed and the money distributed to the seller, seller’s agents, creditors and others.

Closing Documents – The legal documents that are part of a business closing. They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreement, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.

Closing Statement – A statement which contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.

Co-Brokerage – An agreement between two or more Business Brokers for sharing services, responsibility and compensation on behalf of the client.

Co-Business Broker – A Business Broker who shares services, responsibility and compensation on behalf of a client.

Co-Mingling – When an agent mixes the funds of a buyer or seller with his/her own in a “trust account”. This is against the law in most areas and in most states. Licensed brokers may lose their license because of co-mingling.

COE – Close of escrow.

Collar – The ceiling and floor of the price fluctuation on an underlying asset. For example, the price fluctuation where stock in part of the consideration; or, the fluctuation in the amount of trued-up working capital compared to estimated working capital.

Conditional Sales Contract – This is different than a chattel mortgage. Title to the goods, fixtures and equipment or the business itself is not transferred to the buyer, and remains with the seller, until the terms of the contract have been met. This generally means when all the payments have been made.

Conditions to Closing – Certain obligations that must be fulfilled in order to legally require the other party to close the transaction. Other than conditions to closing relating to corporate approvals and governmental filings and approvals, compliance with a particular condition to closing may be waived by the party that benefits from the condition.

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.

Contingency – A clause in a agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event. For example, the sale of the business is contingent upon the buyer obtaining financing.

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.

Conveyance – CONVEYANCE – A transfer of title.

Customer – A person to whom a debt is owed by another person who is called the debtor.

DBA – “doing business as” – an identification of the trade name of the business, which may differ from the legal corporate name. Also known as a “fictitious name.”

Demand Note – A promissory note that has no set time period for repayment and can be called due by the holder at any time.

Directors – Those who are elected by the stockholders to manage the affairs of a corporation. Shareholders elect directors; directors elect officers; officers manage the day-to-day affairs of a corporation.

Discharge of the original Contract – The following 16 events would lead to the discharge of the original contract:

Disclaimer – A statement that attempts to limit liability in the event information is inaccurate.

Discretionary Earnings – 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 – Owner’s total compensation for those services which could be provided by a sole owner/manager.

Duress – Unlawful constraint exercised upon a person whereby he/she is forced to do some act against his will.

Earn-Outs – An agreement in the sale of a company where the buyer agrees to pay the seller consideration in the future (typically cash or stock) based upon certain future events or performance of the business post-close. Because earn-out payments are contingent on the future performance of the acquired company, they are not included in the purchase price.

Earnest Money – A sum of money given to bind an agreement or an offer. It is usually refundable, but might be non-refundable or partially refundable.

Economic Life – The “profitable” life of fixtures and equipment or any improvement; this life could be greater or less than the depreciable life for income tax purposes.

Escalation Clause – A clause, generally in a lease, that provides for an increase in the rent at a specified time.

Escrow – A deed, a bond, money or other piece of property delivered to a third person to be delivered by him/her to the grantee only upon the fulfillment of a condition. A portion of the consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied toward future indemnification claims by the buyer. After a specified period of time, any consideration remaining in the escrow or holdback account is released to the seller.

Escrow Period – The length of time (in months) after the closing date that the escrow is held before being released to the seller.

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. (See Agency Listing)

Execute – To complete, to make, to perform, to do, to follow through; to execute a contract; to make a contract: especially signing, sealing and delivery.

Exlusive Listing With a Crave out or partial Carve Out – The business broker has the sole right to represent the Seller in the sale of the business. However, if the Seller sells the business to one, or more, named Buyer Prospects, the Business Broker receives: – No commission if that buyer prospect was fully carved out. – Partial commission if that that buyer was partially carved out; that is the broker assists the Seller and Buyer to complete the transaction, but the fee is reduced or a fixed fee is stipulated in the listing agreement. This listing is taken when the Seller is convinced that a specific person will buy their business and won’t list because of that. Most of the time the person who was carved out doesn’t buy the business. The business Broker should try to limit the time that Buyer is excluded (e.g. 30 days).

Fictitious Name – The name of a business, in most areas, this name is filed with a state county or local government agency to be legally effective.

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

Financing Statement – A recorded document filed generally in the secretary of state’s office of the state and shows that there is a lien against the fixtures and equipment (personal property) of the business.

Finders Fee – An amount paid to another party for locating and referring a client or customer. If this is for debt or for the sale of equity, then a Business Broker must meet the SEC’s legal definition to be paid a commission.

Franchise – The right or license granted to an individual or group (franchisee) to market a company’s (franchisor’s) goods or services in a particular geographic territory.

Graduate Lease – A lease that calls for periodic increases in the rent.

Hard Assets – Also referred to as “Tangible Assets”) Those assets which are material or physical (e.g. inventory, equipment, tools, vehicles, real estate, leasehold improvements).

Indemnification – Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.

Indemnity – Payment that compensates for an incurred loss or damage.

Instrument – A written legal document, created to affect the rights of the parties.

Intangible Asset – That which has no physical existence but represents value, such as goodwill, going concern value, business trade name. (See Blue-Sky)

IOI – IOI – Indication of interest (letter from Buyer Prospect)

Irrevocable – Incapable of being recalled or canceled; unchangeable.

Joint Tenancy – Same as Tenancy in Common, but if one party dies, his or her title passes to the other surviving joint tenant(s), and not to the heirs of the decedent.

Joint Venture – A business arrangement between two or more persons. Similar to a partnership except that it exists to undertake a single project.

ease – 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.

Leasehold Improvements – Any article or fixture that is attached to land or buildings.

Legal Description – The legal identification of real property.

Legal Object – The legal identification of real property.

Lessee – LESSEE – A tenant; one who has a right to occupy the premises by virtue of a lease.

Lessor – A landlord; one who grants a right to the Lessee to occupy the premises by virtue of a lease.

Letter Of Intent – A description of the key points in a potential acquisition of a business, drafted to see if the parties are in general agreement on key issues before proceeding further in negotiations, and is generally designed not to be legally binding on either party. Sometimes buyers or sellers will use a more informal Memorandum of Understanding to identify the key points of a potential business purchase.

Offset (Set-Off) – A deduction by one against a claim of another; e.g. unknown claims against the assets purchased by a buyer may be “offset” against the obligation the buyer owes to the seller (seller financing).

Open Listing – A listing which is non-exclusive; may be given to any number of agencies without obligation to compensate any of them except the one who first secures a Buyer ready, willing and able to meet the terms of the listing, or who secures the acceptance by the Seller of a satisfactory offer.

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.

Owner – A generic term used in business brokerage to represent the proprietor, general partner or controlling shareholder (singular or plural as appropriate) of a business enterprise.

Owner’s Salary – The salary or wages paid to the owner, including related payroll burden.

Owner’s Total Compesations – Total of an owner’s salary and perquisites, after the compensation of all other owners has been adjusted to market value.

Partnership – A business relationship between two or more persons who join together to contribute to the capital and/or operations of an enterprise, and share the profits and losses (also, see Limited Partnership). Partnerships must lack two or more of the four corporate characteristics (see Corporations) to be taxed as such.

Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

Personal Property – Any property which is not real property; that which is not permanently affixed to the land.

Pocket Listing – Anyone can sell the business. There is no written agreement. The business broker should not advertise the business is for sale because they do not have written authorization to do so. The business broker runs a big risk of not being able to prove that they didn’t “damage” the business if work gets out that it is for sale, and the breach in confidentiality is traced to the business broker. Also, good luck getting paid.

Points – In the language of the loan business, a point is one percent of the amount of the loan.

Post Closing Working Capital Adjustment – In a merger and acquisition transaction, a working capital adjustment typically represents a pre-determined amount of working capital the selling company must have on the books as of the closing date. If the actual amount is more than the pre-determined target amount, the purchase price is increased by the excess. If it is less, the purchase price is decreased.

Power of Attorney – An instrument authorizing a person to act as the agent of the person granting it. A general power of attorney authorized the agent to act generally on behalf of his/her principal; a special power of attorney limits the agent to a specific or particular act.

Principal – The employer of an agent. Also, a sum of money owed excluding any accrued interest.

Promissory Note – A signed written instrument which acknowledges a debt with the promise to pay the debt on specified terms, (i.e. payment amount, payment date(s), interest rate).

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, buyer and seller representations, warranties, and indemnification’s, and so on.

Referree – A Business Broker who receives introductory information which leads to a client relationship.

Referring Business Broker – A Business Broker who provides introductory information which leads to a client relationship.

Referror – A Business Broker who provides introductory information which leads to a client relationship. (also see Referring business broker).

Release – The relinquishment of some right or benefit by a person or entity who already has some interest or right therein.

Representations and Warranties – Specific assurances in a purchase and sale agreement stating that certain statements are true. The purchase and sale agreement also includes specific remedies should assurances made turn out to be false or inaccurate.

Rollover – The amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar value of equity retained.

S Corporation – A small business corporation which is treated differently than a C Corporation for income tax purposes. Normally, it can be used by a corporation with 75 or fewer domestic shareholders when the corporation has only one class of stock. Individuals, another S Corporation, estates, certain trusts, certain financial institutions and tax exempt organizations may own shares in an S Corporation. An S Corporation may own 100% of a C Corporation. If all the statutory requirements are met, the shareholders can elect to have most of the corporation’s income and deductions flow through to the shareholders in a manner similar to the taxation of a partnership.

Security Agreement – The agreement given by a debtor to a creditor giving the creditor a resource to look to in case the debtor fails to pay the principal obligation.

Seller Note – A note payable or loan to the shareholder(s) or owner(s) of a business provided in the sale or transition of a company by the buyer. Seller financing is typically used to bridge a valuation gap either where other forms of financing are not available or where a buyer desires to preserve the borrowing ability of the selling company for secured financing. Seller financing is typically unsecured and subordinated below all other debt.

Simple Interest – The interest on principal only as compared to compound interest, which is interest on both principal and accumulated interest.

Single-Party Listing – SINGLE-PARTY LISTING: The terms are established if we sell it to one (or more) specific Buyer Prospects. We are not allowed to advertise it or tell anyone else the business is for sale; it is “restricted” to the people/companies shown on the agreement. If we do not sell it to the specific Buyer Prospect(s), then the listing terminates. Obviously, others and the Seller can bring the buyers as well. We use “Single-Party” listings to get a “Exclusive” listing. If we have any kind of plausible Buyer, who will want to look at the business, we use that to get a relationship with the Seller. If the Buyer we bring doesn’t buy it, we start to “walk away” from the seller. The Seller says “Hey, where are you going?” We say “Hey, our listing terminated and we do not have the right to show it or advertise it is for sale, so good luck.” Then they say “Wait a minute, I like the way you operate, let’s keep going.” At that point we convert it to an “Exclusive Listing.”

Sole Proprietorship – A business owned by one person or married persons. The owner is personally liable for the debts of the business. The business is not incorporated.

Statute Of Frauds – State law which provides that certain contracts must be in writing in order to be enforceable by law; e.g. the sale of real property, a lease of real property for more than one year, broker’s authorization to act as an agent on behalf of his/her principal.

Stock Sale – The buyer purchases the stock in a corporation so the corporation is acquired in whole and the buyer obtains all assets and liabilities. Buyer gets no step up in basis in the underlying assets in the corporation (unless a not often used tax election is made).

Structure (Transaction Type) – The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the form of either cash or stock. The parties could also merge by exchanging stock.

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 tenant’s right to sublease to a new tenant. This is different from a “master lease” where the lessee has greater control over subletting the property.

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

Survival Period – The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying the buyer (e.g., claims by the buyer must be made on or before that date).

Synergy – The post-acquisition performance, in which the profitability of the continued entity is greater than the sum of the profitability of the individual entities before the acquisition.

Tenancy In Common – Two or more persons holding an undivided interest in the same property. Each tenant can dispose of his/her undivided interest by deed or by will; upon death, the interest descends to the heirs. (See Joint Tenancy)

Terms with Special Legal Meaning – Double Materiality Scrape, Fair Presentation, In All (Material) Respects, Knowledge, Material Adverse Effect, Operation in Ordinary Course, Sandbagging, 10b-5 Full Disclosure, etc. You should ask the attorney, who writes these, exactly what they mean.

Title – 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.

Title Insurance – Insures the interest of the buyer or mortgagee in real estate.

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.

Uniform Commercial Code (U.C.C.) – State laws which regulate the transfer of personal property. Article Nine of the U.C.C. deals with transactions which are intended to create a security interest in personal property.

Valid – Legally binding.

Void – VOID – To have no force or effect; that which is unenforceable

Waive – To relinquish or abandon; to forego a right to enforce or require anything.

Warrant or Warranty – To legally assure or a legal or binding promise.

Without Recourse – WITHOUT RECOURSE – The lender can only look to the security for the debt and cannot go after the buyer personally in the case of default. Often bank loans to closely-held businesses require “personal guarantees” of the business owner(s).