Bizsales

Glossary of Accountancy Terms & and their Meaning

Net Profit, Adjusted Net Profit, Owners Discretionary Earnings

An acquirer is buying the ability to create future profit, but what is the underlying level of true profit? The net profit used for a valuation and by business brokers is usually based on the previous year’s maintainable net profit that is, the profit a buyer is likely to maintain after taking into account the seller’s personal and extraordinary costs. Inevitably assumptions will need to be made and questions asked. A sustainable profit figure will be assumed using the previous year’s net profit using the company's historical trading accounts as a base, but in many cases, a more current and accurate figure for the gross and net profit will be recalculated using the current management accounts. The adjusted net profit would then be identified by calculating the net profit to a buyer, rather than that which the previous owner may have enjoyed. This figure takes into account "ad ons" such as the cost of replacing management or relocating the business and "ad backs" called Owners Discretionary Earnings such as the seller's salary, seller's finance charges, and many other extraordinary costs that are not crucical or essential in the running of the businesses.

Asking Price
The price at which an item is offered for sale. Based on the seller and broker's opinion this is the value that we consider the business is worth

Furniture Fitting and Equipment.
All the company's Furniture Fitting and Equipment valued at Net Book Value

Net Book Value
The net value of an asset. Equal to its original cost (its book value) minus depreciation and amortization. also called net book value and depreciated cost.

...plus stock at Valuation
Normally used in retail type businesses with a high amount of carried stock. On a agreed day prior to the completion of the sale, a stock take is taken of the business and a price agreed for the stock, based on the purchase price of the stock. This is normally done by the buyer and seller, but can also be completed by an independent valuer. This term is used as it stops a seller winding down stock prior to completion of a sale, thus affecting the future turnover of the business.

...plus balance sheet
Most business are sold to include the Furniture Fitting and Equipment. However some companies may have other items on their list of assets such as Intellectual property, Trade Marks, Patents etc. Business which have a high debtor book i.e. customers who owe them money would be sold in this way.

Verified / Non Verified
As part of the listing process a Broker requests certain basis documents to "verify" that that company is legally established and correctly trading. The check list would be a very basic version of what would be used in a Due Diligence on a company. The information sought by the broker may include copies of Bank Account statements, the last 2-3 years accounts submitted to the tax authorities, and a copy of the lease if a leasehold building.

The present of these document, along with other factors would indicate to the broker that a business is in principle operating correctly, and the broker will tag the business has being "Verified".

The absence of these documents does not in itself indicate that a business is not operating correctly. If a business is tagged as "Not Verified", then the owner has still not convinced the broker that everything is operating correctly. Thus any information supplied by BizSales should be treated with caution, as it has been supplied by the business owner and it has still not passed the basic checks that a BizSales Broker

Whilst Brokers are experienced business people, it is still possible to dupe a broker into thinking that a business is trading correctly when it is not. The checks done by a broker are not infallible. The fact that BizSales indicate Verified or Non-Verified should never be used in any circumstance as indicating any validity or otherwise of a business or the information supplied. The only way to do this is by a propper due-diligence audit completed by a professional in this area, which any buyer of a BizSales businesses is contractually obliged to do so.