Business Brokerage Terms

Adjusted Book Value
The Book Value (equity) of a company after adjusting the values of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet.

Adjusted Earnings
The earnings of a business after adjustments for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and any other expenses that are not essential for the successful ongoing operation of the business.

Asset Approach
A way of estimating the value of a business ownership interest using one or more Valuation Methods based on the Adjusted Book Value of the company.

Asset Sale
A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.

Base Year
The company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management.

Blue Sky
Any intangible portion of a price, above the maximum Good will, that cannot be reasonably supported through the application of established Valuation Methods.

Book Value
The value, net of depreciation, at which an asset appears on a company’s balance sheet.

Capital Structure
The mix of invested equity and debt financing of a business enterprise.
Capitalization (Cap) Rate (CR)

Cap Rate = NOI/Purchase Price.
Also used as a multiple or divisor used to convert a single period (usually a year) of anticipated economic benefits into a present economic value.

Capitalizing Net Income
Determining the value of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (investor's required ROI).

• Interest
• Taxes
• Depreciation
• Amortization
• Owner’s Compensation
• Owner’s Fringe Benefits
• One-Time Expenses

Certified Business Intermediary (CBI)-
The designation awarded by the International Business Brokers Association (IBBA) to members that have satisfied the educational requirements and conform to the ethical standards of IBBA.

Deal Structure
The combination of types of payment by which the purchase of a business is accomplished. It can include cash, promissory notes, stock, consulting agreements, earn out provisions and covenants not to compete. The sale can take the form of an Asset Sale or a Stock Sale.

Discount Rate
A rate of return used to calculate the present value of multiple periods (usually years) of payments.

Discretionary Earnings
See Cash Flow above.

Earn out
The portion of the purchase price that is contingent on the future performance of the business. It is payable to the seller after certain predefined levels of sales or income are achieved in the year(s) after acquisition.

Fair Market Value
The estimated price at which an asset or service would pass from a willing seller to a willing buyer, assuming that both buyer and seller are acting rationally, at arm’s length, in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.

Fixed Interest Rate
An interest rate that does not fluctuate over the term of the loan.

Going Concern Value
The gross value of a company as an operating business. This value may exceed or be at a discount from the Liquidation Value. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plan and the necessary licenses, systems and procedures in place.

Goodwill
The amount by which the price paid for a company exceeds the company’s Adjusted Book Value of the underlying tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income.

Income (Income Based) Approach
General way of determining the value of a business, business ownership interest, security or intangible asset using one or more methods that calculate the present value of anticipated future income.

Intrinsic Value
An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.

Investment Value
The value to a particular investor based on individual investment requirements and expectations.

Liquidation or Liquidating Value
The estimated value, net of liabilities, of a company based on the market value of its assets.

Market (Market-Based) Approach
General way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.

Net Book Value
With respect to a business enterprise, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.

Present Value
The value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (Discount Rate).

Pro Forma Financial Statements
Hypothetical financial statements. Financial statements as they would appear if some event, such as increased sales or production, had occurred or were to occur. Also used to make projections for future years.

Projection
Prospective financial statements that present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.

Recasting
Financial recasting eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decisions of the current owner and may not represent financing preferences of a new owner. Recasting provides an economic view of the company and allows meaningful comparisons with other investment opportunities.

Residual Value
The estimated market value of an asset at the end of the period being considered.

Return on Investment (ROI)
The rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.

Stock Sale
A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

Transaction Value
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 is not limited to all remuneration for tangible and intangible assets such as: furniture, equipment, supplies, inventory, Working Capital, non-competition agreements, customer lists, employment and/or consulting agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, Earn outs and future considerations.

Valuation Approach
A general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more Valuation Methods. There are three overall approaches generally used to value a business: Asset Approach, Income Approach and Market Approach.

Valuation Method
Under a chosen Valuation Approach, there are various specific methods to determine value.

Variable Interest Rate
An interest rate that adjusts periodically to a predefined margin above or below an index rate. A commonly used index is the bank prime rate.

Working Capital
The excess of current assets over current liabilities.

Commercial Lease Terms

PARTY & PROPERTY (RECITALS)

Parties
The official names of the tenant and landlord.

Lessor or Landlord
The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.

Lessee or Tenant
The lessee is the person leasing the space; the tenant.

Premises
Describes the space you are renting. Verify that you understand how the space is assigned and what specifically you are paying rent on.

MONEY PROVISIONS

Term
Explains when the lease begins and ends. It may have initial term and renewal term if applicable. This section may also describe how the lease may be re-negotiated.

Rent
Explains how the rent is calculated, including common area maintenance (CAM) and other costs associated with the lease. It may also contain any escalations in rent.

Gross Square Feet
The total square footage of the building or office being leased.

Net Leasable Area (Rentable Square Feet)
The area which rental payments are based. Generally excludes common areas and those designated for heating or cooling of the building.

Common Area Maintenance (CAM)
This term describes costs for areas in a building which are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways and walkways. Most Landlords add CAM costs to square footage costs to calculate lease payments

Base Year
The landlord agrees to pay an expense amount based on a base year (typically the first year) and the Tenant pays the increase in expense for subsequent years.

Load Factor
Load Factor is a method of calculating total monthly rent costs to a tenant that combines usable square feet and a percentage of square feet of common areas. Usable square feet + percentage of common area square feet = rentable square feet.

Utilities
If utility costs are included in the lease, it explains how they are distributed among the tenants. In some cases, each tenant may pay separately for each utility. If the tenant is paying the utilities, this section may explain the requirement to pay them and what happens if they are not paid on a timely basis. This protects the landlord if the tenant fails to pay.

HVAC
An abbreviation for “heating, ventilating and air conditioning.” May be listed under Utilities

Parking
Describes the parking available for the leased space. Some lease documents differentiate between where employees may park and general customer parking.

Taxes and Insurance
Discusses who pays property taxes and insurance on the property. This section usually includes a requirement that the Tenant provide proof of insurance on property and equipment in the leased space and liability insurance, to protect the Landlord.

Deposit
Describes the security deposit the Tenant is required to provide and the circumstances under which it may be forfeited or returned.

Options
Describes the options you may have to rent additional space in the building if it becomes available or options to buy the property.

Tenant Improvements
This is an allowance provided by Landlord to be used by Tenant to construct the space to meet Tenant’s space requirements.

Turn-key
An office or building that is ready to occupy. In most cases, this a commitment by the Landlord to bear the cost of any build-out.

Rent Abatement
Decrease in rent due to interrupted or inhibited actions of the Landlord.

TYPES OF LEASES

Fully Serviced Lease
A lease in which the rental payment includes other services, such as utilities, maintenance and lawn/snow removal services.

Gross Lease
A lease in which the Landlord agrees to pay for all common expenses (CAM), including utilities, repairs, insurance and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.

Net Lease
A lease which the Tenant pays the square footage costs, CAM costs and all other ownership expenses, including utilities, repairs, insurance and property taxes.

Double Net Lease
A lease in which taxes and insurance expenses are included in the lease payment. The Landlord pays maintenance costs.

Triple Net Lease
A lease which includes all taxes, insurance and maintenance costs are in the monthly payment.

USE AND RESTRICTIONS

Use/Restrictions
Lists the restrictions on the use of the premises, including: signs, hours of use and limits on occupancy and sub-lessees.

Maintenance
Describes who is responsible for making and paying for maintenance and repairs. Most leases require Tenants to pay for repairs due to “wear and tear” (common usage), with the Landlord being responsible for extraordinary repairs due to major damage or failure of equipment.

Right of First Refusal
This is an agreement by Landlord to provide Tenant the first right to lease space that becomes available in their building.

RELATIONS WITH 3rd PARTIES

Destruction/Condemnation
These clauses describe what happens if the leased space is destroyed or condemned.

Subordination, Non-Disturbance
Describes rights of the Tenant if the Landlord’s lender forecloses on the property. This section protects the Tenant against being ejected by a new Landlord or the bank.

Assignment/Subletting
Some leases have a separate section describing the conditions under which you can sub-let (divide) the space.

Estoppel
Explains what happens if there is a change in the Landlord’s situation to verify what the Tenant is living up to his/her duties as a Tenant.

ALLOCATIONS AND RISK

Indemnify of Lessor
The Lessor is protected against the Lessee from any claims, actions, damages, liability and expense in connection with loss of life, personal injury and/or damage to property arising at the Leased Premises.

THE REMEDIES

Defaults and Remedies
Describes what happens if one party defaults (breaks the agreement) and the remedies available to the other party.

Hold Over
Explains what happens if the Tenant does not leave at the end of the lease.

Attorney Fees
Agreement about who pays attorney fees in the event of a lawsuit between Landlord and Tenant.

Dispute Resolution
Some leases provide for alternate forms of dispute resolution, like mediation and arbitration. Have an attorney review the terms of the lease to explain any specific terms that you don’t understand and to look for issues that might be a problem for you or are not what you thought you agreed to.