Glossary of Accountancy Terms & and their Meaning
UK Finance Glossary
Lamonts Glossary
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.