Glossary: key terms in the business sale process
Selling a business is a complex process that involves a range of specific terminologies.
This glossary provides an overview of the key terms used in the world of business sales to help readers better understand the process.
- Confidentiality Agreement (NDA - Non-Disclosure Agreement): A legal contract between two or more parties establishing that certain shared information must remain confidential. It prohibits disclosure or use of the confidential info beyond agreed purposes. Commonly protects trade secrets, business plans, financial data, and other sensitive info.
- Right of First Refusal Agreement: An agreement giving the seller the first opportunity to buy the company if the buyer decides to sell it later.
- Asset Sale: A transaction where the buyer purchases specific assets of the business (equipment, inventory, customers) rather than the whole legal entity.
- Articles of Incorporation and Bylaws: Legal documents establishing the company’s legal structure and operational rules.
- Deed of First Refusal: Similar to the Right of First Refusal Agreement—seller gets the first chance to buy if the buyer sells.
- Deed of Sale: Legal document specifying terms and conditions of the business sale, including financial details and responsibilities.
- Draft Contract: The preliminary version of the sales contract, negotiable before final agreement.
- Business Sale Broker: A specialist intermediary who helps sell a business by identifying potential buyers and managing negotiations.
- Working Capital: The difference between current assets (cash, inventory, receivables) and current liabilities (payables, accrued expenses).
- Business Transfer: The act of transferring control and ownership of a business from seller to buyer.
- Customer Base: The collection of customers and business relationships, often a valuable asset for buyers.
- Closing: The final phase where all conditions are met, legal documents signed, and the sale is officially completed.
- Transaction Completion: The moment all documents are signed and the sale is formally concluded.
- Non-Compete Agreement (Covenant Not to Compete): Seller agrees not to compete with the sold business for a set time or in a defined area.
- Virtual Data Room (VDR): A secure online platform to store and share confidential documents during transactions like M&A.
- Profit Distribution: Transfer of profits or dividends from the company to the seller before the sale.
- Due Diligence: Thorough evaluation by the buyer examining financials, operations, contracts, etc.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Financial metric representing gross profit before interest, taxes, and depreciation.
- Earn-Out: Part of purchase price tied to future company performance, usually financial goals.
- Escrow: A bank account managed by a third party holding funds until all sale conditions are met.
- Cash Flow: Net money generated or used by daily operations.
- Free Cash Flow: Cash left after covering operating expenses and working capital investments.
- Goodwill: Intangible value like reputation, brand, and loyal customers.
- Contingent Legal Counsel: Lawyer paid only if the sale closes successfully.
- Letter of Intent (LOI): Preliminary document expressing intent to negotiate or collaborate, usually non-binding.
- LOI: See “Letter of Intent.”
- M&A (Mergers and Acquisitions): Transactions where companies merge or one acquires another.
- EBITDA Multiple: A multiplier used to value a company based on its EBITDA, varying by industry.
- NDA: See “Confidentiality Agreement.”
- Promissory Note: Written promise by buyer to pay seller a specific amount by a future date.
- Non-Binding Offer (NBO): Preliminary purchase proposal that does not legally bind the buyer but shows serious interest.
- Liabilities: Financial obligations like loans, debts, and other responsibilities.
- Long-Term Liabilities: Financial obligations due in the medium to long term.
- Return on Investment (ROI): Metric measuring investment profitability after purchase.
- Option Expiry: Deadline for buyer to exercise options in the sale agreement.
- Market Valuation: Estimate of company value based on comparable transactions.
- Sales Multiple Valuation: Valuation method using a multiple of revenue or earnings.
- Asset-Based Valuation: Valuation based on company’s assets and liabilities.
Note: this glossary is continuously updated.
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