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Asset Sale: A form of acquisition whereby the seller of a corporation 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.
Book Value: The value at which an asset is carried on a company’s balance sheet. See recast Book Value.
Capitalizing Net Income: Determining a future value for the Company by dividing the last year’s proforma net income by the required Return on Investment (ROI).
Cash Flow: The excess of sources of cash over used of cash.
Cash Flow Statement: An analysis of all the changes that affect the cash account during an accounting period. These changes may be shown as either sources or used of cash.
Deal Structure: The form by which the purchase, for example, of a business is accomplished. It could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. The sale could take the form of an asset sale or a stock sale. See those definitions.
Earnout: The portion of the purchase price that is contingent on future performance. It is payable to the sellers only when certain pre-defined levels or sales or income are achieved in the years after acquisition.
Fair Market Value (FMV): The price at which a business passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational, have a reasonable knowledge of relevant facts and are not acting under duress.
Fixed Interest Rate: An interest rate which does not fluctuate with general market conditions.
Discretionary Cash Flow: Cash available for distribution before taxes and before the effects of financing. Calculated as adjusted income before interest and depreciation less expenditures required for working capital and capital equipment.
Going Concern Value: The gross value of a company as an operating business. This value may exceed or be at a discount from the liquidating value.
Goodwill: The amount by which the price paid for a company exceeds the company’s estimated net worth at book value of the company’s underlying assets and liabilities.
Liquidating Value: The value of a company based on the market value of its assets, net of liabilities.
Net Cash Flow: The same as Discretionary Cash Flow except that it is calculated after deducting financing costs and taxes.
Present Value: The value today of a future payment, or stream of payments, discounted at some appropriate compound interest (discount) rate.
Proforma Statements: Hypothetical statements. Financial statements as they would appear if some event, such as issssncreased sales or production, were to occur.
Recasting: Financial recasting eliminates from the historical financial presentation items such as perquisites, 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.
Recast Book Value: The values of a balance sheet item (asset, liability, or equity) after recasting adjustments have been made.
Residual Value: The estimated market value of the Company at the end of the last proforma year.
Return on Investment (ROI): The rate of return at which the sum of the discounted future cash flows for the proforma years plus the discounted residual value equals the initial cash outlay. Also referred to as Internal Rate of Return (IRR).
Stock Sale: A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Pretax net profit plus non-cash expenses, discretionary expenses, costs of financing, one-time expenses, and all compensation paid to a single owner/operator, less employee equivalent compensation to replace additional working owners and any known increases in fixed expenses.
Variable Interest Rate: An interest rate that moves at a pre-defined level 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.