Glossary of Financial Lingo

Abandonment option:
The option of terminating an investment earlier than originally planned. This option can increase its NPV and thus make it more attractive, based on the idea that costs can be contained in the worst case, but if things are going well then continued investment can be made.

Abnormal returns:
Part of the return from an investment that is not due to systematic influences (market wide influences). In other words, abnormal returns are above those predicted by the market movement alone and come from the outperformance of the firm relative to the market.

Absolute priority:
Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.

Accelerated depreciation:
Any depreciation method that produces larger deductions for depreciation in the early years of a project’s life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Accounting earnings:
Earnings of a firm as reported on its income statement.

Accounting insolvency:
Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books, however  its quite possible to continue to trade while technically insolvent, depending on local laws and proper risk management.

Accounting liquidity:
The ease and quickness with which assets can be converted to cash.

Accounts payable: (Creditors)
Money owed to suppliers.

Accounts receivable: (Debtors)
Money owed by customers.

Accounts receivable turnover:
The ratio of net credit sales to average accounts receivable, a measure of how quickly customers pay their bills.

Acid-test ratio: (Quick ratio)
The ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Acquiree:
A firm that is being acquired.

Acquirer:
A firm or individual that is acquiring something.

Acquisition of assets:
A merger or consolidation in which an acquirer purchases the selling firm’s assets but not the entity. Typically done to prevent historic liabilities/potential claims from having an impact on future earnings.

Acquisition of stock:
A merger or consolidation in which an acquirer purchases the acquiree’s stock. In contrast to the acquisition of assets above. The choice here depends mostly on ring-fencing risk and the treatment of Capital Gains Taxes.

Adjusted present value (APV):
The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out.

After-tax profit margin:
The ratio of net income to net sales.

After-tax real rate of return:
Money after-tax rate of return minus the inflation rate.

Aging schedule:
A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

Amortization:
The repayment of a loan by installments.

Annual report:
Yearly record of a publicly held company’s financial condition. It includes a description of the firm’s operations, its balance sheet and income statement. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.

Arm’s length price:
The price at which a willing buyer and a willing unrelated seller would freely agree to transact.

Articles of incorporation:
Legal document establishing a corporation and its structure and purpose.

Asset/equity ratio:
The ratio of total assets to stockholder equity.

Asset activity ratios:
Ratios that measure how effectively the firm is managing its assets.

Asset-based financing:
Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset turnover:
The ratio of net sales to total assets.

Asset pricing model:
A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset.

Assets:
A firm’s productive resources.

Asset requirements:
A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital.

Auditor’s report:
A section of an annual report containing the auditor’s opinion about the veracity of the financial statements.

Authorized shares:
Number of shares authorized for issuance by a firm’s corporate charter.

Average age of accounts receivable:
The weighted-average age of all of the firm’s outstanding invoices.

Average collection period, or days’ receivables:
The ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average cost of capital:
A firm’s required payout to the bondholders and to the stockholders expressed as a percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital. See also Weighted Average Cost of Capital (WACC)

Average tax rate:
Taxes as a fraction of income; total taxes divided by total taxable income.

Accounts Receivable:
how much money is owing to the business.

Angel Investors:
individuals that will lend money to businesses in its early stages.

Accumulated Depreciation:
The depreciation expense for all assets during an accounting period.

Asking Price:
What the seller wants for his business; same as Selling Price.

Balance sheet:
Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners’ equity.

Balance sheet identity:
Total Assets = Total Liabilities + Total Stockholders’ Equity

Bank line:
Line of credit granted by a bank to a customer.

Bankruptcy:
State of being unable to pay debts. Thus, the ownership of the firm’s assets is transferred from the stockholders to the bondholders.

Bankruptcy cost view:
The argument that expected indirect and direct bankruptcy costs offset the other benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Bankruptcy risk:
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Bar:
Slang for one million dollars.

Basic business strategies:
Key strategies a firm intends to pursue in carrying out its business plan.

Basic IRR rule:
Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate.

Bear market:
Any market in which prices are in a declining trend.

Before-tax profit margin:
The ratio of net income before taxes to net sales.

Benchmarking:
Comparing the performance of a firm to a set of industry peers (the benchmark). Typically done across a variety of ratios and using both horizontal and vertical analysis. Industry peers are chosen based on size, industry code, location, etc.

Beta:
The measure of a stocks risk in relation to the market. A beta of 0.7 means the stocks’ total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.

Beta equation (Stocks):
The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

Bill of lading:
A contract between the exporter and a transportation company in which the latter agrees to transport the goods under specified conditions which limit its liability. It is the exporter’s receipt for the goods as well as proof that goods have been or will be received.

Block voting:
A group of shareholders banding together to vote their shares in a single block.

Blue-chip company:
Large and creditworthy company.

Blue-sky laws:
State laws covering the issue and trading of securities.

Boilerplate:
Standard terms and conditions.

Bond:
Bonds are debt and are issued for a period of more than one year. The U.S. government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.

Borrow:
To obtain or receive money on loan with the promise or understanding that it will be repaid.

Break-even analysis:
An analysis of the level of sales at which a project would make zero profit.

Break-even lease payment:
The lease payment at which a party to a prospective lease is indifferent between entering and not entering into the lease arrangement.

Bridge financing:
Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.

Bull market:
Any market in which prices are in an upward trend.

Business cycle:
Repetitive cycles of economic expansion and recession.

Business failure:
A business that has terminated with a loss to creditors.

Buyout:
Purchase of a controlling interest (or percent of shares) of a company’s stock. A leveraged buy-out is done with borrowed money.

Balance of Sale:
The amount owing on the purchase price to any third party after your cash down payment.

Balance Sheet:
The financial statement that shows the assets, liabilities, and owner’s equity of an entity at a particular date.

Book Value:
The same as Net Worth.

Business Type:
Code used by brokers affiliated with a multiple listing service.

Building Type:
The kind of building it is.

Call option:
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.

Capital:
Money invested in a firm.

Capital asset pricing model (CAPM):
An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium.

Capital budget:
A firm’s set of planned capital expenditures.

Capital budgeting:
The process of choosing the firm’s long-term capital assets.

Capital expenditures:
Amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment.

Capital structure:
The makeup of the liabilities and stockholders’ equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.

Capitalization:
The debt and/or equity mix that fund a firm’s assets.

Capitalization ratios:
Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.

Capitalization table:
A table showing the capitalization of a firm, which typically includes the amount of capital obtained from each source – long-term debt and common equity – and the respective capitalization ratios.

Cash:
The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker’s Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash budget:
A forecasted summary of a firm’s expected cash inflows and cash outflows as well as its expected cash and loan balances.

Cash conversion cycle:
The length of time between a firm’s purchase of inventory and the receipt of cash from accounts receivable.

Cash cow:
A company that pays out all earnings per share to stockholders as dividends. Or, a company or division of a company that generates a steady and significant amount of free cash flow.

Cash cycle:
In general, the time between cash disbursement and cash collection. In net working capital management, it can be thought of as the operating cycle less the accounts payable payment period.

Cash flow:
In investments, it represents earnings before depreciation , amortization and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and other investment trusts is important because it indicates the ability to pay dividends.

Cash flow coverage ratio:
The number of times that financial obligations (for interest, principal payments, preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation.

Cash flow from operations:
A firm’s net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net income.

Cash-flow break-even point:
The point below which the firm will need either to obtain additional financing or to liquidate some of its assets to meet its fixed costs.

Cash ratio:
The proportion of a firm’s assets held as cash.

Changes in Financial Position:
Sources of funds internally provided from operations that alter a company’s cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.

Common-size analysis:
The representing of balance sheet items as percentages of assets and of income statement items as percentages of sales.

Competition:
Intra- or intermarket rivalry between businesses trying to obtain a larger piece of the same market share.

Compounding:
The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period.

Comprehensive due diligence investigation:
The investigation of a firm’s business in conjunction with a securities offering to determine whether the firm’s business and financial situation and its prospects are adequately disclosed in the prospectus for the offering.

Contribution margin:
The difference between variable revenue and variable cost.

Core competency:
Primary area of competence. Narrowly defined fields or tasks at which a company or business excels. Primary areas of specialty.

Corporate finance:
One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from that firm’s point of view.

Corporation:
A legal “person” that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.

Cost of capital:
The required return for a capital budgeting project.

Cost-benefit ratio:
The net present value of an investment divided by the investment’s initial cost. Also called the profitability index.

Coverage ratios:
Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

Credit analysis:
The process of analyzing information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations. Related: default risk

Credit scoring:
A statistical technique wherein several financial characteristics are combined to form a single score to represent a customer’s creditworthiness.

Creditor:
Lender of money.

Current ratio:
Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.

Capital Stock:
the amount paid by shareholders for their ownership piece in the business.

Cash Flow:
the amount available to the business before income tax, depreciation, interest and owner’s compensation and benefits. Also known as the amount of cash that the business had at the beginning of a period, what they had at the end of a period, and what happened to the difference.

Cash Flow Valuation:
a formula by which the company’s profit, less certain expenses, is multiplied and then used to establish a price.

Costs Of Goods Sold:
the expense incurred to purchase or manufacture the merchandise sold during a period.

Collateral:
the instruments that you provide to guarantee a loan.

Current Assets:
assets that can be turned into cash in a period of less than a year.

Current Liabilities:
liabilities that can be paid in less than a year.

Days receivables: (aka Days’ sales outstanding)
Average time to collect money owed to you by customers.

Days’ sales in inventory ratio:
The average number of days’ worth of sales that is held in inventory.

Debt/equity ratio:
Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt:
Money borrowed.

Debt capacity:
Ability to borrow. The amount a firm can borrow up to the point where the firm value no longer increases. This happens at the point where the cost of debt increases above the ability to service it. The cost of debt increases as more in borrowed because it becomes harder to service interest payments out of cash flows, so lenders compensate by charing higher interest rates to compensate for the additional risk they incur.

Debt displacement:
The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be forced to cut back on borrowing. The optimal amount of leasing depends on the capital structure of the firm and the type and lifetime of the assets being leased.

Debt leverage:
The amplification of the return earned on equity when an investment or firm is financed partially with borrowed money. Also amplifies the risk as more cash must be used to service the debt.

Debt ratio:
Total debt divided by total assets.

Debt-service coverage ratio:
Earnings before interest and income taxes plus one-third rental charges, divided by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one minus the tax rate.

Decision tree:
Method of representing alternative sequential decisions and the possible outcomes from these decisions.

Deductive reasoning:
The use of general fact to provide accurate information about a specific situation.

Default risk:
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an issuer of a bond may be unable to make timely principal and interest payments.

Deferred taxes:
A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid.

Depreciate:
To allocate the purchase cost of an asset over its life.

Depreciation:
A non-cash expense that provides a source of free cash flow. Amount allocated during the period to amortize the cost of acquiring Long term assets over the useful life of the assets.

Depreciation tax shield:
The value of the tax write-off on depreciation of plant and equipment.

Dilution:
Diminution in the proportion of income to which each share is entitled, usually happens when more shares are issued and the original shareholder doesn’t follow their rights to buy their proportionate share of the new issue.

Dilutive effect:
Result of a transaction that decreases earnings per common share.

Discount factor:
Present value of $1 received at a stated future date.

Discounted cash flow (DCF):
Future cash flows multiplied by discount factors to obtain present values. The only robust way to value the risk/return from an asset as it allows comparison with any other asset class measured the same way.

Diversification:
Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.

Dividend:
A dividend is a portion of a company’s profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.

Dividend clawback:
With respect to a project financing, an arrangement under which the sponsors of a project agree to contribute as equity any prior dividends received from the project to the extent necessary to cover any cash deficiencies.

Dividend yield (Stocks):
Indicated yield represents annual dividends divided by current stock price.

Dividends per share:
Dividends paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. The number of shares often is determined by a weighted average of shares outstanding over the reporting term.

Convertible Debt:
A method whereby a loan is made, but there is a mechanism by which the Debt can get converted into Equity. Often used to provide easy early-stage financing where the value of the equity the funder receives is determined by the valuation of the next financing round.

Down Payment:
How much the Seller “wants” as a down payment. If the selling price and Down payment are the same then the owner is looking for an all-cash deal.

Due Diligence:
Method by which you will access any and all of the company’s files, records, information and personnel in an effort to confirm that everything that you have been told or led to believe is accurate.

Du Pont system of financial control:
Highlights the fact that return on assets (ROA) can be expressed in terms of the profit margin and asset turnover. Each of profit margin and asset turn can be further broken down into their components, allowing the effect of each line item on ROA to be determined. Highly useful in that the Du Pont analysis clearly shows the link between Income Statement and Balance Sheet in measuring the financial performance of the firm.

Earning power:
Earnings before interest and taxes (EBIT) divided by total assets.

Earnings before interest and taxes (EBIT):
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.

Earnings per share (EPS):
EPS, as it is called, is a company’s profit divided by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Economic earnings:
The real flow of cash that a firm could pay out forever in the absence of any change in the firm’s productive capacity.

Economies of scale:
The decrease in the marginal cost of production as a plant’s scale of operations increases.

Economies of scope:
Scope economies exist whenever the same investment can support multiple profitable activities less expensively in combination than separately.

Effective annual interest rate:
An annual measure of the time value of money that fully reflects the effects of compounding.

Employee stock ownership plan (ESOP):
A company contributes to a trust fund that buys stock on behalf of employees.

Equity:
Represents ownership interest in a firm.

Equity options:
Securities that give the holder the right to buy or sell a specified number of shares of stock, at a specified price for a certain (limited) time period.

Erosion:
An innovation that has a negative impact on one or more of a firm’s existing assets.

Ethics:
Standards of conduct or moral judgement.

Expected return:
The return expected on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta. For international investments, additional risk premiums may exist. Smaller cap stocks typically have an additional premium due their typical lack of liquidity.

External finance:
Finance that is not generated by the firm: new borrowing or a stock issue.

Equity Financing:
A method by which money is lent, but instead of the lender being paid back with a payment schedule they receive a percentage of the business and they are paid back through the profits of the business.

Factor:
A financial institution that buys a firm’s accounts receivables and collects the debt.

Factoring:
Sale of a firm’s accounts receivable to a financial institution known as a factor.

Fair market price:
Amount at which an asset would change hands between two parties, both having knowledge of the relevant facts. Also referred to as market price.

Financial control:
The management of a firm’s costs and expenses in order to control them in relation to budgeted amounts.

Financial distress:
Events preceding and including bankruptcy, such as violation of loan contracts.

Financial distress costs:
Legal and administrative costs of liquidation or reorganization. Also includes implied costs associated with impaired ability to do business (indirect costs).

Financial leverage:
Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity.

Financial plan:
A financial blueprint for the financial future of a firm.

Financial planning:
The process of evaluating the investing and financing options available to a firm with a view to maximising the valuation of the firm. It includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan.

Five Cs of credit:
Five characteristics that are used to form a judgement about a customer’s creditworthiness: character, capacity, capital, collateral, and conditions.

Fixed asset:
Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition. Fixed assets are often used as security against debt financing.

Fixed asset turnover ratio:
The ratio of sales to fixed assets.

Fixed cost:
A cost that is fixed in total for a given period of time and for given production levels. In the long-term all costs are variable.

Fixed-charge coverage ratio:
A measure of a firm’s ability to meet its fixed-charge obligations: the ratio of (net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid plus long-term lease payments).

Forward cover:
Purchase or sale of forward foreign currency in order to offset a known future cash flow. Typically used to lock in the price of imports and thus protect against exchange rate shocks.

Free cash flows:
Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from operating income line on the income statement) less capital expenditures less the change in working capital. For smaller privately held businesses this is the sum of Net Income, excess Owner’s income, interest and depreciation.

Friction costs:
Costs, both implied and direct, associated with a transaction. Such costs include time, effort, money, and associated tax effects of gathering information and making a transaction.

Funded debt:
Debt maturing after more than one year.

Fair Market Value:
The realistic value at which Assets can be sold on the open market.

Fiscal Year:
A 12-month period that constitutes a company’s financial year and does not correspond to a calendar year.

Fringe Benefits:
In small business transactions, the total amount of non-salary that may have been paid to the Owner, such as car allowance, health benefits, country club fees, expense allowances, bonus, etc. Fringe benefits require careful tax scrutiny.

Full-Time Employees:
Number of employees working full- time for the business.

Gearing:
Financial leverage.

Generally Accepted Accounting Principals (GAAP):
A technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. Shared global accounting standards allow investment performances of a firm in one market to be directly compared (and easily understood) relative to any other firm in any other market.

Geographic risk:
Risk that arises when an issuer has policies concentrated within certain geographic areas, such as the risk of damage from a hurricane or an earthquake.

Globalization:
Tendency toward a worldwide investment environment, and the integration of national capital markets.

Goodwill:
Excess of the purchase price over the fair market value of the net assets acquired under purchase accounting.

Gross profit margin:
Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold.

Growth opportunity:
Opportunity to invest in profitable projects. This means investing in projects whose expected return is higher than the cost of capital for the firm. Doing otherwise destroys value.

Growth phase:
A phase of development in which a company experiences rapid earnings growth as it produces new products and expands market share.

Good Will:
The cost over and above the hard Assets of the business or the amount obtained when subtracting all of the assets from the selling price.

Gross Profit:
The amount obtained when deducting the cost of goods sold from the gross sales.

Gross Sales:
The total revenue generated by the business, including all activity.

Holding company:
A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.

Horizontal analysis:
The process of dividing each expense item of a given year by the same expense item in the base year. This allows for the exploration of changes in the relative importance of expense items over time and the behavior of expense items as sales change.

Income statement (Statement of Comprehensive Income):
A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Incremental cash flows:
Difference between the firm’s cash flows with and without a project.

Incremental costs and benefits:
Costs and benefits that would occur if a particular course of action were taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return:
IRR on the incremental investment from choosing a large project instead of a smaller project.

Interest:
The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio:
The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm’s ability to pay interest. As the amount of capital borrowed goes up, so the income coverage ratio decreases. Lenders then perceive more risk in lending additional capital so the interest rate goes up to compensate for this risk. The result is a firm has an optimal capital structure – borrowing less or more than the optimal decreases the valuation of the business.

Interest coverage test:
A debt limitation that prohibits the issuance of additional long-term debt if the issuer’s interest coverage would, as a result of the issue, fall below some specified minimum.

Internal rate of return (IRR):
Discount rate at which net present value (NPV) investment is zero. The rate at which a bond’s future cash flows, discounted back to today, equals its price.

Intrinsic value of a firm:
The present value of a firm’s expected future net cash flows discounted by the required rate of return.

Inventory:
For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets.

Inventory loan:
A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover:
The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Income Source:
this part indicates what source was used for the figures.

Just-in-time inventory systems:
Systems that schedule materials/inventory to arrive exactly as they are needed in the production process.

Last-In-First-Out (LIFO):
A method of valuing inventory that uses the cost of the most recent item in inventory first.

Lease Expires:
Date that the current lease terminates.

Lease-Hold Improvements:
The improvements have been done on the premises and are considered as an asset.

Liabilities:
The obligations of the company.

Listing Number:
The ID that the business has been given. This number is important because if it is on the broker association multiple listing services any broker can access it.

Liquidation Value:
When you determine what you can get for the Assets if you had to turn each into cash within 30 days.

Long-term Assets:
Assets that can turn into cash.

Long-term Liabilities: 
Debts or other obligations that will not be paid within one year

Leveraged buyout (LBO):
A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

Liquidation:
When a firm’s business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders.

Liquidation rights:
The rights of a firm’s securityholders in the event the firm liquidates.

Liquidation value:
Net amount that could be realized by selling the assets of a firm after paying the debt.

Liquidator:
Person appointed by unsecured creditors to oversee the sale of an insolvent firm’s assets and the repayment of its debts.

Managerial decisions:
Decisions concerning the operation of the firm, such as the choice of firm size, firm growth rates, and employee compensation.

Modeling:
The process of creating a depiction of reality, such as a graph, picture, or mathematical representation.

Marketing:
identifying the business that you are in, pinpointing your customer and providing them with what they need in order to generate profit for the business.

Multiple Method:
Uses the most recent year’s financial statements to establish a Cash Flow figure, then multiplies that figure by a certain factor to arrive at an indicative value of the business. Simple but prone to inaccuracies.

Negotiation:
An interaction between parties with the goal of reaching a mutual understanding.

Net Income Before tax: (PBT)
The profit before taxes obtained by subtracting the Total Expenses from the Gross Profit.

Net Income:
the amount achieved after deducting all expenses and taxes from the Gross Margin.

Non-Seller Financing:
In small business sales, this will refer to the amount that you must borrow or have available in cash.

Note Amount:
In small business sales, the total amount that is to be financed, which is calculated by subtracting the down payment from the selling price.

Note %:
The interest rate that will be charged on the note.

Non-Compete Agreement:
Legal agreement that specifies how long and for what distance the owner has agreed to not re-enter a similar type of business.

Non-Recourse Loan:
A loan in which the lender cannot come after you personally for any shortfall between the amount owing and the assets pledged.

Number of Payments:
Number of months the note repayment is spread over.

Operating cash flow:
Earnings before depreciation minus taxes. It measures the cash generated from operations, not counting capital spending or working capital requirements.

Operating cycle:
The average time intervening between the acquisition of materials or services and the final cash realization from those acquisitions.

Operating exposure:
Degree to which exchange rate changes, in combination with price changes, will alter a company’s future operating cash flows.

Operating profit margin:
The ratio of operating margin to net sales.

Operating lease:
Short-term, cancelable lease. A type of lease in which the period of contract is less than the life of the equipment and the lessor pays all maintenance and servicing costs.

Opportunity costs:
The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up.

Owner Benefit:
In small business sales, the total achieved by adding net income before taxes + Owner’s Salary + Fringe Benefits + Interest Expense + Depreciation + other.

Owner’s Equity:
Assets minus Total Liabilities.

Owners’ Salary:
What salary the business paid the owner/Seller.

Organization Type:
Legal structure of the firm; corporation, limited partnership, S Corporation, Public Company, etc.

Pre-Tax Income:
The amount of money that the business made prior to deducting what is owed for any and all applicable taxes.

Pro Formas:
A financial statement that uses historical data or trends and combines them with predictions for the future to produce financial statements of what the business may look like under certain conditions.

Quick ratio:
Indicator of a company’s financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm’s liquidity and ability to meet its obligations. Also called the Acid Test ratio.

Return on assets (ROA):
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on equity (ROE):
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Reason for Sale:
why the owner has decided to sell the business (retirement, illness, relocation).

Recourse Loan:
Where the business Assets are used as Collateral but you are personally responsible if the business is not able to make the payments and if the Assets provided do not cover the outstanding debt.

Retained Earnings:
The amount of profits held over in the company from previous Fiscal Years, which was left in the company.

Revenue:
All of the income that the company receives. Revision Date: if the information on the listing has been
revised it will note the date this was done.

Sale and lease-back
Sale of an existing asset to a financial institution that then leases it back to the user.

Sole proprietorship
A business owned by a single individual. The sole proprietorship pays no corporate income tax but has unlimited liability for business debts and obligations.

SBA Financing:
Loans that are made through traditional institutions, but partially guaranteed by the U.S. Small Business Administration.

Seller Financing:
This situation indicates that the Seller is willing to carry a Balance of sale.

Shareholder’s Equity:
The difference between the company’s Assets and Liabilities

Skills required:
This section might note “management skills,” “sales skills” or even something more specific.

Sq.Ft./Dim:
The size of the premises in total square feet and the dimensions.

Term loan:
A bank loan, typically with a floating interest rate, for a specified amount that matures in between one and ten years and requires a specified repayment schedule.

Time value of money:
The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

Tax Return:
this term refers to the fact that the numbers are right off the tax return. This is definitely the most accurate way to verify the reliability of the numbers and it is without question the preferred way to evaluate a business.

Terms & Options:
a general outline of the lease terms.

Total Expenses:
total fixed expenses incurred by the business.

Total Owner Benefit:
owner’s salary and other compensation.

Variable Costs:
is the cost that varies, in total, in direct proportion to changes in the level of activity.

Venture capital:
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Vertical acquisition:
Acquisition in which the acquired firm and the acquiring firm are at different steps in the production process.

Vertical analysis:
The process of dividing each expense item in the income statement of a given year by net sales to identify expense items that rise faster or slower than a change in sales.

Vertical merger:
A merger in which one firm acquires another firm that is in the same industry but at another stage in the production cycle. For example, the firm being acquired serves as a supplier to the firm doing the acquiring.

Weighted average cost of capital (WACC):
Expected return on a portfolio of all the firm’s securities. Used as a hurdle rate for capital investment.

Working Capital:
The amount remaining after subtracting the Current Liabilities from the Current Assets.

Years Established:
Number of years the business has been active.

Years Owned:
Numbers of years that the Seller has owned the business.