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Glossary Of Terms

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For our purposes, “adjusted net income” means something different than in a tax (IRS) context; it is a factor in determining how much a business would be worth to new owners. Adjusted net income (also referred to as cash flow or “SDE”, seller’s discretionary earnings, income, or cash) is the amount of money an owner actually receives from their business, a figure that may be substantially different from the net income - also called profit or net earnings - shown on the profit and loss statements and tax returns for the business. The difference results from adjustments (“add-backs”) made to net income shown on the books to demonstrate actual earnings to prospective buyers of the business.

Most sales of small and mid-sized businesses involve the transfer of specific business assets, such as trade name, equipment, and inventory, rather than stock in the corporation that might own the assets. Allocating the price is a process whereby the parties stipulate what portion is applied to what part of the business assets. Some assets are taxed differently than others. For example, depending on the state, the transfer of furniture, fixtures, and equipment could be a “bulk sale” and subject to sales tax. And, different types of assets are depreciated over different periods of time, with the buyer and seller facing different tax consequences. Both parties are required to agree to the same allocation or face the prospect that the IRS will determine the allocation - probably to their mutual disadvantage. This is both a technical accounting procedure and a tactical negotiating factor best handled by experts – your CPA and attorney – and coordinated by your escrow agent.

An asset purchase agreement ("APA") is a legal contract that outlines the terms and conditions under which one party (the buyer) agrees to purchase certain assets from another party (the seller), for example, a business. The assets in question could be tangible, such as furniture, fixtures, and equipment ("FF&E"), or intangible, such as intellectual property, trade name(s) or customer lists. An APA is used when the 'business" is being purchased but not the corporate entity (Inc. or LLC) owning the assets. If the entity itself is being purchased, then a "Stock Purchase Agreement" is used rather than an APA. The agreement typically includes details about the assets being sold, the purchase price, any financing arrangements, and any conditions that must be met before the sale can be completed. It may also include provisions for warranties, indemnification, and other important issues. The purpose of an asset purchase agreement is to clearly define the rights and obligations of the buyer and seller and to protect the interests of both parties. It is important for both parties to carefully review and understand the terms of the agreement before signing, as it can have significant legal and financial implications. Most small business transfers are an "asset purchase" rather than a "stock purchase." Be aware of the two different uses of the term "asset purchase": While most small business deals are in effect a purchase of all the assets of the business, the term can also be used to refer to the purchase of just the physical FF&E of a business that is no longer an open and operating ("going") concern. On BizBen.com, the designation "asset sale" is used to indicate this kind of limited FF&E/tangible asset transfer.

Most small business transfers are an "asset sale" rather than a "stock sale." Be aware of the two different uses of the term "asset sale": While most small business deals are in effect a sale of all the assets of the business, the term can also be used to refer to the sale of just the physical/tangible furniture, fixtures, and equipment ("FF&E") of a business that is no longer an open and operating ("going") concern. On BizBen.com, the designation "asset sale" is used to indicate this kind of limited FF&E/tangible asset transfer. SEE ALSO: Asset Purchase Agreement (APA)

The Assets of a business are all that is owned by the business, both tangible and intangible. Tangible assets include the physical assets of a business, such as the furniture, fixtures, and equipment ("FF&E"), machinery, raw materials, finished goods, inventory, buildings, and real estate. Tangible assets can further be broken down into two categories called current assets and fixed assets. Current assets are comprised of the physical products and inventory that a business has produced to ultimately be sold over time. Fixed assets, however, are the physical items such as the business equipment and machinery that produce the current assets. These fixed assets are not sold in the normal course of business like current assets and are only sold when the business as a whole sells. Intangible assets have no physical form. Examples of intangible assets are copyrights, trademarks, trade names, logos, websites and domain names, patents, phone numbers, email addresses, software, trade secrets, and goodwill that a business may possess. SEE ALSO: Goodwill, FF&E

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A stock purchase agreement is a legal contract that outlines the terms and conditions under which one party (the buyer) agrees to purchase corporate stock from another party (the seller). The stock in question could be shares of a publicly traded company or private company. (Or, it could be a "membership interest" in a limited liability company - LLC.) In the typical small business ownership transfer, the corporate entity is NOT transferred and an asset Purchase Agreement ("APA") is used instead. Also, in the typical small business stock purchase, the buyer is acquiring 100% of all the outstanding shares (ownership interest). The agreement typically includes details about the stock being sold, the purchase price, any financing arrangements, and any conditions that must be met before the sale can be completed. It may also include provisions for warranties, indemnification, and other important issues. The purpose of a stock purchase agreement is to clearly define the rights and obligations of the buyer and seller and to protect the interests of both parties. It is important for both parties to carefully review and understand the terms of the agreement before signing, as it can have significant legal and financial implications. In addition to the stock purchase agreement, the parties may also enter into other related documents, such as a stockholders agreement or a voting agreement, which outline the rights and obligations of the parties as stockholders.