Financial Poise

Business Transition and Exit Planning Glossary

Assignment and Assumption Agreement

An Assignment and Assumption Agreement is an agreement between a seller and buyer by which the seller (the assignor) transfers its rights and obligations under one or more executory contracts to a buyer (the assignee). The assignor may not be completely relieved of potential liability under a contract being assigned.

Audited Financial Statements

Audited Financial Statements are a company’s financial statements prepared and certified by a certified public accountant as meeting the requirements of U.S. General Accepted Accounting Principals. In contrast, “Reviewed Financial Statements” have been reviewed by an accounting firm but that review is not nearly as thorough as is made in connection with an audit. Think of a spectrum in which audited financial statements are the most reliable and reviewed financial statements are the next most reliable. Less reliable are “Compiled Financial Statements,” which are created by an accountant from statements prepared by its client.

Bill of Sale

A Bill of Sale is a legal document signed by a seller to evidence the transfer property to a buyer.

Business Broker

A Business Broker is an intermediary who connects buyers and sellers, commonly on a commission basis. Business brokers perform similar functions to investment bankers but do so for smaller companies whereas investment bankers typically work with larger companies.

Business Exit Professional

A Business Exit Professional, also sometimes called an Exit Planning Professional, is an advisor who collaborates with professionals in many specialties, to help business owners determine what they have, what they need, and how to enhance the value of what they have to meet their goals and objectives. In addition and in collaboration with other professionals, they assist in determining when and how to exit a business and help business owners plan for life without the business.

C Corporation

A C Corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders.The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This results in double taxation; the corporation does not get a tax deduction when it distributes dividends to shareholders and shareholders generally cannot deduct any loss of the corporation.

Capital Expenditures

Capital expenditures (or “CAPEX”) are investments in assets that will have a long life. Examples include the purchase of a building, computer equipment, machinery, office equipment, and vehicles. In accounting terms, the money spent will not run through the income statement directly but will appear on the cash flow statement. Capital investments, or the fixed cost of the purchase, will be depreciated and the depreciation expense will run through the income statement over multiple periods which are equivalent to the useful life of the asset acquired by the company.

Capex differs from a revenue expenditure which, in accounting terms, is used to cover repair and maintenance charges that do not enhance a company’s earning capacity. For example, a company might repair a piece of equipment at a factory, but it will not result in the machine producing any more goods. As a result, the initial purchase of the equipment would be a capital expenditure, while the repair cost would be a revenue expenditure.

Capital Gains

Capital Gains are the profit that results from a disposition or sale of a capital asset. Capital gains are realized when the sale of certain assets, such as stock, or real estate, exceeds the original purchase price. The gain is the difference between a higher selling price and a lower purchase price. Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage investment and entrepreneurship.

Certified Copies

Certified Copies are photocopies of original documents that have an endorsement, seal,or certificate from a government office or municipality. The endorsement serves to assure that the copy is a true copy of the original document. It does not certify that the original document is genuine, only that that the copy is a true duplicate of the original document.

Closing Conditions

As explained by Lexology, “In the event there is a period of time between the signing of a definitive acquisition agreement and the closing of the acquisition, the parties will have to agree on a set of conditions that must be satisfied (or waived) before the acquisition may be closed. These conditions are generally referred to as “closing conditions.”

The failure to satisfy a closing condition gives the other party a right to refuse to close the acquisition but does not make the failing party liable to the other party, unless such failure is the result of, or the cause of, a separate breach of the acquisition agreement. In addition, because of the period of time between signing and closing, events may occur that may result in a party’s desire to terminate the acquisition agreement prior to closing. Accordingly, the parties often negotiate provisions granting the right to terminate the acquisition agreement upon mutual agreement or upon the occurrence of certain specified events.

Confidential Information Memorandum

A Confidential Information Memorandum (or “CIM”) is a marketing document that is presented at the initial stages of the sale process to potential buyers. The goal of a CIM is to provide buyers with the information necessary to decide whether to submit a letter of intent. It typically includes a description of the sale process and outlines the type of transaction (stock or asset sale) being offered by the seller. While called a “confidential” information memorandum, nothing in the CIM is confidential unless a non-disclosure agreement (NDA) is signed prior to releasing the CIM. As such, sellers should take care and avoid disclosing highly sensitive information in the CIM if an NDA is not executed prior to issuing the CIM. As the CIM is an introductory document, there are other opportunities in the sale process for a seller to release additional sensitive or complex financial information.

Definitive Transaction Documents

Definitive Transaction Documents are the binding documents that govern a transaction. In contrast, a term sheet or letter of intent is a preliminary document which form the basis for drafting the Definitive Transaction Documents.

Disclosure Schedules

Disclosure Schedules are documents that disclose instances that deviate from the representations and warranties found in the Definitive Transaction Agreement.

Discount Rate

Discount Rate is the interest rate used to discount a stream of future cash flow to its present value. Depending upon the application, the discount rate is used to determine a company’s cost of capital or the current market rate. It is a mathematical formula that converts anticipated returns from an investment project to their current market value (present value). It is always less than 1, and depends on the cost of capital and the time interval between the investment date and the date when returns start to flow.

Due Diligence

Due Diligence is an investigation of an asset or company to ensure what is being offered for sale is properly represented by a seller. Due diligence helps a buyer make sure that there are no unexpected problems with the asset, and to assist a buyer in its effort to determine value.

Due Diligence List

A Due Diligence List is a list of items that a buyer would like to review during the due diligence. Among the items that are typically sought by a buyer during due diligence may include, but are not limited to, the following: recent complete tax returns, recent complete financial statements (profit & loss statements, balance sheets, current interim financials, current inventory report, list of assets being sold with the business, current accounts receivable report, current accounts payable report, checkbook register), client list, list of employees, current and past payroll records, a current copy of all licenses used by the business, copies of lease or mortgage documents, lien reports, environmental reports, appraisals, vendor list, and copies of all contracts (equipment, advertising, suppliers, etc.).


An Earn-Out is a part of the purchase price that may or may not be paid to a seller, depending on the performance of the business after a sale of the business closes. Earn-outs are employed when a buyer and seller disagree about the expected growth and future performance of the target company. Earn-outs are also common as a way to keep the sellers involved and motivated following the acquisition.


EBITDA is the acronym for Earnings Before Interest, Tax, Depreciation, and Amortization. EBITDA measures a company’s operating performance and is a widely accepted way to evaluate a company’s performance without having to factor in financial decisions, accounting decisions or tax environments. EBITDA is calculated by adding back the non-cash expenses of depreciation and amortization to a firm’s operating income. EBITDA allows analysts to generate useful comparisons between companies, project long-term profitability, and the ability to pay off future financing. EBITDA also can be used to calculate the income available for interest payments to a company’s secured creditors.


ERISA is the acronym for the Employee Retirement Income Security Act of 1974 (Act). The Act sets forth minimum standards for pension plans in private industry and provide extensive rules on the income tax effects of transactions associated with employee benefit plans.


An Escrow refers to money held by a third-party on behalf of a buyer and seller, to be released to one or the other only upon appropriate instruction from the parties or fulfillment of a condition found in a contract..

Family Office

A single-family office is an organizational structure that manages the financial and personal affairs of a single wealthy family. For more information, we suggest the Family Office Exchange.

Financial Statements

Financial Statements are records about an organization’s financial activities and condition. The most common examples include the Balance Sheet, Income Statement, and Statement of Cash Flows.

Fixed Asset Base

Fixed Asset Base are those assets owned by a company that contribute to the company’s income but are not consumed in the income generating process and are not held for cash conversion purposes.

Free Cash Flow

Free Cash Flow is the amount of cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes. The formula for free cash flow is:

FCF = Operating Cash Flow – Capital Expenditures

The data needed to calculate a seller’s free cash flow is usually on its cash flow statement. It is important to note that free cash flow relies heavily on the state of a seller’s cash from operations, which in turn is heavily influenced by the seller’s net income. Thus, when a seller has recorded a significant amount of gains or expenses that are not directly related to the seller’s normal core business (a one-time gain on the sale of an asset out of the ordinary course, for example), it may very well be appropriate to exclude it from the free cash flow calculation to get a better picture of the seller’s normal cash-generating ability.

Generally, free cash flow might be influenced or manipulated by lengthening the time taken to pay bills, shortening the time it takes to collect accounts receivables, or delaying the purchase of inventory.

Good Standing Certificate

A Good Standing Certificate proves that a corporation (or limited liability company) was properly incorporated (or formed) and authorized to transact business in a certain state and is current with the filing requirements and franchise taxes required by that state.

Hedge Fund

A Hedge Fund, at the most fundamental level, is a private investment pool for wealthy, financially sophisticated investors, historically organized as partnerships, with the general partner (or managing member of an LLC) – the hedge fund manager – managing the fund’s portfolio and making investment decisions. In concept, they are intended to hedge against risk, however, they are known for a “high risk, high reward” approach. Hedge fund managers typically seek a specific range of performance, regardless of market trends. They do this by using sophisticated strategies and techniques. Read more here.


A Holdback is a portion of purchase price that a seller does not receive at closing until certain conditions are met. Like an indemnification, a buyer may negotiate a holdback on purchase price as a form of insurance to protect the buyer from overpaying for the company.


An Indemnification is an agreement to compensate a party for loss or damage that may occur. A common form of indemnification is an insurance policy. In the M&A context, a seller may agree to indemnify a buyer for claims that a third party may bring against the buyer for events that happened before the buyer buys. Indemnification provisions tend to be heavily negotiated because whereas buyers commonly want complete protection from events that did not happen on their “watch,” sellers commonly want a “clean break.”

Independent Valuation Analyst

An Independent Valuation Analyst is an appraisal professional designated by the American Society of Appraisers (ASA) as certified to conduct business valuations. The analyst must have sufficient work experience in business valuation, submit a sample valuation report, satisfy the educational and ethics requirements, and pass four specific exams. Other organizations offer similar accreditation; for example, the National Association of Certified Valuators and Analysts (NACVA) offers the “Certified Valuation Analyst” (CVA) designation and the American Institute of CPAs (AICPA) offers the “ABV” (Accredited in Business Valuation) designation.

IPO Market

IPO Market is the initial public offering on an open market, or the first time a company sells shares on an open market. The IPO Market refers to the market of companies that are in line or ready to sell securities in their companies for the first time.

Intangible Property

Intangible Property is personal property that cannot actually be moved, touched or felt. Intangible property includes goodwill, patents, trademarks, copyrights, company social media profiles, customer lists, vendor lists, internet websites, and other web-based properties are considered intangible property.

Non-Disclosure Agreement

A Non-Disclosure Agreement (or “NDA” or “Confidentiality Agreement”) is a contract by which one party agrees to keep in confidence information that is disclosed to it by another party. NDAs are commonly used in connection with the buying and selling of businesses because in order for a potential buyer to perform its Due Diligence it commonly needs access to confidential information and the seller needs to be protected against that information being used for purposes other than to evaluate the potential transaction.

Organizational Documents

Organization Documents are the documents which legally form an entity, such as a corporation or limited liability company. The organizational documents of a corporation typically include articles of incorporation and bylaws. Those of an LLC typically include articles of organization and an operating agreement.

Private Equity

Private Equity refers to the business of raising funds from investors to purchase a control positions in established privately held companies, typically by borrowing a high percentage of the cash used for the purchase. A private equity fund is any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course. For more information, click here.

Reverse-Breakup Fee

Reverse-Breakup Fee is a fee paid by the buyer if it breaches the acquisition agreement or is unable to consummate the transaction due to lack of financing and the seller terminates the agreement in accordance with its terms.

S Corporations

An S corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.

Section 1031 Real Property Exchange

A Section 1031 Real Property Exchange allow a seller to postpone paying tax on the gain if the seller reinvests the proceeds of the sale in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under Section 1031 is tax-deferred, but it is not tax-free. The term refers to Internal Revenue Code Section 1031, which provides this exception to the realization of capital gains from the sale of real property.

Sign and Close

Sign and Close refers to a situation in which parties to a transaction sign Definitive Transaction Documents and then, immediately, perform the actions necessary to consummate the underlying transaction. This is in contrast to a transaction in which there is a lapse in time between the signing of Definitive Transaction Documents and the consummation of the underlying transaction (and in such situations, the failure of a “Closing Condition” may prevent the transaction from ever being consummated).

Strategic Plan

A Strategic Plan communicates a company’s goals and the steps required to achieve those goals. It is the result of strategic planning.

Title Certificates

Title Certificates or “certificates of title” are documents issued by a governmental authority that serves as documentary evidence who the owner personal is.

Transaction Multiple

Transaction Multiple is a financial metric used in valuing a company. As accurately described by Wall Street Oasis, “[i]t is used as part of comparable analysis. The theory is that you look at a group of companies similar to the one you are valuing, see what kind of prices they have been bought and sold for, and apply a similar valuation method to the target company.”

Venture Capital Funds

A venture capital fund invests in the equity of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from other sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company. For more information, click here.

Working Capital

Working Capital is the money available to a company to fund day-to-day operations and is a commonly used financial measurement of a company’s liquidity, efficiency, and overall health. It generally includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts.

Read more: When Should a Seller Sign a Letter of Intent? and Strategic vs. Financial Buyers: Distinctive Ways of Acquiring Businesses

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