Business Terms
- Ad Backs
- Adjusted Net Profit
- Balance Sheet
- EBITDA
- Financial Statements
- Goodwill
- G.S.T.
- Profit & Loss Statement
- POA
- PSAV
- ONO
- EOI
- WIWO
- Return on Investment (ROI)
Ad Backs
Ad backs include all expenses relating solely to the owner plus non-cash expenses such as “Depreciation” and “Amortisation”. Once off expenses such as “Loan Establishment Fees”, “Legal Fees” or unusual repairs can be added back but need to be examined carefully to be sure they are additional to the ordinary expenses of running the business. These expenses are “Added Back” to the net profit of the business to establish a true net profit. Ad backs will generally include:- Owners Salary or Directors Fees, Managers Salary, Interest Paid, Amortisation. Sometimes part of the “Wages” and “Super” can be added back where they are paid to a family member. See an example.
Adjusted Net Profit
The adjusted net profit is the actual net profit shown on the financial statements PLUS the ad backs. This indicates the true profit of the business if the owner/ proprietors expenses, non-cash expenses and one off expenses were left in the business.
Goodwill
Sometimes defined as “The value accruing to a business in respect of it’s position, it’s customers and it’s ability to produce a profit.” Putting a price on goodwill can be difficult unless you have other similar business sales to compare to. Protected businesses (ones that you can’t just start) have higher “Goodwill” factor than those you can start almost anywhere. Compare a Newsagency with Lotto to a corner Delicatessen. Goodwill is the amount remaining after deducting plant, equipment and stock.
Financial Statements
Financial statements for a business relate to a set trading period such as a financial year. They provide a record of cash inflows and outflows, the amounts owing and owed, details of plant & equipment for depreciation purposes and normally comprise of the following:
- Profit and Loss Statement
- Balance Sheet
- Depreciation Schedule
- Accountants Notes
Profit & Loss Statement
The Profit and Loss Statement forms part of the “Financial Statements” of a business. It represents a historical record for a set period of time of the cash inflows and outflows of a business. Careful analyses of the Profit & Loss Statement may indicate expenses that can be ‘added back” to show the true net profit.
Balance Sheet
The Balance Sheet is a snap shot of the financial position of a business as of a certain date. It details assets, liabilities, debtors, creditors, proprietorship for the business. By comparing Balance Sheets from year to year a financial picture of the business can be obtained.
EBITDA
Earnings before interest tax depreciation and amortisation.
GST
From July 1 2000 the Federal government introduced the Goods and Services Tax into Australia. The commencing rate of GST is 10%. and it replaces a number of wholesale taxes on a broad range of products. All businesses are required to have an “Australian Business number (ABN) and be registered for GST if their anticipated turnover is $75,000 or over. Unregistered businesses are unable to claim credits for GST paid. Business purchasers must be registered for GST at the time of settlement.
More information is available from the Australian Taxation Department here. (See GST & Business Sales in “Articles”)
POA
Price on Application. Owners do not wish to disclose price.
PSAV
Plus stock at Valuation. Stock is estimated in the offer to purchase and the final figure is established after an independent stock take at settlement. See Articles for more information.
ONO
Or nearest offer. Owner is keen to look at offers.
EOI
Expressions of Interest requested
WIWO
Walk-in Walk-out. Price is inclusive of goodwill, plant & equipment and stock.
ROI
Return on Investment. ROI is now the yardstick used by many Business Valuers and Business Brokers to determine the price of a business based on sales of similar businesses across Australia. Return On Investment is the adjusted net profit of the business divided by the total purchase price expressed as a percentage. Mainly applies to businesses up to $2m.
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Profit $100,000 Purchase Price $200,000 ROI 50%