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Posted 03/02/2020 in Business

The A-Z Glossary of Common Terms for Business Buying, Selling and Franchising

The A-Z Glossary of Common Terms for Business Buying, Selling and Franchising

It is easy to get overwhelmed by industry language that business brokers, intermediaries and franchisors use everyday. 

Before you start down the road of buying or selling a franchise and or business, don't get baffled by the jargon, use our glossary of common terms to understand the language and terminology when buying and selling a franchise business.


Addbacks
Refers to owners expenses incurred by the business that are added back to the profits. Add-backs can be items such as depreciation, finance costs and interest, the owner or managers’ salary and superannuation, motor vehicle for personal use, bookkeeping fees, one off legal costs, and personal insurance expenses that are specific to the owner or are ‘one off’ and/or extraordinary expenses that are unlikely to recur.


Marketing Fee aka Advertising Fund, Advertising Levy
Is what franchise business owners contribute back to the Franchisor to cover the franchise advertising and promotional activities.  It's either a fixed monthly fee or calculated as a percentage of the franchisee's total revenue, either paid monthly, quarterly or annually.


Adjusted Business Earnings
Earnings after all commercial wages have been paid to staff and working owner or manager before Interest, Tax, Depreciation and Amortisation.   Business Earnings is considered a reasonable representation of the cash flow available to a non-working owner or managed business.


Adjusted Proprietor’s Earnings aka Sellers Discretionary Earnings (SDE)
Earnings to one full time working owner before Interest, Tax, Depreciation and Amortisation and after adjustments for once off or non-business related items. Proprietor's Earnings is considered a reasonable representation of the cash flow available to one full time working owner.


Agreement 
Is provided by the Franchisor, which is a written legal document specifying the rights and responsibilities of both the parties, detailing fees, systems, payments, territory and duration of the agreement.


Area Developer 
Are usually franchisees or Master Franchisees who own and operate a number of franchises and are responsible for bringing a new franchise concept within a geographical location. They may also be responsible for recruitment, training and management of sub franchisees within their area.


Approved Site 
Is a strategic location a franchise has available for establishment and set up, or it could be a location that a franchisee nominates wanting to establish a franchise, which needs to meet the Franchisor's criteria.


Area Franchisee 
Is a franchisee that has purchased the rights to open and operate numerous franchises in a geographical area, with a specified period of time. 


Business Broker
is a qualified real estate professional who helps individuals sell and buy a franchises and businesses.  


Business Format Franchise
Is where the franchisor grants the use of the business format, operating systems and use of the trademark to a franchisee.  This type of franchising model is mostly used for hotel & catering businesses, auto services, business services, home and educational services.


Business Plan
Is a document prepared by the purchaser, summarising key goals and objectives for the business detailing operational and financial goals along with detailed plans and budgets highlighting how these objectives are to be achieved.  This document is especially needed when applying for finance.


Capital
Is the amount of money a franchisee or business buyer must have at his/her disposal. (also refer to 'working capital') 


Capitalisation Rate
Percentage used to ascertain the Return on Investment Rate when comparing the Business Earnings (net profit) divided by the total funds required to purchase and operate the business. See Return on Investment (ROI).


Copyright
The symbol for copyright is ©. Copyright in franchising and business means an agreement and the right has been provided to you to use the businesses brand name, logo. This can also include operational manuals, franchise and business manuals, promotional and advertising materials.


COGS
Cost of Goods Sold relates to the direct cost of producing the goods sold by the business. EG; cost of coffee beans to make a coffee.


Condition of Sale
Refers to where a contract of sale is subject to any condition to be fulfilled by the seller to satisfy the buyers requirements.


Confidentiality Agreement
Also referred to as an NDA (Non Disclosure Agreement), is a common agreement used between two or more parties to share sensitive information and not disclose or discuss with anyone outside of the agreement.  Widely used by Business Brokers when sharing information with buyers about a business.


Contract of Sale
Refers to the legal contract for the sale and purchase of the business between the buyer and seller which contains the particulars and conditions of the sale. The contract of sale is signed by both parties to execute the sale. From the moment that the buyer signs the contract of sale, it becomes a legal and binding document.


Creditors
Refers to a person or company to whom money is owed to by the business, e.g. suppliers


Disclosure Document
The Franchise Disclosure Document (FDD) Is a legal disclosure document that must be provided to any individual interested in purchasing a franchise and is part of the pre-sale due diligence process. It is a legal document which discloses all establishment fees, recurring charges, key staff, operations and performance of the franchise since it started.


Earnings Multiple
Similar to Return on Investment (ROI) expressed as a multiple instead of a percentage.


EBIT
Earnings before Interest and Tax. The reported profit of a business before accounting for income tax or financing related expenses such as interest, borrowing costs, finance lease expenses.  Note - No other adjustments are required to calculate EBIT.


EBITDA
Earnings before Interest, Tax, Depreciation and Amortisation. The reported profit of a business before accounting for income tax or financing related expenses such as interest, borrowing costs, finance lease expenses or Depreciation and Amortisation expenses. Note - No other adjustments are required to calculate EBITDA. EBITD is also acceptable if no Amortisation is included in the calculations.


Equity
Is calculated from the total worth of an asset minus total liabilities, giving you an equity value. Using property as an example, the owner's equity is the value of the house minus the remaining mortgage or loan amount outstanding.


Feasibility Study
A process used if a business is wanting to become a franchise, or a business that is wanting to expand and open up in new locations. The purpose of the study is to asses market factors and business issues, uncover hidden threats or discover opportunities that may help or hinder the business future success.


Financial Capital
The amount of money required for the initial investment of a business or franchise, including the licencing fee relating to a franchise business and the initial working capital to float when opening your venture.


Fixed Assets
The assets of the business that are tangible items such as machinery, equipment, vehicles, fixtures and fittings, leasehold improvements, etc.


Franchise
An arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications, in exchange for a fee.


Franchise Attorney
The number one person to turn to before you sign any franchise agreement!  Why? Because they are lawyers who specialise in franchising law and can expertly guide you through the franchise agreement.  


Franchise Council
Wherever you are in the world, and your looking to buy a franchise, Franchise Councils are voluntary organisations that represents franchisors, franchisees and service providers within the franchise industry and open to any organisation within the franchising sector.  


Franchise Consultant
A franchise consultant can be identified in 2 ways. First being a representative of the franchise, that helps potential purchasers understand and navigate around a franchise purchase. They advise of current opportunities, the benefits and help you navigate your way to ownership.  

The second is an individual who specialises in Franchising and can assist current franchises to improve their processes and procedures, help them expand and improve their bottom line. They can also help a business turn into a franchise too. 


Franchisee
Is an individual, partnership or corporation who is awarded a franchise and agrees to enter into a franchise agreement with the franchisor, including payment of the franchise fees and ongoing royalties to the franchisor for the duration of the franchise agreement, allowing the rights to open a franchise and trade under that franchise name.


Future Maintainable Earnings (FME)
An estimate of the future profitability of a business. Most commonly based on historical earnings. This figure is used as a basis for many accounting based valuation approaches. Depending on the methodology used, FME can refer to different earnings figures.


Franchise System
Refers to a franchise operating within a region. As an example, McDonalds  would be considered a franchise system as they operate in many locations. The term also involves the companies head office admin that looks after the administrative side of the franchise and franchised units.


Franchise Unit
Refers to an individual store or business setup within a geographical area or location. A franchisee can purchase one or more franchise units from the franchisor, that can operae and manage multiple franchise businesses within a specified and agreed location.


Franchisor
A franchisor is the owner of the entire franchise brand, usually an established franchise business allowing a new a purchaser with an agreement and the rights to trade a under the business using the business name,logo, organisation and operational methods.  The franchisor should offer training to new owners, assist with marketing, ongoing support and financial goals


Goodwill
The amount paid for the business that cannot be attributed to tangible Assets or Stock.


Goodwill Multiple
Calculated as the Goodwill Value divided by the Adjusted Proprietor's Earnings.


Gross Profit
Refers to the total net sales of the business minus the cost of goods (COGS).


Gross Profit Margin
Gross profit margin is calculated by dividing gross profit by revenues, expressed as a percentage.


Initial Investment
Refers to the total investment and capital required to start a business or franchise. It includes the initial purchase price of a business and with a franchise being the franchise fee or transfer fees.  It also needs to cover Lease, Equipment, Personnel and working capital float required for the operation of a business or franchise, until it becomes profitable.


Initial Franchise Fee
Refers to a once off payment paid by the purchaser to the franchisor when signing the franchise agreement. This payment covers the training, recruitung and the right to use the brand name of the franchise


Franchise Agreement or Licensing Agreement
Is a legal contract between a company or franchisor granting the rights and permission to produce and market their product, services and trade name in exchange for a fee and or royalty on the monthly sales.


Master Franchise
Relates to an individual who negotiates with the franchise the rights for a geographical location, which is usually a country or state. The master franchisee purchases the rights and then has the responsibility to establish the franchise business and system in their region.   


Mark-up
Refers to the difference between the cost of the product and the price that it is sold for by the business to make a profit which is calculated at Gross Profits divided by the Cost of Goods, expressed as a percentage.


Multi Unit Franchise
Is a franchisee who owns and operates multiple franchises.  


Operations Manual
If not the the most important document, the franchise operations manual is the blueprint to all the processes and procedures of how to exactly open, operate and market the business and to what expected standards required. It covers daily operations, key business procedures, advertising, personnel and maintenance through to marketing activities and accounting requirements.


Profit and Loss Statement
A profit and loss or income statement lists your sales and expenses and is generally recorded on a monthly, quarterly or yearly basis. It tells you how much real profit you're making or losing. 


Property
A non-business transaction such as Residential Freehold, Commercial Freehold, Industrial Freehold or any other Freehold Property


ROI
(Return On Investment) The percentage (%) return on the total funds invested (ROTFI) required to purchase and operate a business including the amount of working capital required vs. future maintainable profits based on the proven business earnings (business net profit). Formula to calculate is - Business Earnings divided by the total funds required = Return on Investment percentage or Cap Rate.


Royalty Fee
Is an ongoing payment  the franchisee must pay to the franchisor and is either a fixed monthly amount or calculated based on a percentage of the gross revenue of the business. 


SAV
Stock at Value. The Asking Price for many businesses is advertised as (Price + SAV) which means the buyer is required to buy the stock held by the business at settlement based on its cost value.


Section 52 (Victoria, Australia Only)
Specific to selling a business in Victoria, Australia, the Section 52 (Form 2) refers to the statutory form required by a vendor when selling a business of $450,000 or less in total value. The Section 52 must be prepared by a Certified Accountant and presented to the purchaser.

A Contract of Sale may become void if the Section 52 is not provided to the purchaser prior to signing the contract of sale.

Businesses with a liquor licence are exempt from providing a Section 52, however usually provide a Profit & Loss statement instead.


Small Business (Australia)
A small business in Australia is defined as a business with sales of less than $8,000 per week or less than $400,000 per annum.


SOH
Stock on Hand. Refers to the level of stock of products or materials the business has available at that time.


Takings
Refers to the amount of money generated by the business from selling it’s goods or services before any expenses are deducted.


Territory
is a specified area / location which a franchise has exclusive rights to operate their business without the threat of a competition from fellow franchisees. Information regarding the territory should be detailed in the franchise agreement. 


TOL
Take Over Leases on equipment or assets. Refers to a contract condition that requires the Buyer of the business to take over existing equipment leases held by the Seller.


Trade Creditors
Suppliers that provide goods & services to the business based on pre-agreed credit terms, instead of the business paying for the goods upfront or prior.


Trade Debtors
Any customer that owes a business money for unpaid goods and services provided. Customers of the business may have been provided with a terms or a period of time to pay the invoice for products or services supplied by the business.


Trademark
Is identified by the symbol ™ and relates to a businesses brand name and logo, which is protected by law. 


Trial
A trial refers to when the seller permits the buyer to be present at the business during it's operations for a period (usually between 5 and 14 days) to observe and validate the performance and its financial takings of the business. Usually occurs after the Contract of Sale has been signed by both parties and is a Condition of Sale that the business meet the takings as stated by the business owner.


Unencumbered
Generally applies to the assets of the business being supplied to a buyer as fully owned even if the assets are currently under a lease arrangement. The business owner would settle any outstanding monies owed on any items that will be included with the sale of the business.


Vendor
Refers to the owner of the business who is selling.


Vendor Finance
Refers to when part of the purchase price of the business is funded by the vendor and the buyer agrees to pay back the portion borrowed from the vendor over an agreed period.


WIWO
Walk In Walk Out is a condition of sale where the buyer agrees to take over the business unconditionally without a trial. Stock may be included in the total sale price or the buyer may be required to purchase the stock held by the business at the time of settlement.


Working Capital
The amount required by a buyer to operate the business such as purchase stock, pay staff, rent, etc in addition to the purchase price.The formula to assess the additional financial requirements of the business is (Stock + Trade Debtors - Trade Creditors.)


Last updated: February 18, 2020


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