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Common Terms used in Hospitality Business Sales

Common Terms used in Hospitality Business Sales

It is easy to get overwhelmed by industry language that business brokers use everyday.

Before you start down the road of buying or selling a hospitality 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 hospitality business. 

Print the page or download the PDF and keep it as a handy reference to refer to it anytime.

Addbacks Refers to 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.

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 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.

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

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).

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.

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.

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

Future Maintainable Earnings 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.

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.

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.

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.

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 Specific to selling a business in Victoria, the Section 52 (Form 2) refers to the statutory form required by a vendor when selling a business of less than $350,000 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 A small business 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.

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 Customers of the business that are provided with a period of time to pay the invoice for products or services supplied by the business.

Trial A trial refers to when the seller permits the buyer to be at the business 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.

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 in addition to the purchase price.  The formula to assess the additional financial requirements of the business is (Stock + Trade Debtors - Trade Creditors.)

By Peter Kais | hospitalitytrader.com