Understanding the language

A few definitions of terminology used

Accrual Accounting

Income and expenses are entered into the books at the time of contract instead of when payment is received or expenses incurred.

Barriers to Entry

The degree of difficulty competitors faces when entering a specific market, based on barriers such as high initial investment requirements, patents, trademarks, specialist technical knowledge.

Cost of Goods

Direct costs incurred in manufacturing a product or providing a service (usually includes materials and labour).

Cost of Sales

Includes the expenses involved in selling and delivering the product or service, plus the cost of goods.

Due Diligence

A period of between 7 to 21 working days (sometimes longer) where a purchaser is allowed to verify the information supplied in the Information Memorandum and to review other material or documents not previously supplied due to commercial sensitivity.


Earnings Before Interest and Tax.


Sellers discretionary cash expressed as Earnings Before Proprietors Income, Interest, Tax and Depreciation.


Employment Protection Provision. A clause in employment agreements stipulating how their employment will be handled if the

business is sold.


Preparing in advance for the sale of a business by maximising its efficiency, earning potential, structure and presentation.

Gross Profit

Revenue generated by the business minus cost of sales.

Information Memorandum

A document providing a detailed overview of a business. The document must be crafted to ensure it is accurate and honestly represents the business and its benefits.

Intangible Assets

Non-physical assets such as a customer base, supplier relationships, intellectual property, patents, trademarks, brand names and goodwill.

Letter of Intent

A document containing a declaration of the intentions of the Purchaser.


Management buy out – the company is purchased by existing management.

Net Profit

Total revenues less total expenses.

Net Worth

Assets minus liabilities.


Net Profit After Tax.

Retained Earnings

Profits that are retained in the business and not disbursed to owners or shareholders.

Return on Investment

An indicator of profitability shown as a percentage, calculated by dividing the net profit by the net worth, and then multiplying by 100.


Seller’s Discretionary Earnings.

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