Sale of a business--- come back * Flashcards
(96 cards)
1
Q
brokerage services
A
real estate brokerage authorized under REBBA to trade in real estate
2
Q
code of ethics
A
fairness and honesty , protect client best intrests
3
Q
two common types of business sales
A
1- only the business being sold ( an agreement is required OREA has a specific form for this purpose )
2- real property and the business are bing sold ( an agreement for the sale of the business and second for the sale of the property
4
Q
municipal business bylaws
A
- in addition to the typical limitation imposed by zoning bylaws ( use restriction)
- municipalities have business bylaws to regulate business including licenses, health and safety..
5
Q
Income tax act
A
capital gain/loss may result form the sale which impacts taxation
6
Q
excise tax act
A
harmonized sales tax is applicable to sale of goods and services
7
Q
personal information protection and electronic document act
A
any personal info collected must comply with PIDEDA
8
Q
Canada labour code
A
employment standards generally apply to specific work situation
9
Q
employment start act
A
protect intrest of employee
10
Q
required documents prior to a binding agreement
A
- profit and loss statement for the preceding 12 month or since the acquisition of the business by the person disposing of it
- statement of asset and liabilities of the business
-statement of list of fixtures and chattels
- make certain the NOT LIST IS COMPLETE
11
Q
asset sale
A
if only psychical assets are sold to the buyer, the seller normally has responsibility for liabilities
-if asset is sold above its cost - the difference is taxable to the seller as a capital gain
12
Q
share sale
A
- of a buyer acquire the share of business then all asset and liability are assumed
13
Q
if an item is not excluded it is deemed to be included
A
14
Q
intangible assets
A
legal right that have no physical substance but have value
1-license - a licence may be required to continue operating ( sales of tabbacoo or liquor)
15
Q
distribution right
A
the business may have distribution rights.
allow for the rights to sell someone else’s product
16
Q
intellectual property
A
17
Q
trade union intangible asset
A
18
Q
seller financing
A
a seller might assit if lender are averse to financing given business risk ( lender might agree to finance 40% of the purchase price if the seller finance another 40% and the buyer down payment of 20
19
Q
seller financing has benefits
A
1- helps open the market to more potential buyers, providing buyer with funding not available through traditional lenders
2-keep the seller involved in the business with possible benefits for both, the sller remain a resource, it is easier to track the business and take it back from the buyer if things go wrong
3- the seller can spread capital gain over a longer period
20
Q
earnout financing
A
the earnout arrangement the buyer earn his ways of the debt for the seller , paying for business based on its ongoing financial performance after sale closing
21
Q
base period earnout
A
a base year is selected, if there is significant variation in profitability over the past several year, a weighted average might be used to determine the base year
22
Q
incremental earn out
A
- very similar to a base period earn out expect they are determined on year to year profitability increase
-
23
Q
cumulative earn out
A
-fix min payment per year
24
Q
the value of a business can be determined
A
1- the net operating income is known
2- prevailing cap rate for the business type is also known
25
GPM
26
direct capitalization
establishes the present value of a future income stream base don a a single year project income and expenses
27
REEBB A requirement for sale of business
allow for a waiver by the buyer if certain financial statement are not deliver to the buyer
28
a seller has the right to refuse to provide books of records even though he possess such record
29
earnout arrangment
when selling a business is based on some measure of future performance
30
earnout
involves an agreement in. which the seller receives a specified amount at closing with additional monty to be paid based on business performance
31
financial statment
must be received by he buyer prior to a binding agreement being entered into between buyer and seller for the sale of the business
32
incremental earn out
baed on proportion of the year or year increase for specific time period
33
1- Affidavit statements
This affidavit statement sets out the following:
1. The terms and conditions under which the seller
holds possession of the premises in which the
business is being carried on.
2. The terms and conditions under which the seller has
sublet a part of the premises in which the business is
being carried on.
3. All liabilities of the business.
4. A statement that the seller has made available the
books of account of the business that the person
possesses for inspection by the purchaser, or that
the person disposing of the business has refused to
do so or has no books of account of the business, as
the case may be.
The affidavit statement is a means of protecting a buyer
client
34
2- prior to entering into a binding agreement a buyer must receive the following documents
- profit and loss statement of the last 12 month or since the acquisition of the business by the person disposing of it
- statement of asset and liability of the business
- list of fixtures , goods, and chattels that are NOT included ( make certain the NOT is included any item that doesn't appear is deemed to be included )***
35
if all of this above is NOT provided by the seller
the BUYER or someone on behalf of the BUYER sign a statement deliver to the brokerage indicating that the buyer has received and read a statement ( AFFIDAVIT) under oath by the SELLER OF THE BUSINESS THAT INCLUDE:
1-THE TERMS AND CONDITIONS UNDER WHICH THE PERSON DISPOSING OF THE BUSINESS HOLDS POSSESSION OF THE PREMISES IN WHICH THE BUSINESS IN LOCATED
- SUBLET A PART OF THE PREMISES IN WHICH THE BUSINESS IS BEING CARRIED ON
- ALL LIABILITES OF THE BUS
-MAKE AVAILABLE OR NOT THE BOOKS OF ACCOUNT OF THE BUS
36
ASSET SALE
if only physical asset are sold to the buyer, the seller has responsibility for liabilities and retains all accounts receivables
-asset sold above its cost , the different is taxable to the seller as capital gain
37
share sale
if buyer acquires the shares of the bus (corporation) then all assets and liabilities are assumed
- capital gian taz exemption
38
financial statement available
39
inventory count ( all the new raw working in progress material)
if no inventory count is completed ( a dispute will happen at closing)
- adjustment can be made during he period from agreement to completion
40
lease / sublease
- a copy of any lease should be given to the buyer
- what are the lease terms, can it be assigned or sublease and what condition and terms apply
41
intangible assets
legal rights that have no physical substance but have value
1- license- sale of tobacco
2- distribution rights - allow right to sell Simone else products
- intellectual property
- trade union
42
trade unions
- unionizes buz may necessitate the buyer , adhere to union mandated terms and conditions
43
employees
key employee are individual essential to the bus operation
-receive assurance the key employees are retained
- if you want to terminate an employee you must follow ( employment standard act)
44
due diligence and third party professionss
repeat
45
notice to reader
an accountant has obtained financial details from the owner and organized them into financial statement ( no formal review but generally accepted accounting principles)
46
review engagement letter
an accountant when completing the review engagement has reviewed the financial details provided by the owner , did not identify any significant concerns with these details when preparing the financial statement
47
independent auditor report
the accountant preforms a full audit including detailed examination of all relevant financial details prior to preparing the audit report
48
earnout financing
the buyer earn his way out of a debt to the seller
- buyer provides downpayment with the seller agreeing to receive the balance of purchase price throught subsequent yearly earning
-seller require full audit privilege to make certain financials tracked and reported
49
3 broad categories for earn-out financing
1- base period earnout - base year is selected, fiscal year immediately preceding the sale , if there is significant variation in profitability ( a weighted average might be used to determine base year)
2- incremental earn-out - payment determined on year to year provability increases which are then capitalized to determine the receptive earnout payment ( buyer often like this approach because payement are geared to successive year of business growth)
3- cumulative - accumulated for payment at the end of the agrement terms
50
direct capitalization approach
income approach - use capitalization as a financial method to arrive at a value estimate
- it arrives at present value of the future income income stream that a property is capable of generating by capitalizing one year NOI
51
value of the business can be determined
1- net operating income is known
2- cap rate for the business type is also known
52
GROSS PROFIT MULTIPLIER (GPM)
multi-unit residential valuation
- this is a variation using profitability instead of gross income
53
value estimates and discounted cash flow
-
54
net operating income and direct capitalization
55
cash flows and yield capitalization
discounted cash flow
56
turnkey
ready to immediately operate tuen the key open the door and being operating
57
franchise
is a form of turnkey
58
sample agreement clauses
-francise clauses
-inspection/ re-inspection clauses
-Arranging insurance
59
base year
used as benchmark when busying a business to calculate future payment
60
REBBA requires buyer to receive a list of items NOT included in the SALE
61
REBBA require certain document must be received by the buyer of a business before a binding agreement is reached
61
REBBA require certain document must be received by the buyer of a business before a binding agreement is reached
62
if the business is sold to a new owner the terms of the sale could involve assignment of a trader union contract
63
discounted cash flow involved in yield capitalization calculations
64
asset valuation methord to determine value
seller want the highest figure
65
Net operating income for a business is capitalized to arrive to an estimate value
66
distribution document
allows a business owner to sell a supplier product or service
67
earnout
method of paying for a business based on its actual performance following the sale
67
earnout
method of paying for a business based on its actual performance following the sale
68
business
undertaking for the purpose of profit
69
assest valuation
valuation goodwill
70
business share
buyer assumes all assets and liablities
71
Intellectual Property Use Agreement
Intellectual property is a legal right for a person to use a certain name or product in the business. Anyone
possessing an intellectual property use agreement may use the name or the product stated in the agreement as
part of their business. Having the rights to a piece of intellectual property may increase the financial value of the
business.
72
direct capitalization
convert income generate by a business into capital value
73
places to grow act
limit the type of business permitted in a particular area
74
shareholder will appear on the balance sheet for a business
75
adjusted book value and asset valuation are helpful when evaluating business with low profit
76
the buyer may be unable to change employment terms if the business being sold is represented by union
76
the buyer may be unable to change employment terms if the business being sold is represented by union
77
the buyer may be unable to change employment terms if the business being sold is represented by union
78
seller financing is beneficial as it permits the seller to spread the capital gain over a longer timeframe
79
terminate the agreement
subsequent notice is required
condition is no longer binding if certain event occurs
80
true condition precedent
cannot be waived and must be fulfilled
81
direct capitalization is not effective
is NOI us not determined or not accurate
82
franchise
type of buz that offers an existing image access to expertise and establish business model
83
a charted business valuator
84
when a seller has no books or refuses to provide them
the oath could be signed by the seller
85
discounted cash flows
projected future revenue and expense and the receipt of such amounts at varying points in the future
86
direct and yield capitalization
basis for the comparison of investment properties
87
sale of share
the buyer assumes responsibility for any debts of that business
88
profit and loss statement
- income and expense statement- detail financial performance for a specific time period
88
profit and loss statement
- income and expense statement- detail financial performance for a specific time period
89
profit and loss statement
- income and expense statement- detail financial performance for a specific time period
90
owner contribution
91
selling a business
important consideration is wether or not the lease for the business premises can be assigned
92
franchise business can be broadly grouped under retail, business, personal service, travel, leisure
