Understand The Strange Acronyms Used When Buying A Business
Are you busily researching businesses for sale to find your ideal first business? When looking at websites, newspapers and magazines, you are certain to come across some unfamiliar terminology. Most industries have their own unique acronyms and real estate certainly has its fair share.
Use this handy guide to become fully adept in real estate "speak" and be able to decipher all those confusing terms. Start with the ones that you may possibly have encountered elsewhere, as they are the most frequently used:
NDA: Non-Disclosure Agreement
An NDA is a formal document designed for the confidentiality of both parties.
- In the case of a business sale, the owner agrees to disclose private information about their business to the potential buyer and not to share any information about the buyer.
- In turn, the buyer agrees they will not share information about the business. Both parties sign the agreement, which stands for a specified length of time.
The NDA works to protect sellers because they are releasing important financial information. Should a potential buyer discover that the business is not quite as profitable as it appeared from the outside, clearly the business owner does not want this information to spread. Competitors may discover the information and use it to their advantage.
In the same way, the expression of interest by the potential buyer is not shared with other parties.
WIWO: Walk In Walk Out
This means that on the day the purchase, the business (including any current stock) is transferred over to the buyer, while the previous owner "walks out".
- Stock is included in the sale price.
- There is unlikely to be any training provided or a handover period—the business is entirely in the hands of the new owner.
SAV: Stock At Value
Quite often a business will be advertised at a certain price plus "stock at value". This means that a stock take is required to determine the value of stock which is then added to the purchase price of the business. Before the business is sold, a stock take can be arranged and completed by the vendor or an independent party.
Take care when reading a business sale price. When stock figures are calculated separately, they may require a higher outlay than the cost of the actual business. If the owner has been slow to move stock or has over-invested heavily in it, the figure can be excessively high.
TOL: Take Over Lease
In some situations a business is sold where the buyer is required to take over an existing lease of the property. This happens if the business is sold during the term of the lease. The new owner is then required to take over and continue the same payments for the rest of the term of the lease. At the end of this period, the terms can be re-negotiated.
ROT: Restriction Of Trade
In certain cases a seller is required to protect a buyer. Restraints may be placed on the seller to prevent them from competing directly with the new business owner. For example, they may be prevented from opening a similar business in close proximity. Restrictions need to be reasonable; they should specify the duration for the restraint and define the geographic location. For example, it would be reasonable for the seller of a successful business not to set up a similar competing business within the same suburb for a period of two years.
After carefully noting these terms, you can be confident in your enhanced understanding of the unique terminology used in the sale of a business. When you are ready and are seriously interested in purchasing a business, your next step should be to obtain the assistance of the experts. Business brokers can guide you with each step of such an important transaction and ensure you make the best possible deal.