Dictionary of Exit Planning Terms

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Earn-Out

A promise of future payment made to the seller of the business, which is typically tied to future company performance.

EBITDA

The acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. This is an approximate measure of a company's operating cash flow based on data from the company's income statement. EBITDA when multiplied times a industry standard multiple is one way to estimate the sales value of a company.

Equity

The interest or value that an owner has an a property over above any indebtedness.

Estate

The total property owned by an individual prior to the distribution of that property. Under the terms of a will, trust, or inheritance laws. An individual's estate includes both assets and liabilities.

Estate Tax

A tax imposed on the transfer of the "taxable estate" of a deceased person. The estate tax is one part of the federal Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate.

Many states also imposed an estate tax.

EBIT

The acronym for Earnings Before Interest and Taxes.

Employment Agreement

An agreement in which an employee agrees to continue to work at a company for a specified period of time and other employment conditions.

ESOP or Employee Stock Ownership Plan

A trust established by Corporation, which acts as a tax-qualified, defined-contribution retirement plan by making the corporation's employees partial owners. Contributions are made by the sponsoring employer, and can grow tax-deferred, just as with and IRA or 401(k). But, unlike other retirement plans, the contributions must be invested in the company stock. The benefits of the company include increase cash flow, tax savings, and increase productivity from highly motivated employees.  ESOP administration is regulated and numerous restrictions apply.

Estate Plan

A plan that provides for the orderly control and management of one's asset with arrangements for the eventual transfer of those assets to one's chosen heirs. This often includes creating Wills, Powers of Attorney, Trusts (if appropriate), and Advanced Health Care Directives.

Exit Plan

A plan that addresses how a business owner will successfully transition the ownership of his or her business to others in order to facilitate the owner's retirement or exit.