Dictionary of Exit Planning Terms

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A sale transaction in which an owner or owners sell part of the equity of the business in order to take some money out of the business, while still operating the business. A recapitalization is typically created by the sale of company stock, and may or may not involve change control.

Representations and Warrants

In business and legal transactions, representations and/or warrants are assurances by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.

Retained Earnings

Net profits to accumulate in the business after dividends are paid.

Return on Assets (ROA)

A measure of a company's profitability, equal to a year's earnings divided by its total assets, expressed as a percentage.

Revocable Trust

A trust that can be amended or revoked by the grantor at any time, provided that the grantor is not mentally incapacitated. Although this type of trust does not eliminated most estate and gift taxes, it is a way to minimize probate time and costs and to centralize administration of one's financial affairs.

Recast Earnings

Earnings that have be restated by adding back certain unusual or excessive expenses to determine the true earnings of a private company. Recasting allows meaningful comparison with other investment opportunities. Examples of "ad backs" would be owner compensation above market salaries, excessive owner perks, one-time expenses, and other discretionary expenses.

Residual Value

The estimated market value of the company at the end of certain number of years, usually 4 to 5 years. This residual value is used in calculating the discounted cash flow of a proposed sale transaction.

Retirement Planning

A process that helps an individual assess when they should retire, how much they need to retire, how much they can spend, and what target rate of return they need to support their retirement objectives.

Reviewed Financial Statements

A type of financial statement that requires that the CPA perform inquiry and analytical procedures in addition to the procedures described above for a compilation. Upon completion, a report is issued stating that a review has been performed in accordance with AICPA professional standards, that a review is less in scope than an audit, and that the CPA did not become aware of any material modifications that should be made in order for the statements to be in conformity with generally accepted accounting principles, or if applicable, another comprehensive basis of accounting. This is known as the expression of "limited assurance." Reviewed financial statements are often prepared for entities that have bank loans, outside investors, or trade creditors, but those third parties do not require audited statements.

Risk Management

For a business owner planning to exit or transition from their business, risk management is a process of considering all the situations that might occur both before and after the event that might impact the time of the event, the valuation of the business, or the owner's wealth management plan.  This process considers planning and/or insuring for owner death or disability, loss of key employees, major liability law suits, or loss of business property.