Glossary of Business Terms

What is Leasehold?

While most people are familiar with the term "Freehold," the concept of "Leasehold" property may be less well-known. In simple terms, "Leasehold" means that the freehold is owned by another party (the landlord, also called the "lessor"), who grants the right to occupy the property for a specified duration (the "term"). This arrangement includes specific conditions outlining what the occupant (the "tenant" or "lessee") can and cannot do, as well as details such as the payment amount and schedule for the right of occupation (the "rent") and when those payments can be reviewed or adjusted ("review date"). All of this information is documented in a legal agreement known as "The Lease."

There are two important considerations regarding leases. First, whether the lease is "assignable," meaning the tenant has the right to transfer the lease's benefits to another party—such as the buyer of a business operating from the premises—provided they meet the suitability criteria to become tenants. Second, whether the lease can be used as "security" for a loan.

It’s essential to note: not all leases are renewable, not all leases are assignable, and not all leases can be used as security for a loan.

Landlord & Tenant

Landlords can be private individuals, local authorities, or property companies. In most cases, tenants have the opportunity to renew their lease when it expires. This may be due to an option to renew included in the original lease, the landlord’s preference to continue renting out the property, or a legal obligation under the Landlord and Tenant Act, 1954.

Typically, tenants retain the right to renew their lease for an additional term, provided they have complied with all the conditions of the previous agreement. Your solicitor will guide you on the specific implications of the lease you are considering and whether it guarantees a clear right to renewal upon expiration.

Security

This term refers to a tangible asset that the finance source can hold or secure during the loan period. Examples include freehold or leasehold property, valuables, or other assets with readily realizable value. To ensure these assets can be quickly sold to cover the debt, their value is often discounted.

If the borrower defaults on the loan, the lender will first turn to this "primary security" to recover the outstanding debt. Additionally, lenders typically require "personal guarantees" from the borrowers, making them liable for any remaining debt after the primary security has been liquidated.

"External security" refers to additional collateral offered beyond the primary security, such as a house or shares, to further safeguard the loan.

Equity

If the value of the business you are purchasing does not provide sufficient security for the loan you require, a 'second charge' can be placed on 'external security,' such as a house that already has an existing mortgage. 'Equity' refers to the difference between the property's market value and the outstanding mortgage (the 'first charge'). However, usable equity is typically calculated as 70-80% of the property's value under a 'forced sale' scenario, minus the outstanding mortgage. It's important to note that 'third charges' are generally not considered acceptable as additional security.

For example, if a house is valued at £100,000 on the open market but has a forced sale value of £75,000, and the first mortgage on the property amounts to £50,000, the usable equity available as additional security for a loan would be £25,000.

S.A.V.

'SAV' stands for 'Stock at Value' and is commonly mentioned in advertisements or sales particulars, immediately following the price. The stock value is determined on the day of completion, typically by independent stock valuers, based on its 'cost price.'

The purchase price of a business generally consists of the freehold value or lease value, the 'goodwill' of the business, and the value of fixtures and fittings. Together, these elements form the 'asking price' quoted in advertisements. In addition to the asking price, you will also purchase the stock at its cost value on the day of completion.

Loans are usually calculated as a percentage of the price excluding SAV. This means you will typically need to cover the remaining percentage of the price, including SAV and purchase-related expenses, using your own funds, often without the option of further borrowing.

Accounts

Financial accounts are inherently historical records and may not accurately reflect the current performance of a business.

When evaluating a business, aim to determine its turnover and profitability for a recent trading period, such as the past 12 or 13 weeks—unless the business is highly seasonal. Be prepared to rely on the vendor's statements or any supporting evidence provided, such as VAT records, which are often an excellent source of this information.

Further verification can be conducted after your offer has been accepted. In many cases, an independent valuer will assess the business's performance, examining turnover and profitability as part of the lender's loan evaluation process.

Clearing banks typically request three years of audited accounts. While these can be useful for identifying trends, they are less effective for gauging the business's current profitability.

Finally, note that it is standard practice for accounts to present turnover and expenses excluding VAT. Therefore, the business's "takings" (the amount passing through the till) will generally be higher than its "turnover" (takings less VAT).

Gross Profit

Gross profit is typically calculated as the difference between the purchase price of a product (i.e., the cost charged by the wholesaler or supplier, excluding VAT) and the selling price, also excluding VAT. This difference is expressed as a percentage of the selling price.

In labor-intensive industries-such as garage repair workshops or hair salons-wages are sometimes factored into costs before gross profit is determined.

For example, if goods are purchased for £10 plus VAT and sold for £15 plus VAT, the gross profit is £5. The gross profit margin, in this case, would be calculated as (£5 ÷ £15) × 100 = 33.3%.

It's important not to confuse gross profit margin with 'mark-up.' Using the same example, the mark-up is based on the cost price: (£5 ÷ £10) × 100 = 50%.

Net Profit

Net profit represents the amount remaining from the gross profit after deducting operating expenses. These operating expenses typically include costs such as rates, electricity, wages, accountancy fees, insurance, telephone bills, motoring expenses, and similar outlays.

In trading accounts, certain expenses unique to the business owner—such as finance charges, taxation, depreciation, and owner’s drawings—are also listed. This is why the term "adjusted net profit" is often used. Adjusted net profit reflects the profit that would have been achieved if personal or variable expenses had been excluded.

It's important to note that, unless you are purchasing shares in a limited company, you are generally only entitled to access the vendor's profit and loss account—not their balance sheet.

Goodwill

Goodwill represents the portion of a purchase price attributed to the 'intangible value' of a business.

While tangible assets like freehold property, leases, or fixtures can be assigned specific values, these alone do not define the essence of a business—or make it one worth acquiring.

Goodwill accounts for the value of a business's established reputation, consistent customer base, reliable trade levels, and other intangible factors, such as operating efficiently within limited hours. This intangible element is often what sets a thriving business apart.

Fixtures & Fittings

These are the items included in the sale price that are essential for displaying, storing stock, or operating the business. Examples may include a counter, till, frozen food cabinet, alarm system, barber's chair, flooring, or computer, depending on the nature of the trade.

An inventory outlining the included items is typically prepared as part of the contractual agreement. Unless otherwise specified by the vendor or selling agents, it is generally assumed that the buyer will acquire these items free from any outstanding liabilities, such as hire purchase agreements or leases.

Items not owned by the business, but provided on free or nominal loan by suppliers—such as ice cream cabinets, greeting card stands, or hosiery displays—should be clearly identified in the agreement to avoid confusion.

Replayability

This refers to a business's capacity to repay or "service" its debt while also covering regular expenses and achieving a satisfactory level of profit.

What qualifies as an "acceptable profit" depends on the nature and scale of the business in question.

When evaluating borrowing, both lenders and borrowers must ensure there is a clear and realistic ability to repay the loan within the agreed timeframe. This assessment should also account for potential fluctuations in interest rates and variations in trade performance.

EBITDA

EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a fundamental measure of a company's profitability and cash flow capacity. It is derived by adding back interest, taxes, depreciation, and amortization to net income, offering a clearer view of a firm's core operational performance.

This can be used to a form of valuation, once you know the profit, you can multiply the profit by the return you want then add the fixtures and fittings and any other assets to formulate a value.

The issue is that the period in which you are looking for 100% return on investment is not the same from buyer to buyer or seller to seller.