The following terms and definitions will help you understand the business when you are purchasing a restaurant.
Ability to Pay - The borrower's ability to meet principal and interest payments on long-term obligations with money generated from the restaurant's earnings.
Accounts Payable - The amounts your business owes on open account to its creditors for the goods and services they have already supplied.
Accounts Receivable - The money owed to your restaurant by its customers for goods and services you have sold to them on open account.
Ad Valorem - Latin term for "according to value." The method for determining taxes on goods and property.
Asset - Anything your company owns, including, but not limited to, cash, inventory and property.
Audit - Examination and verification of a company's books and financial documents.
Bad Debt - The kind you don't want to have! An open account balance or funds that your company has been unable to collect. It can be written off against profits on your tax return.
Balance Sheet - A financial report showing the balance of a company's assets, liabilities and owner's equity.
Barter - Trade amongst small businesses where good and services are swapped rather than bought. Be aware that the IRS still considers a barter to be a taxable transaction.
Break-Even Point - Point at which your sales volume equal your expenses. Any monies beyond that point are considered profit.
Budget - Annual estimate of your income and expenses. Your income should always be equal or greater than your expenses.
Calendar Year - 12 month period running from January 1st to December 31st.
Capital Gain - The difference between an asset's purchase price and selling price. If you sell your business for more than what you paid for it, as in most cases, you are subject to a capital gains tax.
Depreciation - The wearing out of equipment in a business and the amortization of the costs of fixed assets over time.
Fiscal Year - An accounting period covering 12 consecutive months, 52 consecutive weeks, 13 consecutive four-week periods or 365 consecutive days.
General Ledger - Formal ledger that includes all of a company's financial statement accounts.
Goodwill - The value of your company as an operating business in addition to its inventory, property, assets and accounts receivable.
Lien - A creditor's claim against property allowing a creditor to seize property if terms of an agreement are not met.
Outstanding - Unpaid balances, items that have not yet been presented for payment and accounts receivable with balances due.
Profit and Loss Statement (P&L) - Summary of company's income and expenses during a given period. A P&L and balance sheet constitute a company's financial statement.
Secured Debt - Debt that is guaranteed by collateral.
Seed Money - Money first invested in a start-up business. This usually comes from the entrepreneur's own pocket, an investor or other sources.
Subchapter S - A corporation of 35 or fewer shareholders that meet certain requirements from the Internal Revenue Service Code to qualify. S corporations follows the tax laws of a partnership, which allows them to distribute income directly to shareholers and avoid corporate income tax.
Undercapitalized - The condition of a company not having enough money to carry out its normal business functions.