No. 8: Glossary of Keywords, Topics and Concepts

An audio book version of Building With the End in Mind will be available shortly to complement the current eBook/Kindle, paperback and hardbound versions. To assist listeners as they enjoy the audio book, I am adding the Glossary of Key Words and Concepts here, in writing, so it can serve as a reference while listening. Again, if you have questions that arise after listening to the audio book, don’t hesitate to submit them under the “Ask Questions” tab.

Thanks for reading (and listening!),

David Sr.

GLOSSARY OF KEYWORDS, TOPICS & CONCEPTS  

Age Proximity Rule. This guideline suggests that clients and service providers (such as insurance professionals, financial advisors, doctors, therapists, or consultants) are often within a ten-year age range of each other, easing the processes of trusting, communicating, and understanding one another.

Balance Sheet. This financial statement provides a “snapshot” of a Business’s financial position at a specific point in time. A Balance Sheet contains the details of a Business’s assets (what it owns), its liabilities (what it owes), and the owners’ equity, which represents the net worth of the Business.

Bank Financing. In a Succession Plan for a Professional Services Business, members of the Successor Team may use conventional bank financing for incremental purchases of Equity, or an SBA-backed loan for a complete buy out of the founding owner(s). Bank loans to a next generation Professional Services provider, or PSP, who wants to acquire equity and be a member of the Successor Team are amortized over five to ten years based on lending guidelines at a given bank. Compare and contrast Bank Financing to Seller Financing, also terms in this Glossary.

Basis. Basis (also referred to as “Cost Basis”) is the amount of a capital investment in property for tax purposes. In most situations, the Basis of an asset is equal to what you paid for it, whether with cash, debt obligations, or other property. In a Succession Plan, the Cost Basis is the starting point for calculating gain or loss on the purchase or sale of stock or Equity. If you sell Equity in a Professional Services Business for more than its Cost Basis, you will realize a capital gain. If you sell equity for less than its Cost Basis, you will realize a loss. If the Cost Basis has been depreciated, the amount between the original Cost Basis and the depreciated Cost Basis is taxed as ordinary income. See also Equity, a term in this Glossary.

Blue Sky Laws. State securities laws, also known as “Blue Sky Laws,” are designed to protect investors against fraudulent sales and activities. One of the overarching goals of these laws is to ensure that investors receive accurate and necessary information regarding the type and value of a securities interest. While the laws vary from state to state, the basic framework of every state’s Blue Sky Laws is to require registration of securities offerings unless the securities or the transaction is exempt. Federally, The Securities Act of 1933, The Securities Exchange Act of 1934, and The Investment Company Act of 1940 may also apply depending on the circumstances, subject to common exceptions.

Book. This term describes a one-generational level of ownership as a Professional Services Provider (also see PSP in this Glossary). One can own a Job or a Book; the synonymous terms describe the base model ownership structure as compared to owning a Practice or a Business. A Book revolves around just one person’s talent, drive, and personality. This level of ownership describes as a single individual, usually a sole proprietor, who often works from an executive suite or from home and sometimes on a revenue-sharing basis under someone else’s Practice or Business. The goal of a Book owner is primarily that of revenue production. Compare and contrast a Book to a Practice and a Business, also terms in this Glossary.

Book Building. This term refers to a Book owner who continues to own their own clients and generate revenue  often while sharing space with the larger Practice or Business models.

Business or Firm. In the context of a Succession Plan, and as used in this book, a Business defines an enterprise that is not only larger and stronger than a Practice, a Business has multiple owners and multiple generations of ownership. A Business also utilizes a professional compensation system that supports strong profitability. Profit distributions, in turn, augment the compensation system for Equity owners, to service the debt resulting from a purchase of Equity, and to recruit, retain and reward next generation owners. Sustainability is the goal and a hallmark of a Business or Firm. Compare and contrast a Business to a Book and a Practice, also terms in this Glossary.

Buy-Sell Agreement. See Continuity Plan, a term in this Glossary.

CAGR (Compound Annual Growth Rate). A CAGR is a way to measure how much a business (or investment) has grown over a specific period. The calculation process requires only three inputs: (1) the beginning value, (2) the ending value, and (3) the time period. A CAGR takes into account the effect of compounding which means that the growth builds upon itself.

Capital Assets. In a Professional Services Book or Practice, the individual service provider owns the client relationships, the associated cash flow, any tangible property, and goodwill. Collectively, these are referred to as Capital Assets which can be contributed into an entity structure. This shift in who or what holds the assets and value is the first step in building an Equity-Centric Business. See also Equity-Centric Business, a term in this Glossary.

Closely Held Business. A closely held business is a private corporation or LLC that is owned by a limited number of shareholders or members. Shares or units of such a business are not traded on a public exchange and cannot be purchased by the public. In the case of a Professional Services closely held business, the regulated or licensed owners and/or service providers also typically work in the business on a day-to-day basis.

Continuity Plan. Often referred to as a Continuity Agreement or Buy-Sell Agreement (also known as a Shareholders Agreement in a corporation, or an Operating Agreement and/or a Members Agreement in an LLC), this is a written contract that provides for an orderly transfer of ownership, control and responsibility in the event an owner suddenly leaves a Business. Sudden ownership departures might be due to choice or through termination of employment, a partnership dispute, death, or disability. These professionally drafted agreements anticipate a variety of triggering events and then establish rules to determine who can or will buy the equity and how it is to be valued and paid for. Careful coordination of the Continuity Plan documents with the overall Succession Plan is vital.

Contribution Agreement. This is a legal document through which a sole proprietor or Book owner contributes all of his/her rights, title and interest into an Equity-Centric Business in exchange for Equity via the Tax-Neutral Exchange Process. See also Equity-Centric Business, Tax-Neutral Exchange Process, and Equity, also terms in this Glossary.

Control Premium. A Control Premium is the additional amount a buyer, or G2 in this context, might be willing to pay over the FMV of an Equity Interest in order to acquire a controlling interest in a Business. This reflects that there is value to an owner who can gain control over Business operations and decision making. Compare and contrast to a Minority Discount, a term in this Glossary.

Disregarded Entity (“DE”). A Disregarded Entity refers to one of the tax elections an owner can make after filing Articles of Organization to set up a Limited Liability Company, or LLC. A tax election as a DE allows a single owner to report his/her income federally, and in most states, as though he/she were operating as a sole proprietorship, albeit one with limited liability in certain respects. The taxing authorities then disregard the entity structure for tax reporting purposes.

Drag-Along Rights. If a majority shareholder (typically a G1) desires to sell the entire business to an outside buyer via an Exit Plan, Drag-Along Rights (sometimes referred to as a ‘Come Along’ Right or a ‘Bring Along’ Right) give a majority shareholder authority to compel the minority shareholders (G2s) to sell their shares in the Business to the same outside buyer and on the same terms. Note that the Continuity Plan may require a super-majority of one or more willing sellers. Compare and contrast to a Tag-Along Rights, a term in this Glossary.

Due Diligence. As used in the context of a Succession Plan, Due Diligence is the process of investigating and verifying information about a Business and an investment opportunity. A prospective buyer, or investor, will typically want to review the Business’s financial statements, legal documentation, entity structure and meeting minutes, a stock ledger, tax filings, regulatory and compliance records, operational manuals, Business appraisals, liability and/or litigation issues, among other things.

EBITDA. This accounting term refers to earnings before interest, taxes, depreciation and amortization and is used to measure a business’s overall financial performance. EBITDA is a metric that focuses on the financial outcome of operating decisions by eliminating the impact of non-operating management decisions and is used by investors and banks.

Equity or Equity Interest. In a financial sense, and as used in this book, this term means a share or unit of ownership in a company or Business.

Equity-Centric or Equity-Centric Business. This Business model serves as the foundation to support a Succession Plan. An Equity-Centric Business has five key attributes implemented over the course of a Plan:

1. A shift in value from one or more individual revenue producers, to Equity, in an entity structure
2. A focus on profitability as the measure of business value and success
3. Building a business that, in the eyes of the next generation, is investable
4. Generating consistent top-line growth, year-over-year, and
5. Building a multi-generational, multi-owner Business and achieving sustainability.

Equity-Centric means the owners and ownership prospects are focusing on the value of Equity in the Business and not on individual clients or building their own Book(s) separate from others involved in the entity.

Equity Income. As used in this book and as part of a Succession Plan, the term Equity Income refers to the proceeds paid to the seller of Equity in a given Tranche, usually realized at long-term capital gains tax rates, less any Cost Basis. See also Tranche, a term in this Glossary.

Exit Plan. This term refers to a complete sale of a Book, Practice or Business resulting from a transaction with either an external, third-party buyer or an internal buyer such as a key employee, or son or daughter. Regardless of who the buyer is, the commonality is that the transaction is completed in one step, usually an asset-based sale/acquisition as opposed to the incremental series of stock or equity sales that define a Succession Plan. Compare and contrast to a Continuity Plan and a Succession Plan, also terms in this Glossary.

Fair Market Value (“FMV”). FMV is defined by the American Society of Appraisers as “The amount at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.” FMV is a standard of value and is the most commonly applied standard in the context of a Succession Plan, but it does not necessarily result in the highest value of a given Practice or Business. Compare and contrast Fair Market Value to Intrinsic Value, Investment Value, and Synergistic Value, also terms in this Glossary.

Flow-Through Structure. See Tax Conduit, a term in this Glossary.

G1, G2, & G3. The term “G1” refers to the first generation of ownership, or the founder(s) of a Business. The terms “G2” and “G3” are used to refer to the second and third generations of ownership relative to G1’s age, or the average ages of all the founders of the Business that are still actively engaged. Actual family generations are not required in this system; a gap of 15 years minimum between G1 and G2, and G2 and G3, etc., is usually sufficient to support sustainability in a Professional Services Business.

Hybrid Entity Structure or Hybrid Model. These synonymous terms refer to a common structure utilized by larger Professional Services Businesses often with valuations of at least $5.0M. The Hybrid Structure occurs when the operating entity for the Business is an LLC taxed as a Partnership and one or more of the owners each hold their interest in the LLC/Partnership through an LLC electing to be taxed as an S-Corporation. This is the most powerful and adaptive entity structure for a Professional Services Business because it offers the flexibility and fluidity of a Partnership with the tax savings of an S-Corporation, though it requires multiple entities to achieve these cumulative benefits.

Intrinsic Value. This standard of value refers to the value of a Business if sold to financial buyers, using private equity as an example. Intrinsic value refers to the perceived value of a Business in the eyes of a buyer who sees greater value than a market might ordinarily place on such assets. Value investors look for businesses with higher intrinsic value than market value; they see this as a sound investment opportunity. Compare and contrast Intrinsic Value to Fair Market Value, Synergistic Value, and Investment Value, also terms in this Glossary.

Investment Value. This standard of value refers to the value of a Business if it is to be sold to an investor or a corporate buyer; it attempts to consider the perspective of an investor whose purchasing decision necessitates an investment that can consistently generate a specific rate of return. This differs from Fair Market Value due to the differences in uses and investment objectives. Compare and contrast Investment Value to Fair Market Value, Synergistic Value, and Intrinsic Value, also terms in this Glossary.

IRC or Internal Revenue Code. The U.S. tax code, or Internal Revenue Code, is a body of law covering the federal tax laws in the United States found in Title 26 of the U.S. Code. The IRC is about 7,000 pages long; when tax regulations and official guidelines from the IRS are included, the total body of law is about 75,000 pages. In addition, each state has its own tax code.

Liquidity Discount. This discount from Fair Market Value, typically applied to a Closely Held Business, is a reduction in the value of an Equity Interest due to its limited ability to be converted into cash without affecting its market price. See also Marketability Discount, a term in this Glossary.

LOC or Line of Credit. A Line of Credit provides for immediate liquidity “on demand” with access to funds to be used whenever needed up to the limit of the Line. Unlike a loan which is best used for a onetime, fixed expense with installment-based repayment terms, a LOC functions more like a credit card.

LOS or Length of Service. This term is used to reflect an employee’s time, measured in years, working for a Business or the G1 owner/employer. LOS matters because key employees, even sons/daughters, need enough time to prove themselves worthy as ownership prospects and enough time to decide if they want to make a career-length investment in the equity opportunity at hand.

Managers/Board of Directors. These synonymous terms in this book refer to those authorized to make management decisions for a Business. The structure used for a corporation, that of a Board of Directors, works equally well in an LLC in the form of a Board of Managers. This and other of the traditional “corporate attributes” are adapted for use in an LLC entity structure in this book. The powers of the Directors are set forth in a corporation’s Bylaws or an LLC’s Operating Agreement, each within the statutory structure of the forum state. Directors typically have one vote on key issues regardless of the amount of Equity they own, making this a unique governance tool.

Marketability Discount. This discount from Fair Market Value, typically applied to a Closely Held Business for which there is no public market or exchange, is a reduction in the value of an Equity Interest due to its lack of a ready market. This discount attempts to account for the difficulty in selling an Equity Interest quickly without affecting its price. See also Liquidity Discount, a term in this Glossary.

Members/Shareholders. These terms are used synonymously in this book to refer to the equity owners of a Business. “Members” is a term used by a Limited Liability Company, whereas “Shareholders” is the equivalent term applied by a corporation.

Members Agreement. Often drafted separately from the Operating Agreement in an LLC in which a Succession Plan exists, this agreement serves as the Buy-Sell Agreement. Just as a corporation has Bylaws and a separate Shareholders Agreement, we consistently recommend in this book that LLC’s draft separate agreements for the “constitutional provisions” of the business, vs. the buy-sell terms.

Minority Discount. This term refers to the economic concept that a partial, non-controlling ownership interest (less than 50%) in a Business, may be worth less than its pro rata share of the total Fair Market Value of the Business because the minority owner does not have the authority to direct or control the Business operations. The amount of a Minority Discount, if any, is typically determined by a professional Appraiser and is based on each individual set of circumstances.

Newco, LLC, or Newco. This is the generic term used throughout this book for a new (or existing and rebuilt) entity structure to be taxed and cash flowed as a Disregarded Entity (“DE”), a Partnership, or an S-Corporation. The working assumption is that Newco will be set up as a Tax Conduit or flow-through structure in order to support the individual investors and the Business’s goals under a Succession Plan. See also Tax Conduit, a term in this Glossary.

Officers. On a day-to-day basis, it is the Officers, such as a CEO (Chief Executive Officer), a COO (Chief Operations Office), a CFO (Chief Financial Officer), or even a President and series of Vice Presidents, who make most of the meaningful decisions that move a Business forward and help it to grow and prosper. Officers in a Professional Services Business are usually, but not always, Shareholders as well. This term is used and applied independently of the requirements of many states, which necessitate having a designated President and a Secretary.

Onboarding. This term refers to the process in which an individual contributes his/her Book to a Business (which is typically structured as an LLC taxed as a Partnership) in exchange for an Equity Interest in the Business. See Tax-Neutral Exchange Process and Equity Interest, also terms in this Glossary.

Partnership. Used in the context of a tax election under a domestic LLC, this is the default tax structure when there are two or more owners, also called Members or partners. Profits and losses in an LLC/Partnership can be shared on a pro rata basis or as the owners determine and document in their Operating Agreement. An LLC/Partnership is a Tax Conduit or flow-through entity structure and provides the owners with limited liability protection in certain respects. See also Tax Conduit, a term in this Glossary.

Performance Ratios. See Three-Basket Cash Flow System.

Phantom Income. This term refers to income not physically received by an owner of a Tax Conduit entity but which is still taxable to the individual owner(s), usually on a pro rata basis. Phantom Income occurs when more income is allocated to an owner than is distributed to such owner. It can be created when a business redeems stock from an owner who leaves or retires or when a business pays a non-deductible expense, such as premiums for life insurance policies on the owners.

Plan. See Succession Plan.

Plateau Level Compensation Strategy. This strategy focuses on setting a relatively high level of compensation for each owner as the foundations for an Equity-Centric Business and Succession Plan are being set in place, and then “locking in” that level of compensation for all owners for three to five years at a time, or as determined by the Business’s leadership. Since owners’ compensation is one of the largest Business expenses, freezing that expense allows bottom-line profits to grow more rapidly. The result is that newer, next generation owners learn to focus on growing the business in an efficient, profitable manner in order to maintain their personal cash flow through a combination of fixed wages and growing profits. See Equity-Centric Business and Succession Plan, also terms in this Glossary.

Practice. As compared to a Book or a Business, a Practice is defined as a level of Professional Services ownership that is not only larger and stronger than a Book, its owner will have made the investment in office space, will have at least a small support staff and will have assembled the basic infrastructure (desks, computers, furniture, fixtures, etc.) to support growth. Practice owners tend to have a formal entity structure, commonly an LLC or a corporation taxed as an S-Corporation, even though there is only one shareholder, by definition. With strengthened foundations, time, and a good plan, a Practice can grow into a full-fledged Business with a Succession Plan.

Professional Services Business. The term “Professional Services”, for purposes of the Succession Planning strategies referred to in this book, includes any Practice or Business whose core output is a service requiring specialized knowledge or skill and often requiring a professional degree, license, certification or registration. See Succession Planning, Practice, and Business, also terms in this Glossary.

Profit-Based Promissory Note. This term refers to a spreadsheet modeling process that isolates the share of acquired equity, such as 10%, to the same share of profit distribution dollars received from that specific, 10% equity acquisition only (ignoring any profit distribution dollars from additional equity that might be owned or purchased prior). In a series of overlapping equity purchases or Tranches, each purchase and each separate promissory note (Bank Financed or Seller Financed) stands alone in the modeling of the cash flows and amortization schedule. This strategy, if used, can take the form of a legal Note. See Tranches, Bank Financing, and Seller Financing, also terms in this Glossary.

Profit & Loss Statement, or P&L. Also known as an Income Statement, a P&L is a financial statement that summarizes the revenues, expenses, and any profits or losses remaining, for a specified period of time.

PSP(s). This acronym, used throughout this book, refers to aProfessional Service Provider, or an individual who is capable, by way of licensing, education, or accreditation, of providing professional services to a client.

PSSP. This acronym, used throughout this book, refers to a Professional Services Succession Plan and is also used in the accompanying website supporting this book at www.ProfessionalServicesSP.com.

Residual Equity Strategy. This strategy refers to the ability of a G1, or founding owner, to continue to own up to 10% to 20% of their original shares or equity interest, after retiring and no longer participating in the day-to-day operations of the  Business. This strategy allows G1 to continue to benefit from the flow of profit distributions, as well as stock appreciation rights until the residual ownership is sold. In addition, clients often benefit from the sense of continuity from one generation of ownership to the next. Owning residual equity is subject to regulatory constraints in various Professional Service venues.

ROI or Return on Investment. From a Successor Team member’s perspective, as an investor, profit distributions and stock appreciation are considered to be the Return on Investment for those who purchase an Equity Interest in a Business. The ROI must be sufficient not only to warrant the investment in a Business, but also in the context of a PSSP, to service the associated debt of the buy in process.

Seller Financing. In its simplest form, Seller Financing occurs when the seller of an Equity Interest plays the role of the lender and holds the paper in a transaction—usually in the form of a promissory note. Sellers can mimic current conventional bank lending terms or can offer better terms within certain limits.

Shareholder Value. This concept refers to the cumulative benefits of being an equity owner. The basic formulas, depending on one’s ownership level, are:

For G1 Owners:    Wages  +  Profit Distributions  +  Equity Income  +  Stock Appreciation

For G2/G3 Owners:   Wages  +  Profit Distributions  –  Debt Service  +  Stock Appreciation

Shares/Units. A “share” or a “unit” is a record or indication of ownership, or an Equity Interest. Though technically a share is a corporate term, and a unit is an LLC term, these terms are used synonymously in this book for simplicity and reflect the blending of corporate attributes into the more common LLC entity structure used by many Professional Service Businesses. Essentially shares and units work the same way, but it ultimately depends on the tax election that ownership makes as explained the entity structuring Lessons.  See also Equity Interest, a term in this Glossary.

Statutory Merger. Covered by Internal Revenue Code (IRC), Section 368, as well as applicable state statutes, a statutory merger is a legal process in which one business, the “acquiring” business, effectively absorbs another business so that the latter business ceases to exist as a separate legal entity. In a statutory merger, all the assets, contractual rights, duties, privileges and obligations of the absorbed entity transfer to the acquiring and continuing entity by operation of law, which means that the transfer happens automatically. Shares of stock are exchanged in most cases so that the shareholders of the absorbed business are paid with shares of stock from the acquiring business.

Stock Redemption. A stock redemption occurs when a corporation (or LLC) buys back its own shares or units from an owner in exchange for cash, a promissory note, or other property.

Succession Plan or “Plan.”  As applies to the Professional Services space, a Succession Plan is best defined as a documented series of steps, or Tranches, designed to build a sustainable Business from which to seamlessly and gradually transition ownership, leadership, and revenue production responsibilities internally to a next generation of owner(s), referred to as a “Successor Team”, whose individual members purchase Equity from a founding member in most cases. A Succession Plan is designed to support the evolution of the founder(s) roles and skill sets from entrepreneur, to Shareholder, CEO, mentor, perhaps even a residual equity owner. 

Successor Team or Successors. A Succession Plan involves multiple owners and multiple generations of ownership, gradually assembled over time. The basic formula is this: G1 + G2 + G3, indicative of the next generations of owners, certainly including G1’s children or other relatives if available and appropriate. This group of next generation owners are part of the Successor Team or are individually known as the Successors of a given Business. See G1 + G2 + G3 and Business, also terms in this Glossary.

Support Team. Most Equity-Centric Businesses that successfully implement a multi-Tranche Succession Plan gross over $1.0 million a year, if not at the start, certainly early in the process. At that point, and beyond, most owners need a professional team around them that includes an accountant, usually a CPA or EA, a bookkeeper (often part-time), and a business attorney. These same professionals can help a founder transition into an Equity-Centric Business. This initial and basic Support Team will need additional professionals in the design and implementation of a Succession Plan, to include a Consultant/Plan Designer, a Financial Analyst, an Appraiser, and a banking liaison. An independent insurance professional may also be an important member of this Support Team. See Tranche, Succession Plan, and Equity-Centric Business, also terms in this Glossary.

Synergistic Value. For appraisal purposes, this term refers to thevalue of a business if sold to a strategic buyer who might place additional value on the business due to the synergies that can be exploited by the combined firms. Synergistic value may emanate from increased revenue or lower expenses, additional territories or larger marketing footprint, the combined services that can be offered to both client bases, or some combination of all of these, and other factors, thereby increasing the acquiring firm’s income and cash flow.

Synthetic Equity. This umbrella term refers to the ability of a Business to provide key employees with some of the economic benefits of ownership without actual stock or Equity changing hands. Common Synthetic Equity plans may include phantom stock, stock appreciation rights, a profits interest, or a significant bonus that pays out only at the end of an employee’s career based on the Business’s value or success, among others. Synthetic Equity is something less than an Equity Interest with all its attendant benefits and obligations, and it is something more than a base wage plus a bonus.

Tag-Along Rights. In the context of a Continuity Agreement or Buy-Sell Agreement, Tag-Along rights protect minority shareholders. In the event the majority shareholder decides to sell his/her shares or units, Tag-Along Rights provide minority shareholders the option to participate in the sale on the same terms and conditions as the majority shareholder; in effect, to “tag along.”

Tax Conduit. With conduit entities, such as a corporation electing to be taxed as an S-Corporation, or an LLC taxed as a Disregarded Entity (DE), Partnership, or S-Corporation, the entity itself does not pay taxes federally and in many states. Instead, all income or loss of that Business flow through to the shareholders, pro rata, who report these earnings on their own income tax returns. As with many of the tax laws and supporting rules, exceptions are commonplace at the city, county and state levels. A C-Corporation, in contrast, is not a tax conduit and is considered to be a tax payer.

Tax-Neutral Exchange Process, or “TNE.” This process describes the most common type of “merger” between Professional Service Providers, usually occurring within an LLC taxed as a Partnership. IRC §721 allows for a tax-neutral exchange of assets for Equity in entities taxed as Partnerships, and under certain circumstances, IRC §351 allows for a TNE of assets for Equity in entities taxed as S-Corporations, rather than a formal, statutory merger. See Onboarding and Equity, also terms in this Glossary.

Three-Basket Cash Flow System. This simple, rudimentary, but effective cash flow model is used to convey some important Equity-Centric Business building strategies, compartmentalizing incoming revenue flow to a Business. Basket No. 1 is for general overhead expenses of the Business, Basket No. 2 is reserved for owners’ compensation, and Basket No. 3 is for everything that is left over, or profits. The general idea is this—overhead is the cost of running the Business and encompasses all expenditures except for the owner(s) salary. Basket No. 2 is for the owner(s) annual base salary, or wages for work performed. These two “baskets” serve to acknowledge that everyone, including and especially the owner(s), must be paid for the work that they do, but not all the revenue after overhead is paid should be allocated to the owner’s salary. Balancing the cash flow in an appropriate, tax efficient manner between these three-baskets, or categories, helps to make a Business valuable, profitable, and investable. See also Equity-Centric Business, a term in this Glossary.

T-12. This term is shorthand for “trailing twelve months” of revenue flow.

Tranche(s), and T1, T2, T3. A typical Succession Plan design takes into account the value of the Business, G1’s estimated time to retirement, the business growth rate, profitability, and, of course, the talent and ages of the G2s or prospective owners, among other things. From these inputs, the overall estimated length of the Succession Plan is divided into a series of Tranches, or significant steps. Most Succession Plans have at least two to three Tranches, which are denoted by the terms T1, T2, and T3. If a Plan starts when G1 is in his/her 40s, age-wise, the Plan might have four or five Tranches. See Business, Succession Plan, G1 + G2 + G3, also terms in this Glossary.