Terms and Definitions
Key Terms & Definitions
The transfer of a corporation's stock or assets when purchased by a buyer.
A business acquired by a private equity firm to supplement a larger company. The acquisition is "added on" to create an even larger corporation.
Often referred to as a Recasted Cash Flow Analysis, Adjusted Earning is the adjustment of historical financial statements to reflect expenses not related to the ongoing running of a business.
Allocations of Purchase
This refers to the value assigned to intangible and tangible assets of a company when a premium over historical cost has been paid.
As asset sale is the most common type of sale performed by The Firm. In this structure, the Buyer forms a new corporation or limited-liability company that then purchases the assets of the previous owner's company. This includes hard assets such as equipment, as well as intangible assets. Some example of intangible assets are a business' customer lists, business name, social media/websites and software.
The potential value of tangible assets if they were to be sold at auction.
A verification process to determine the accuracy of financial statements.
Revenue or expense items that are non-recurring, and that are separated in a financial statement from typical, or above-the-line, results and recurring items.
The capitalized cost of assets less depreciation, depletion or amortization, as it appears on a company's books.
A Buyer/Seller Meeting is the initial meeting between the prospective Buyer of a business and the current owner, or Seller. This can take place in person via conference call, or at the company location.
A compiled list of prospective buyers a seller would consider approaching with an investment opportunity.
A buyer's market refers to when market conditions are more favorable to buyers, which typically occurs when supply is in excess of demand.
Capital Gains Tax Rate
One of the most important taxes to consider when selling a business, capital gains tax refers to the tax rate applied to the difference between the basis in an asset and the amount it sold for.
Capitalization is the conversion of historic or projected income into value. Capitalization can also be applied to the capital structure of a business enterprise, or an expenditure as a capital asset to be depreciated over time.
A percentage used to convert income into value.
Cash Flow is the current owner's disposable income from running the business, and is computed by using the net income figure plus any non-cash items such as asset depreciation, interest paid for loans that will not be assumed by the Buyer, and an owner "perks".
Cash Flow Lending
Unsecured financing based on the timing and certainty of the borrower's cash flow.
Cash Flow Statement
Analysis of changes that affect cash during an accounting period, with the changes separated into operating, investing and financing categories.
Confidential Business Review
A detailed description of a business and its growth opportunities, including information on products, services, markets, competitors, organization, facilities and financial information. A Confidential Business Review is only shared with buyers who have signed a confidentiality agreement.
An agreement reached between seller and buyer in which the seller provides business advice and/or direction for a certain amount of time and compensation.
Contingent Offer to Purchase
A Contingent Offer to Purchase is submitted to The Firm by a prospective Buyer who intends to make a purchase of the business. To protect both the current and future business owner, only one Contingent Offer to Purchase can be placed on a listing at one time. This states that if all contingencies outlined on the offer are met, the business will be sold to the Buyer after due diligence is complete.
Covenant Not to Compete
Referring to an agreement by which the seller agrees to abstain from business that would be in competition with the company being sold, and is often for a specified period of time.
The term "deal flow" refers to the number of new deals that are referred to a brokerage's investment banking division. While this generally involves stock and bond issues, it may also refer to mergers and acquisitions.
This refers to any issue that cannot be resolved to the satisfaction of both Buyer and Seller. Common deal killers are employee fears of losing jobs, vendors concerned about losing an account or irrational behavior by either party.
The person who facilitates mergers and acquisitions; also known as an intermediary, finder or investor.
The allocation of funds paid for a business. Deal structures often consist of cash, notes, stock, consulting agreements, earnout provisions, and non-compete clauses.
Depreciation and Amortization
A reduction in the value of an asset over time.
A down payment is the amount of liquid capital a prospective business purchase should expect to invest up front when buying a business. Typically, we recommend 10% of the purchase price, but amounts vary by deal.
The due diligence phase occurs after a Contingent Offer has been placed, but before the final closing. This phase typically includes a full review of tax returns, buyer's inspection of the assets, and securing of financing.
Standard acronym for earning before interest and taxes.
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. This is the net income of a company, adding back only specific expenses which will not apply to the new owner.
A portion of the purchase price contingent on the future performance of a business. An earnout is payable to sellers only when certain predefined sales or income are achieved.
Employee Stock Ownership Plan (ESOP)
An ESOP is a stock bonus in which employees have the opportunity to purchase securities issued by the owner.
An agreement reached between Buyer and Seller in which the Buyer agrees to continue the Seller's employment in the business. Employment duration and pay are hammered out during negotiations.
An owner's definitive action plan to strategically exit the business through the M & A process. An exit plan takes into consideration the owner's personal and financial goals.
FF & E
This stands for Furnishings, Fixtures and Equipment, and describes the hard assets owned by the business that will transfer to a new owner. Usually, FF & E are part of the purchase price.
Fair Market Value
A price at which a business would change hands between a Buyer and Seller. A Buyer must not be compelled to buy, a Seller must not be compelled to sell, and all parties have knowledge of the relevant facts.
Fixed Interest Rate
A fixed interest rate is an interest rate that doesn't fluctuate with general market conditions.
Free Cash Flow
Available cash for distribution after taxes but before financing. Free Cash Flow is calculated as debt-free net income plus depreciation less expenses required for working capital. Capital items are adjusted to remove effects of financing.
The Firm provides prospective funding examples of its listed businesses. These are our estimations of the Buyer's required initial down payment, and how much of the business could be financed through a traditional lender. There are many factors which determine lendability, to the funding example should be used as a guideline rather than a hard rule.
Going Concern Value
The gross value of an operating business.
These are the "top line" revenue figures of each business, counting all income the business received in a given year. This does not take into account taxes, depreciation, interest or amortization.
The purchase of similar businesses, including competitors.
Determining the value of a business based on anticipated financial benefits.
The compensation or act of compensating for the losses or damages sustained.
Nonphysical business assets with value, such as patents, software, heavily depreciated assets, experienced staff and strong contractual relationships. These are not shown on a balance sheet, and are sometimes referred to as Off Balance Sheet Items.
Usable stocked goods to be resold or used to supply services for the company's customer base.
Letter of Intent
A written agreement defining preliminary understandings of contractual negotiations on a proposed transaction. This typically covers purchase price, terms, and conditions.
The availability of liquid assets to a market or company, determined by how easy it is to convert assets to cash.
M & A Advisor
An experience professional that assists business owners throughout the selling process, from valuing the company to finding buyers and negotiating a deal.
Valuing a business by comparing it to similar businesses that have been sold.
In conjunction with the Market Approach of valuing a business, Market Multiple is a factor applied to a business to generate an indication of value. The market multiple is derived from marketplace transactions where the value can be divided by similar companies' financial data.
Combining one corporation with another.
A company with sizeable annual revenues between as little as $10 million and as high as $100 million plus.
A multiple is a number, typically between 1 and 5, used by valuation experts in brokerage, banking and insurance industries. This determines the market value of a business when its list price is computed by a Cash Flow Valuation. The number is determined by an average of 20 parameters that characterize a company's current strength.
Multiple Buyer Process
The involvement of many buyers in the purchase of a business. This often increases the price paid and improves the deal structure.
Mutual Confidentiality Agreement
Sometimes referred to as an NDA, this is an agreement signed between each Buyer or Seller and The Firm, allowing each party to share their information confidentially and securely.
A company's total assets less total liabilities
Net Cash Flow
Calculated by net income plus depreciation less expenditures required for working capital and debt repayment. Net Cash Flow is the cash available after taxes.
Net income is the amount left over after all business expenses are paid each year.
Net Operating Income (NOI) is the yearly amount the new business owner can expect to profit after all expenses and any new loan payments are made.
A deal structure where a portion of the purchase price is based on an agreement that prohibits a Seller from operating a competing business for a certain amount of time after selling a current business.
Optimal Time to Sell
When market conditions is ideal for a seller. Contributing factors for a seller's market include low capital gains tax rates, low interest rates and high buyer activity.
Steps taken to plan for successfully integrating two companies, including how to merge management and support culture.
Private Equity Firm
Sometimes referred to as a private equity group (PEG), this type of firm pools capital for the acquisition of businesses to maximize their investment value. A private equity firm typically buys part of all of a company, with the aim of helping a business grow at an accelerated rate. Often, a PEG will then sell the business after growing it for a large return on investment.
The addition of a product or service that can be sold in the business acquirer's current geographic area and to current customers.
Pro Forma Statements
Financial statements based on one or more assumptions or hypothetical situations built into data. Pro forma statements should be supported by a documented, reasonable future of a business.
Rate of Return
A percentage of an investment, found by determining the amount of income (or loss) and change in value anticipated or realized on that investment.
Financial statement adjustment that removes expenses unrelated to the ongoing business, such as the seller's retirement plan or personal expenses that are run through the business. Recasting offers a view of a company as if it were run by management seeking to maximize profitability, and allows for comparisons with other businesses.
Replacement Cost New
The value placed on an item if it were to be purchased new today.
Representations and Warranties
Disclosure of all legal and financial material of the business to the Buyer. A Buyer would also disclose their legal and financial ability to purchase the business.
Assets not included in the purchase of a business. These can include a Seller's personal items.
Return on Investment (ROI)
The percentage of the Buyer's initial down payment that will be recouped in the first year under normal operating conditions.
The analysis of a company's strengths, weaknesses, opportunities and threats, and is key to understanding a company's competitive position and growth potential.
Seller Carryback is the total amount of the purchase price that will be paid to the seller in increments by the buyer, often referred to as a Promissory Note to Seller.
The value of a company less debt retained in the business and assumed by new owners.
A stock sale occurs when the Buyer purchases the ownership interest in the company. This type of purchase is less common because all indemnification and obligations of the previous owner are then taken on by the new owner.
A buyer willing to pay a premium above economic value based on projected growth and profit that can be achieved by consolidation.
Identifying and training key employees to fill management positions within a business as they become available. This is done prior to the sale of the company so that Buyers can see that the business operates smoothly in the absence of the current owner.
Physical assets, such as cash, real estate and machinery.
A company that is being acquired
A non-binding, preliminary agreement that sets forth the basic terms and conditions under which an investment is being made.
An agreement's details, such as price, payment schedule and interest rate.
The announcement of an acquisition.
During the due diligence phase, the Seller and Buyer determine an amount of time that the Seller will remain active in the business to ensure the smooth transition of employees, vendors and key customers.
A valuation determines the list price for an available business represented by The Firm. There are several types of valuations, but Cash Flow Valuations and Cost-to-Create Valuations are the most widely used.
A reasonable price at which a business passes from Seller to Buyer.
Variable Interest Rate
Refers to an interest rate that moves at a set level above or below an index rate, which usually a bank prime rate.
Occurs when a company buys a supplier or customer business in order to expand operations into different steps of the same production path.
Excess of current assets over current liabilities.