Glossary of Terms

Accounts Payable

The amounts owed by a business for services or products delivered from a vendor. A Current Liability on a company’s balance sheet.

Related uses or terms – Trade Payables, Working Capital

Accounts Receivable

The amounts owed to a business for services or products delivered to a customer. A Current Asset on a company’s balance sheet.

Related uses or terms – Trade Receivables, Working Capital

Amortization

The reduction of the value of an intangible asset (such as goodwill, intellectual property, patents, etc.) by spreading its cost over the useful life of the asset.

Related uses or terms – Depreciation

Asset Purchase Agreement

A formal legal contract that outlines the terms of the sale of a company’s assets (and sometimes select liabilities but not its stock) owned by the company and to be conveyed to the buyer in exchange for the purchase price.

Related uses or terms – APA, Definitive Purchase Agreement

Book Value

Total assets (minus intangibles assets like goodwill) minus total liabilities.

Related uses or terms – Net Asset Value

Business Broker

An individual (or company) that solicits and represents business owners that are considering selling their business and acts as an intermediary between sellers (business owners) and buyers.

Related uses or terms – business intermediary, investment banker

Capital Expenditures

Monies spent to acquire fixed assets or to add to the value of an existing fixed asset. Capex is used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings.

Related uses or terms – CAPEX

Cash at Closing

Proceeds received by a business owner in the sale of a business after any post closing adjustments such as Escrow payments or Working Capital Adjustments.

Committed Equity Capital

Equity investment funds readily available to an investor to make investments according to a pre-defined investment strategy.

Related uses or terms – Capital Under Management, Capital Available for Investment

Confidentiality Agreement

A document that protects a buyer and seller from the unauthorized use or disclosure of either party’s sensitive or proprietary information.

Related uses or terms – Non Disclosure Agreement

Contingent Purchase Price

The proceeds of a sale of business that are paid only if certain pre-determined criteria are achieved in the months or years after the close of the sale.

Related uses or terms – Earnout

Debt Financing

Borrowing money from an outside source, typically a bank, with the promise to return the principal, in addition to an agreed-upon level of interest.

Discounted Cash Flow

A method for valuing a company by estimating a company’s future free cash flows and discounting these cash flows, using a discount rate, to present value.

Related uses or terms – DCF, Net Present Value

Due Diligence

Research and analysis of a company or organization done before a contract or definitive agreement is signed. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.

Earnout

Payments made to the seller of a business based on the future performance of the business and based on a pre-determined calculation. A form of purchase price.

Related uses or terms – Contingent Purchase Price

EBITDA

A financial term that is a rough proxy for free cash flow. Formally defined as Earnings Before Interest and Taxes plus Depreciation and Amortization and calculated as Net income (revenues minus expenses) plus interest plus taxes plus depreciation plus amortization.

Related uses or terms – Operating Cash Flow, Operating Income

EBITDA Margin

The ratio of a company’s EBITDA to Revenue.

Employment Agreement

A contract that outlines the terms of a employee/employer engagement between a business seller and a buyer.

Enterprise Value

The market value for an entire business. Reflects all claims on the business by all parties including equity holders and debt holders. Roughly calculated as equity value plus total debt less cash.

Equity Value

The value of a company available to equity holders after satisfying all debt obligations. Roughly calculated as the Enterprise Value less total debt plus cash.

Escrow

A trust account established during the sale of a business and held by a third-party (usually a bank). Typically represents 10–15% of the purchase price with a term of 12–24 months. Established to protect the buyer of a business from the sellers’ breach of representations and warranties or covenants of a business sale.

Free Cash Flow

The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits and negative adjustments for capital expenditures. Formally defined as operating cash flow (Net Income plus depreciation and amortization plus taxes plus interest) minus capital expenditures and dividends.

Gross Profit Margin

The ratio of a company’s Gross Profit (revenue less variable costs) to Revenue.

Growth Capital

An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership.

Inventory

Goods held for sale by a business whether in finished (available for sale) or unfinished (raw) form. A Current Asset on a company’s balance sheet.

Related uses or terms – Raw Materials, Work-In-Process, Finished Goods Inventory, Working Capital

Investment Banker

An individual (or company) that assists business owners in private and public capital raising (equity and debt), mergers and acquisitions, and various strategic alternatives analysis.

Related uses or terms – Intermediary

Letter of Intent

A formal, written document indicating the terms a buyer is offering a seller in a proposed acquisition or investment. Although not a contract, it is a document stating a serious intent, by both parties, to carry out the proposed acquisition.

Related uses or terms – LOI (Letter Of Intent), term sheet

Leveraged Buyout

The acquisition of a business utilizing equity or investment capital and third-party debt financing. Typically includes a change of control or change of ownership.

Related uses or terms – LBO (Leveraged Buy Out)

Management Buyout

A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund.

Related uses or terms – MBO (Management Buy Out)

Multiple of Cash Flow

A method for valuing a company by applying a multiplier to a company’s current operating cash flows or free cash flows.

Related uses or terms – Multiple of EBITDA

Non-Compete Agreement

A contract that forbids a business seller from entering into a similar line of business. Typically for five years.

Operating Cash Flow

The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits.

Related uses or terms – Free Cash Flow, EBITDA

Owners' Benefits

Personal, non-business expenses incurred by a company on behalf of a business owner. May include owner compensation in excess of market rates, facility rental expenses in excess of market rates, personal automobiles, family vacations or other personal expenses.

Related uses or terms – EBITDA add backs, non-recurring expenses

Portfolio Company

A company acquired and majority owned by a private equity fund or in which a private equity fund has made an investment but is not a majority owner.

Private Equity

An investment in non-public securities of, typically, private companies. Also an investment asset class typically reserved for large institutional investors such as pension funds and endowments as well as high net worth individuals. Includes investments in privately-held companies ranging from start-up companies to well-established and profitable companies to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, growth capital and distressed investments.

Private Equity Fund

An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of committed equity capital.

Recapitalization

A financing transaction whereby a company borrows money from a third-party financing source such as a commercial bank in order to generate cash for a pre-defined purpose such as funding a purchase and sale agreement, declaring a cash dividend, undertaking an acquisition, or conducting a leveraged buyout.

Related uses or terms – Leveraged Recapitalization

Representations and Warranties

A part of an Asset Purchase Agreement that outlines the statements of facts (both historical, present and future) or the assurances about the business that a seller is making to a buyer. For example, a seller may represent that all accounts receivables reflected on a balance sheet are valid, earned and collectible in the ordinary course of business.

Search Fund

An individual or group of individuals seeking to identify an acquisition candidate that the individual or group can acquire and subsequently manage. Typically, search funds do not have dedicated capital to acquire a business but, rather, have informal pledges from potential investors.

Related uses or terms – Fundless Sponsor

Seller Note

A debt obligation issued by a seller of a business to a buyer and used by the buyer to finance a portion of the purchase price. Typically structured as a five year, interest bearing note. Amortization is usually over five years or, in some cases, a lump sum or bullet payment at maturity. Often subordinated or junior to other classes of debt.

Related uses or terms – Seller Financing, Seller Paper

Subordinated Debt

Any debt that has claims that are secondary, or junior, to a more senior class of debt. May be secured or unsecured debt.

Term Sheet

A preliminary, non-binding indication of the terms – valuation and structure – a buyer is offering a seller in a proposed acquisition or investment. Typically followed by a more formal Letter of Intent.

Related uses or terms – Letter of Intent

Working Capital

The short term liquidity (or cash) required to operate a business on a day-to-day basis. Calculated as Current Assets minus Current Liabilities. Current Assets primarily include Accounts Receivables and Inventory. Current Liabilities primarily includes Accounts Payable.

Related uses or terms – Net Working Capital, Working Capital Ratio

Working Capital Adjustment

A mechanism that ensures that any changes in working capital between letter of intent and closing is fairly captured by the buyer or seller. Includes a working capital target negotiated in the letter of intent. If working capital at close is higher than the working capital target, the purchase price is increased. If working capital at close is lower than the working capital target, the purchase price is decreased.