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.
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.
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.
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.
Book Value
Total assets (minus intangibles assets like goodwill) minus total liabilities.
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.
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.
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.
Confidentiality Agreement
A document that protects a buyer and seller from the unauthorized use or disclosure of either party’s sensitive or proprietary information.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.