Capital Structure - Capital structure refers to a company’s outstanding debt and equity. It provides insight into the level of financial leverage and type of funding a company uses to finance its activities.
Capex - Capital expenditure, or Capex, is the use of funds or assumption of liabilities to acquire, upgrade, and maintain capital assets such as property, industrial buildings, or equipment.
Confidential Information Memorandum (CIM) - A confidential information memorandum is a document drafted by an M&A advisory firm or investment banker and is used in a sell-side engagement to market a business to prospective buyers or investors.
Due Diligence - Due diligence is an investigation of a business being acquired to confirm all relevant facts, and includes a review of financial records and other information deemed material.
Earnout - In the sale of a business, an earnout is an arrangement that allows the seller to obtain additional compensation in the future if the business achieves certain goals, typically related to achieving profitability targets.
EBITDA - Earnings before interest, taxes, depreciation and amortization (EBITDA) is an indicator of a company’s financial performance. A multiple of EBITDA is the most commonly used valuation metric in private company purchase and sale transactions.
Enterprise Value (EV) - Enterprise value is a measure of a company’s total value and is calculated as the value of the equity, plus debt, minus cash and marketable securities.
Escrow - In an escrow arrangement, financial assets are held by a third party on behalf of the parties that are in the process of completing a transaction. The funds or assets are released by the escrow agent once it receives instructions or predetermined contractual obligations have been fulfilled.
Fair Market Value (FMV) - Fair market value refers to the highest price that an asset or a business would sell for between a willing and able buyer and a willing and able seller acting at arm's length in an open and unrestricted market.
Free Cash Flow - Free cash flow represents the cash a company generates after the investment required to sustain the business. It provides a measure of the company's financial performance.
Goodwill - Goodwill represents the value of the intangible assets acquired in a business acquisition. It arises when one company purchases another at a premium to its net book value.
Holdback - A holdback is a portion of the purchase price that is not paid at the closing date. It is used as a reserve to cover certain contingencies and remains unpaid until a specified date or until certain conditions have been met.
Letter of Intent (LOI) - A letter of intent is the offer that a buyer submits to a potential seller of a business and, when signed by both parties, forms the initial agreement stipulating the purchase price, and key terms and conditions governing the proposed transaction.
Management Buyout (MBO) - A management buyout is a transaction where a company’s management team secures financing and purchases the assets and operations of the business they manage.
Mergers and Acquisition Advisor - A mergers and acquisition (M&A) advisor, also referred to as an Investment Banker, provides advice on corporate mergers, acquisitions and divestitures as well as debt and equity financing.
Mezzanine Debt - Mezzanine debt is a middle layer of capital that falls between secured senior debt and equity. It is more expensive than senior debt but less costly than equity, and is often used as a flexible part of the financing package in an acquisition.
Multiple - A multiple or "multiplier" is applied to a specific financial metric of a company to calculate the business' valuation or assess its reasonability. The most common financial metrics that multiples are applied to include EBITDA, EBIT, Net Earnings and Revenue.
Personal Goodwill - Personal goodwill relates to the ability, skills, experience, contacts and reputation of individuals within a business, most often the owner. The value of a business in a sale is diminished to the extent that this goodwill cannot be transferred to new owners.
Private Equity - Private equity is comprised of funds and investors that directly invest in or acquire established private companies. This type of financing is often used in support of management buyouts.
Purchase and Sale Agreement (PSA) - The purchase and sale agreement is the definitive agreement that finalizes all terms and conditions in the purchase/sale of a company as originally outlined in the letter of intent.
Quality of Earnings - The quality of earnings, used in the context of a business acquisition, usually refers to how closely a company's financial statements reflect the true and sustainable profitability of the business. Due diligence often comprises a quality of earnings report.
Recapitalization - A recapitalization is the restructuring of a company's capital structure (debt and equity), and is often used by shareholders seeking liquidity to fund dividends, repayment of shareholder loans, or a partial sale of the business.
Redundant Assets - Redundant assets are those assets that are not specifically required by a company to generate earnings. As they are “redundant” to the operation of a business, these assets are typically retained by the seller when a business is sold. Cash, marketable securities, and land are often examples of redundant assets.
Representations (Reps) and Warranties - Reps and warranties is a term used to describe the assertions that a buyer and seller make in a purchase and sale agreement. Representations are provided to disclose material information, and the warranties are a promise to indemnify the other party if the representations are false.
Roll-Up - A roll-up (also known as a consolidation) is a term used to describe a strategy where smaller companies with similar products and services are acquired and merged to achieve industry consolidation.
Strategic vs. Financial Buyer - A strategic buyer is an acquirer that is in the same industry/business as the target company, and typically looks to buy businesses that can be integrated with its main operations. A financial buyer typically looks to invest in a company to improve its operational performance and then sell the investment at a profit within a three to seven year timeframe.
Teaser - A teaser is a short summary document that highlights the sales process and the attributes of a company for sale or an investment opportunity. It is sent to prospective buyers in order to determine their initial level of interest in the opportunity.
Vendor Take Back (VTB) - A vendor take back is a form of purchaser financing that involves the seller agreeing to lend a portion of the sale price back to the buyer, and is usually subordinated to all senior debt.
Working Capital (WC) - Working capital, also known as net working capital, is a measure of current assets minus current liabilities on a company's balance sheet. A buyer will generally require that a minimum net working capital level is included in an acquisition.
Working Capital Adjustment - A working capital adjustment will occur when the net working capital level delivered at closing is above or below the amount previously agreed to by the parties (the working capital peg). The purchase price is adjusted up or down on a dollar for dollar basis to reflect the level of working capital delivered relative to the peg.