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11 Essential M&A Definitions for Business Owners

By Generational Equity

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In any industry, you can expect to come across unique words and phrases that would stump the uninitiated. As a successful business owner, you probably have a strong understanding of terms used in your industry and how they can often be confusing to those outside of the business.

The same is true in M&A, but these terms are important for any business owner to be aware of while exit planning. The important thing to remember is you will likely exit your company one day, so taking steps to prepare early to understand M&A terminology will place you in a better position to secure your financial future for life after business.

At Generational Equity, we prioritize helping our clients understand what is required to exit their business for the optimal value. Whether it is through our comprehensive M&A executive conferences, or in face-to-face meetings, we think it is crucial that people leave with a clear picture of how we’ll achieve this goal.

In that vein, we have put together an essential list of M&A terms and their definitions that will give you an informed understanding of key M&A terms. When you decide to exit, you must become very familiar with these. Hopefully, these give you a head start when you meet our M&A advisors for the first time.

Plus, this is just a sample. If you want to really immerse yourself in the world of M&A, download our white paper The Ultimate Glossary of Must-Know Terms if You’re Selling a Business.  So here are 11 key terms to know:

Below-the-line items

Items that are considered below-the-line are extraordinary incomes or expenses that companies don’t incur on a regular basis. It is vital to consider these when recasting a company’s financials, which will present the most accurate portrait of your company’s value to buyers.  Note:   The term “recasting” is covered below.

Book Value

Book value is the value of an asset on your balance sheet, calculated by finding the cost of an asset, minus the accumulated depreciation, depletion or amortization. These help you understand the book value of the assets in your business, an important early step in the M&A process.   However, keep in mind that since most of your assets may be fully depreciated, your book value is NOT the true value of your company in many cases.

Dry Powder

This is the amount of capital yet to be invested by private equity firms in their portfolio. With PE firms currently sitting on a record amount of dry powder, this term could be very valuable when choosing the ideal buyer for your business.

Generally Accepted Accounting Principles (GAAP)

These are standard accounting principles for financial reporting, as set by the Federal Accounting Standards Advisory Board. It is important to understand when you need to apply these terms in presenting the value of your company because professional buyers will want to see financials that are in GAAP compliance in most cases.

Intangible Assets

Your intangible assets help set your business apart from others. While these hidden values won’t appear on your balance sheet, such as patents, proprietary software, and branding, these will be important in achieving a premium offer from the optimal buyer. Our team at Generational Equity are specialists at helping middle-market business owners identify these” off-balance” sheet items and present them to buyers that will often pay a premium for them.

Letter of Intent

When selling your business, a letter of intent will form the crux of negotiations with your potential buyers. Covering key elements of your deal structure, such as price, terms and conditions, this written agreement is essential before committing to any discussions.

Nine-Year Ramp

Your nine-year ramp will show buyers the past, present and future of your company’s growth. Made up of the past three historical years, a base year and a five-year pro forma, this information will tell buyers that your company is worth acquiring or investing in.

Platform Company

A platform company is one acquired by a private equity firm that will be gradually grown through other acquisitions. Our advisors at Generational Equity have noted a growing trend for this activity in M&A. So, when you decide to sell, your company might be purchased as a long-term investment, or to bolster the growth of another business. Either way, these can lead to premium offers.

Purchase Document/Acquisition Agreement

The end goal of all your hard work – the legal document transferring ownership from seller to buyer. This will be drafted by the buyer at the end of negotiations, setting out the complete deal structure and terms of the acquisition. It is at this point in the exit process that you will need professional M&A advice because unless you have sold a company before, you may not understand all the terms and how they impact you. 

Recasting

Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses, and nonrecurring revenues and expenses.

Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability and allows meaningful comparisons with other investment opportunities. It is a critical first step in ensuring that your historic financials reflect your company’s true profitability, especially since it forms the starting point of your pro forma.

S.W.O.T Analysis

This considers a company’s strengths, weaknesses, opportunities and threats. This should be handled early on, to help you understand what the competitiveness of your business will be on the market, and establish ways to reduce any negatives in the eyes of buyers.   Again, having professional, third party, objective input on your SWOT analysis is very important.

Take the next step on your M&A journey

We hope these definitions provide a window into the process of selling a business. Exiting is something every business owner will need to consider one day, so taking the time to read these is a step towards an optimal business sale.

Take the next step by joining us for a complimentary executive conference. These are held throughout North America, and provide attendees with a detailed breakdown on exiting a company and building a buyer-ready business. In just a few short hours, you’ll have a firm grasp on the steps needed to sell a business and better position yourself to secure an optimal deal for your company.

For advice from one of the country’s leading M&A advisory firms, call Generational Equity today at 972-232-1121 or fill out our contact form.