As is true of most industries, the M&A industry has developed M&A terms, much of it confusing to uninformed business owners. In this article we thought we would demystify some of these terms so that you will have a greater comfort level when discussing the idea of actually selling your company. This will be especially true if you are considering selling your business without professional representation. Knowledge of these key terms will be critical.
Adjusted (Recast) Book Value – The book value that results after one or more asset or liability amounts are added, deleted, or changed from the respective book amounts via the recasting process (see recasting below).
Adjusted (Recast) Earnings – The earnings that result from the adjustment of historical financial statements reflecting items that are unrelated to the ongoing business via the recasting process described below.
Asset-Based Valuation Approach – A method of determining the value of a business’ assets and/or equity interest using one or more methods based directly on the market value of the assets of the business less liabilities.
Asset Sale – A form of acquisition where the seller of a corporation agrees to sell all or certain assets and, in some cases, the liabilities of a company to a purchaser. The corporate entity is not transferred.
Book Value – The difference between total assets (net of depreciation, depletion, and amortization) and total liabilities of an enterprise as they appear on the balance sheet.
Business Valuation – The process of arriving at an opinion or determination of the economic value of a business or enterprise.
Confidential Business Review – A book containing a detailed analysis of a business and its growth opportunities. Also called an Offering Memorandum.
Confidential Business Profile – A brief profile of a business that is used to solicit buyer interest. It is usually a one- to two-page synopsis of the Confidential Business Review. It is also called a Profile Letter or a Teaser.
Confidentiality Agreement – This document is signed by potential buyers and it requires them to keep the information contained in the Offering Memorandum and ensuing discussions completely confidential. This document is signed BEFORE the Offering Memorandum is sent.
Deal Structure – The allocation of the consideration paid for a business. Components could include cash, notes, stock, consulting agreements, and earn-outs. Many non-cash deal structure components have tax benefits to sellers.
Discount Rate – A rate of return used to convert a monetary sum, payment or receivable in the future into present value.
Due Diligence – The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and future of the business to be purchased. Due diligence occurs subsequent to the Letter of Intent (see below).
EBITDA – Earnings before interest, taxes, depreciation, and amortization. It is typically the number used by most evaluation firms when valuing an enterprise.
Earn-out – The portion of the purchase price that is contingent on future performance. It is payable to the sellers only when certain pre-defined levels of sales or income are achieved in the years after the acquisition.
Enterprise Value – The value of a business, using any number of valuation approaches, as an integral operating unit rather than as a collection of individual assets and liabilities.
Financial Buyer – A buyer interested in a target based solely on the financial return of the investment rather than any strategic or synergistic reasons.
Intangible Assets – The assets of a business that have value but are non-physical and not shown on the balance sheet. Some common ones include patents, software, depreciated assets, contracts, and experienced employees.
Letter of Intent – A written agreement that defines the respective preliminary understandings of the parties about to engage in contractual negotiations on a transaction. Items covered typically include price, terms, and conditions.
Market Approach of Valuation – A general way of determining a value of a business using one or more methods that compare the subject to similar businesses that have been recently sold.
Net to Owner – The amount realized by the owners of a business from its sale. Usually it is the enterprise value of the business less debt retained in the business, plus the net assets and liabilities not included in the sale and retained by the owners.
Recasting – Also known as financial statement adjusting, recasting eliminates items that are unrelated to the ongoing business from the historical financial presentation. These can include superfluous, excessive, or discretionary expenses and non-recurring revenue and expenses. It is a critical piece of any business valuation and not doing it accurately is one of the five common mistakes made by business owners.
Stock Sale – A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Synergistic Buyer – The opposite of a Financial Buyer, a Synergistic Buyer is one willing to pay a premium above the economic value of a business based on additional growth and profit opportunities that can be achieved through the benefits of consolidation. Intangible Assets play a key role in this premium.
Term Sheet – A preliminary, non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet usually precedes the Letter of Intent.
Obviously, this list is not comprehensive and contains only a small part of the overall M&A lexicon. If you would like to learn more about the process of selling your company, I would invite you to attend one of our free, no obligation M&A workshops. It may be the most important business workshop that you have ever attended.
Remember you are probably only going to get one chance to sell your company. Learn as much as you can before you start the process to save you the expense of doing it incorrectly.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.