The mergers and acquisitions industry, like many other industries, over time has developed a terminology and jargon that is unique to itself and can be quite confusing to the general public and more importantly, to business owners.
Because we realize the process of selling a business can be quite complicated and detailed, we have created a mini M&A glossary of terms that may provide you with some guidance as you work your way through the course of selling your company.
As you will see below, we have taken a number of key terms and phrases, all of which are critical at some point in the M&A process, and distilled their meaning into something that a business owner can actually use to better understand the process of selling a business, especially before they begin negotiations with any buyer.
Some of the questions that we get asked the most about in our exit planning conferences are included as well. Keep in mind that this is just a sampling of key terms, a much more detailed whitepaper glossary can be downloaded here:
A business that a private equity firm acquires to enhance a larger platform company. The new acquisition is “added on” to the platform company to create an even larger entity overall.
A form of acquisition where the individual selling a business agrees to sell all or certain assets and, in some cases, liabilities to a purchaser. The corporate entity itself is not transferred.
The act or process of arriving at an opinion or determination of the economic value of a business or enterprise, or an interest therein. A business valuation can be conducted for a variety of purposes, including, but not limited to, a merger or acquisition; gift, estate, or inheritance tax planning; ESOPs and other employee benefit plans; going public; buy-sell agreements; marital, partnership, and corporate dissolutions; and bankruptcy reorganizations.
A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement. Also referred to as an Offering Memorandum.
The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components offer tax benefits to the seller.
The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased. Due diligence occurs after the Letter of Intent is agreed.
The portion of a purchase price in an M&A transaction that is contingent on future performance. It is payable to the sellers only when certain predefined levels of sales or income are achieved.
The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce. Also referred to as Off Balance Sheet items.
A situation where you have at least two buyers interested in purchasing your company. By creating a competitive bidding space, the interested parties will likely bid against one another, which increases the business’s value.
When certain M&A market conditions are present such as low capital gains tax rates, low interest rates and high buyer activity. An increase in buyer activity can be caused by a variety of factors, including slow organic growth, and private equity firms or corporate buyers with a large amount of capital to invest. This market situation is also referred to as a seller’s market.
Entities that raise capital with the goal of acquiring businesses and maximizing the value of the initial investment. Also referred to as PE firms. PE firms typically buy part or all of a company, provide the missing resources currently preventing the company from growing at an accelerated rate, help the company grow extensively for a few years, and then sell it for a solid return on their investment.
Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.
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.
A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Process of identifying and training certain employees and/or family members to fill key management positions within a business as these become available. This needs to be done prior to selling a company, since businesses that can operate smoothly in the absence of the current owner are more attractive to professional buyers.
Hopefully these key terms provided in this article will help you gain a better understanding of M&A terminology. If you want to get a mini-MBA on selling a company, I would suggest attending a Generational Equity M&A conference as a good follow-up step.
An investment of a few hours of your time will likely yield a tremendous benefit to you, especially if you have no exit plan or strategy in place. Putting off the inevitable is not wise for you, your family, or your financial legacy, and it’s never too early to learn how to sell a business for maximum value.
We hold our complimentary M&A conferences throughout North America so chances are very good that we will be in your region sometime in the coming months. Find a business exit planning conference near you to gain the knowledge you need.
For more information, please visit our website, provide us with your confidential contact information, and we will reach out to you.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
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