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Understanding Key M&A Terms

By Generational Equity

Flying Letters

The mergers and acquisitions industry is like most others, having developed a lexicon and vocabulary that are unique to the work we do. However, oftentimes these terms and the verbiage we use can be very confusing to non-M&A professionals.

To address this issue, several years ago we decided to create a glossary of terms and provide it not only to business owners that attend our M&A seminars but also include it in our Research Library so that readers who are browsing our site can download the glossary for free.

Our primary role as M&A professionals is to educate our clients on the process that we are going to be taking them through. Part of this learning curve is to help them understand the terminology we use on a regular basis. As we proceed through the 9 to 14-month journey with them, they will understand key phrases such as:         

  • Add-on Company – 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.
  • Asset Sale – A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and, in some cases, liabilities of a company to a purchaser. The corporate entity is not transferred.
  • Base Year – A company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the year-to-date results and expectations of management.
  • Capitalization – The conversion of historic or projected income into value; the capital structure of a business enterprise; or the recognition of an expenditure as a capital asset to be depreciated over time rather than a period expense.
  • Contingent Liabilities – A potential liability that may occur depending on the outcome of a future event. Probable obligations are real liabilities and therefore require adjustment in accounting records. Contingent liabilities require footnote disclosure only. Some examples are pending lawsuits, purchase commitments carrying default penalties, and warranties and guaranties for which no historical basis is available for assessing the possible obligation.
  • Deal Structure – The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earn-out provisions, and covenants not to compete. Many non-cash deal structure components have tax benefits to the seller.
  • Discounted Cash Flow Value – The present value of future earnings taken out to infinity and discounted at a rate that approximates the risk.
  • EBITDA – Earnings before interest, taxes, depreciation and amortization.
  • Internal Rate of Return – The rate of return where the net present value of cash inflows and outflows equals zero, thereby indicating that the future cash flows on the investment equal the cost of the investment.
  • Net Cash Flow – Cash available for distribution after taxes and after the effects of financing. Calculated as net income plus depreciation minus expenditures required for working capital, capital items and debt repayment.
  • Net to Owner – The amount realized by the owners of a business from a sale. Usually equal to the Business Enterprise Value of the business minus debt retained in the business, plus the net of assets and liabilities not included in the sale and retained by the owners.
  • Pro Forma Statements – 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 – 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.
  • Representations (Reps) and Warranties – Intended to disclose all material legal and any material financial aspects of the business to the buyer. Buyer makes similar reps about its legal and financial ability to complete the transaction.
  • Stock Sale – A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

This is just a small sample of the more than 100 terms we have defined for you in our whitepaper on this topic. If you would like to download the entire glossary, you can do so here:

The Ultimate Glossary of Must-Know Terms If You’re Selling a Business

Knowledge is Power

If you have attended a Generational Equity M&A seminar, then your education process has already started. As our clients attest, the education we provide to business owners in our workshops is well worth the investment of a few hours of your time:

Our complimentary glossary and all of our research papers are designed to help educate business owners on one of the most important processes that they will ever undertake: monetizing their largest asset and doing so in an optimal fashion that benefits the owner financially and maintains the legacy built over time.

Are you at a point where you are beginning to contemplate your next move as a business owner?

Has the risk vs. reward equation begun to tilt more heavily towards the risk side of the scale?

Is it becoming clear that your children are uninterested and your employees are financially unable to buy you out?

If your answer to any of these is yes (and especially if it is yes to all of them), then you need to reach out to Generational Equity, attend one of our exit planning workshops, and meet with our professionals one-on-one while there. Not only are we great at creating useful M&A glossaries, we are also the leading lower middle-market M&A firm in North America.

To find out when we will be in your area next, please contact Steve Schreiber, our V.P. of Business Development at 877-213-1792 or email him at schreiber@generational.com.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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