glossary

A

Adjusted EBITDA:
A variation of EBITDA that adjusts for non-recurring, irregular, or non-operational expenses or income to better reflect the company's normal cash flow generation.

Amortization:
The gradual repayment or "write-down" of a debt or intangible asset over time, often used in financial analysis to assess cash flow.

Asset Sale:
A sale in which the buyer purchases selected assets of the business, such as inventory, equipment, and intellectual property, while liabilities generally stay with the seller.

B

Breakup Fee (Termination Fee):
A fee that one party agrees to pay the other if the deal is terminated for specific reasons, such as the seller backing out after signing an LOI or PA.

Bridge Loan:
A short-term loan used to cover immediate financial needs in an acquisition, typically before long-term financing is secured.

Buyer:
The individual or entity acquiring the business.

Buyer’s Fatigue:
The emotional exhaustion experienced by a buyer who has been searching for the right acquisition or negotiating deals for an extended period.

C

Change of Control Clause:
A provision in contracts that gives parties the right to terminate or renegotiate contracts if ownership of the company changes.

Capital Expenditures (CapEx):
Funds used by a company to acquire, upgrade, or maintain physical assets such as property or equipment. It can affect cash flow and EBITDA calculations.

Capital Stack:
The hierarchy of different sources of financing used in an acquisition, including senior debt, mezzanine debt, and equity.

Cash Flow:
The net amount of cash and cash equivalents being transferred in and out of a business, a critical measure for business valuation.

CIM (Confidential Information Memorandum):
A detailed document prepared by the seller or their advisor, providing an in-depth overview of the business for potential buyers.

Clawback Provision:
A contractual clause that allows the buyer to recoup part of the purchase price if certain post-closing conditions, such as underperformance or undisclosed liabilities, are discovered.

Creative Deal Structure:
An approach to structuring a business acquisition using innovative or non-standard methods to align the interests of the buyer and seller.

D

Debt Service Coverage Ratio (DSCR):
A financial ratio used to assess a company’s ability to service its debt, comparing net operating income to debt obligations.

Deferred Payment:
A portion of the purchase price that is paid after the closing date, often tied to specific conditions or timelines.

Drag-Along Rights:
A provision that allows majority shareholders to force minority shareholders to join in the sale of the company on the same terms.

Due Diligence:
The comprehensive appraisal and investigation of a business conducted by the buyer before a transaction.

E

Earn Out:
A deal structure in which part of the purchase price is contingent on the business achieving certain financial targets post-acquisition.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):
A measure of a company’s operating performance, showing earnings before accounting for financing costs, taxes, and non-cash accounting items.

Enterprise Value (EV):
A measure of a company’s total value, including its equity value, debt, and cash. It gives a fuller picture of a company’s worth.

Equity Rollover:
A situation where the seller retains a portion of ownership in the business post-sale by rolling over part of their equity into the new entity.

Escrow:
An arrangement where part of the purchase price is held by a third party for a specified period after closing.

Escrow Holdback:
A portion of the deal price placed in escrow to cover any indemnities, potential liabilities, or closing adjustments.

Exclusivity Period:
A specified period during which the seller agrees not to negotiate with any other buyers, giving the potential buyer time to complete due diligence.

F

Family Office:
Privately held companies that manage investments and wealth for ultra-high-net-worth families.

Forgivable Note:
A loan or debt obligation that can be forgiven if certain conditions are met, such as the business achieving specific performance metrics.

Free cash flow (FCF):
Is a company's available cash repaid to creditors and as dividends and interest to investors. Management and investors use free cash flow as a measure of a company's financial health. FCF reconciles net income by adjusting for non-cash expenses, changes in working capital, and capital expenditures.

G

Goodwill:
The premium a buyer pays over the fair market value of a company’s identifiable assets during an acquisition, often due to intangible assets such as brand reputation.

H

Hold Period:
The amount of time an acquirer, such as a private equity firm, plans to hold a business before exiting the investment.

Holdback:
A portion of the purchase price that is withheld by the buyer for a specified period after the closing of the deal.

I

Indemnification:
A provision in the purchase agreement where the seller agrees to compensate the buyer for any losses resulting from breaches of the reps and warranties or other undisclosed liabilities.

Individual Buyer:
A person who acquires a business for personal ownership, typically using a combination of personal equity and financing.

Indication of Interest (IOI):
A preliminary, non-binding offer from a buyer to the seller, signaling interest in acquiring the business.

Integration Planning:
The process of developing strategies for smoothly combining the operations, cultures, and systems of two companies post-acquisition.

Integration Risk:
The risk associated with combining two companies after an acquisition, including operational, cultural, and technological challenges.

L

Leverage Ratio:
A financial ratio that measures the amount of debt a company has relative to its equity or assets.

Leveraged Buyout (LBO) Institutional Buyer:
An acquisition strategy where an institutional buyer uses a significant amount of borrowed funds to purchase a company.

Letter of Intent (LOI):
A non-binding agreement outlining the terms and conditions of a potential acquisition.

M

Mezzanine Financing:
A hybrid form of financing that combines debt and equity, often used in leveraged buyouts.

Multiple Arbitrage:
The process of acquiring businesses at lower valuation multiples and selling the consolidated entity at a higher multiple, creating value for the acquirer.

N

NDA (Non-Disclosure Agreement):
A legal contract between two or more parties restricting the sharing of confidential information during negotiations.

Non-bank SBA Lenders:
Lenders who are not traditional banks but are authorized to issue SBA loans.

O

Operating Capital (Working Capital):
The capital required to run the day-to-day operations of the business, calculated as current assets minus current liabilities.

P

Post-Closing Adjustment:
A final adjustment to the purchase price based on actual post-closing performance or financial metrics.

Private Equity (PE):
Investment firms that acquire businesses using a combination of equity and debt with the goal of improving and reselling them for profit.

Purchase Agreement (PA):
The legally binding contract that formalizes the terms of the sale between buyer and seller.

R

Reps and Warranties (Representations and Warranties):
Statements of fact or assurances made by the seller regarding the business’s operations, financials, and legal standing.

Reps and Warranties Insurance (RWI):
An insurance policy designed to protect buyers and sellers from financial losses related to breaches of the representations and warranties in the purchase agreement.

Retention Bonus:
A financial incentive offered to key employees of the acquired business to encourage them to stay with the company after the acquisition.

Reverse Due Diligence:
The process where the seller conducts their own due diligence on the buyer to ensure the buyer has the financial capacity to complete the transaction.

Roll-Up Strategy:
An acquisition strategy where a buyer consolidates multiple small businesses within a specific industry to create economies of scale.

Run-Rate:
The current financial performance of a business, typically annualized, that projects future results based on existing conditions.

S

SBA (Small Business Administration):
A U.S. government agency that supports small businesses through financing programs.

SBA 504 Loan:
An SBA loan program used for acquiring fixed assets like real estate or equipment.

SBA 7a Loan:
A loan program offered by the SBA designed for acquiring businesses, working capital, and refinancing.

SDE (Seller’s Discretionary Earnings):
A financial metric used in small business sales, representing the business’s earnings before owner’s salary and other non-essential items.

Seller:
The individual or entity that owns and is selling the business.

Seller Financing:
A form of acquisition financing where the seller agrees to finance part of the purchase price.

Seller’s Fatigue:
The emotional and mental exhaustion a business owner experiences during the process of selling their business.

Stapled Financing:
Pre-arranged financing offered by the seller’s financial advisor to potential buyers during an auction process.

Stock Sale:
A type of business sale where the buyer purchases the seller’s shares, acquiring the entire entity.

Synergies:
The potential cost savings or revenue growth opportunities that arise from combining two businesses.

T

Tag-Along Rights:
A provision that allows minority shareholders to join in on the sale if the majority shareholder sells their stake.

True-up Period:
The period after the closing of a deal during which adjustments are made to ensure that the working capital target is met.

U

Underwriting:
The process of evaluating the financial health, risk, and viability of a business before approving an acquisition or financing.

V

Venture Capital (VC):
Investors that provide capital to early-stage, high-growth startups in exchange for equity.

W

Waterfall Distribution:
A method of allocating profits among different investors or stakeholders based on the hierarchy of the capital stack.

Working Capital:
The amount of capital required for the day-to-day operations of the business.

Working Capital Target:
A negotiated figure between buyer and seller representing the amount of working capital that should remain in the business at the time of closing.