M&A Terms

By Generational Equity

11/27/2011

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.

Key M&A Terms

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.