MnA GLOSSARY OF TERMS

Accretion
An improvement in per share metrics post-transaction (after issuing additional shares).

Acquirer
The firm that is purchasing a company in an acquisition – the buyer.

Acquisition
The purchase of one company by another. The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive.

Add-backs
See Normalisation.

Amalgamation
The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.

Asset Purchase
The acquirer purchases only the assets of the target company (not its shares) Instead of buying the entire company, only parts of the business are bought. for example, the trading name and brand, the equipment that’s required to run the business, and the customer contracts.

Asset-Based Lending
A method of financing in which a business loan is secured using a company’s fixed assets as collateral.

Backward Integration
A company acquires a target that produces the raw material or the ancillaries which are used by the acquirer. It intends to ensure an uninterrupted supply of high-quality raw materials at a fair price.

Bootstrap Effect
One of the poor reasons to make a merger. If the target’s P/E ratio is lower than the acquirer’s P/E ratio, the EPS of the acquirer increases after the merger. However, it is purely an accounting/numerical phenomenon, and no value or synergies are created.

Bottom Line
The net profit of a business.

Business Brokers
Companies (and their representatives) who handle the sale of a business, typically at the lower end of the SME market, on behalf of the business owner. At the SME level, typically brokers earn the majority of their income through the initial listing of a business, not necessarily from selling the business.

Business Cycle
A repeating cycle of economic expansion and contraction, typically averaging three to four years.

Buy and Build
A focused acquisition strategy involving buying businesses and combining them into one large business that is worth more than the sum of the individual smaller businesses.  Also known as a Roll-Up in North America.

Cash Consideration
The portion of the purchase price is given to the target in the form of cash.

Cash Flow
The movement of money in and out of a business.

Cash Flow Finance
Borrowing against future strong cash flows.

Comparable Analysis
A method of valuing a business where you look at what other similar businesses are selling for.

Compensation Manipulation
One of the poor reasons to make a merger. Management compensation is according to company performance benchmarked to other companies, so an increase in the size of the company often means an increase in salary for management.

Completion Accounts
A set of accounts prepared to show the business’s position as of the date of completion.

Conglomerate
A merger of companies with seemingly unrelated businesses.

Consideration
The price agreed and paid for the acquisition of a business. (See also Initial Consideration and Deferred Consideration.)

Consolidation
Merging two or more individual businesses into a group. There are three key areas to address: people, operations and finance. (Also known as ‘integration’.)

Consulting Agreement
A condition of the sale whereby the owner stays on as a consultant for a period of time.

Corporate Finance
Often a division of an accountancy firm, handles the sale of larger ($5 million-plus) businesses.

Corporate Structure
The way a business is organized.

Covenant
A written agreement or promise is included in a contract such as a lease or loan agreement.

Deal Flow
The volume of potential deals in the pipeline.

Deal Structure
The combination of assets used to finance an acquisition.

Deal Team
A team of professionals (accountants, MnA lawyers, due diligence/vetting experts, tax experts, Human resources expert) involved in the process of due diligence and completion of sale.

Debt Issuance Fees
Underwriting fees charged by investment banks to issue debt in connection with the transaction.

Debtor Finance
Leveraging against the money owed to the company. (See Factoring and Invoice Discounting.)

Deferred Consideration
defined as a part of the purchase price that is payable by the buyer in the future, once the deal has been closed. The purchase price is mostly negotiated on the basis of the fair market value, and the mutual understanding between the purchaser, as well as the buyer.

Director
An elected or appointed person responsible for managing a company’s business and affairs. Every registered company must have at least one director.

Discounted Cash Flow (DCF)
A complicated valuation method used to estimate the value of an investment based on its expected future cash flows. DCF attempts to answer the questions: ‘How much money will this business generate in the future?’ And therefore: ‘What do we pay for it now?’

Distressed Business
A business that is unable to pay its creditors.

Dividend
A distribution of earnings from a company to shareholders.

Drag-Along Rights
Rights that enable the majority shareholder to compel any other
shareholder(s) to sell their stock, if the majority shareholder wishes to sell the business to a third party.

Dilution
A worsening of per share metrics post-transaction (after issuing additional shares).

Due Diligence
The investigation conducted to make sure the business is what the seller says it is. There are several types of due diligence, Financial, Tax, Commercial, Technology, Cultural, Lega; but the most important initially are: financial due diligence,
legal due diligence, and commercial due diligence. The purchase value will most likely be influenced by the findings of the due diligence process.

Earn-out
An arrangement in which sellers of a business may receive additional future payments based on the future performance of the company.

EBITDA
Earnings before interest, tax, depreciation, and amortization.

Economies of Scale
Fixed costs decrease because merged companies can eliminate departments with repetitive functions.

Economies of Scope
A gain of more specialized skills or technology due to a merger.

Empire Building
One of the poor reasons to make a merger. Management decides to make a merger to increase the size of the company purely for the purpose of ego or prestige.

Entry Valuation
A method of valuing a business where you ask yourself, ‘How much would it cost me to set up this business from scratch?’ The resulting calculation is used to determine a fair price for the business.

Equity Issuance Fees
Underwriting fees charged by investment banks to issue equity in connection with the transaction.

Excess Purchase Price
The value of the purchase price over and above the net book value of assets (total purchase price minus the net book value of assets).

Exit Strategy
A business owner’s plan for eventually selling the business or group.

Exclusivity Agreement
A contractual requirement preventing a company from soliciting or negotiating other deals for a specified period of time, while it is exclusively negotiating with a potential buyer.

Fair Value Adjustments
The increase or decrease in the net book value of assets to arrive at the fair market value.

Factoring
An advance against unpaid invoices, where the business deals in B2B environment. The factoring company invoices the end customers, the customer pays the factoring company, and
the factoring company chases payment, when necessary. (See Debtor Finance.)

Fair Market Value
The price an asset would sell for on the open market.

Fixed Assets
Things purchased for long-term use, such as machinery and vehicles.

Friendly Takeover
The board of directors and management of the target company approve of the takeover. They will advise the shareholders to accept the offer.

Forward Integration
A company acquires a target that either makes use of its products to manufacture finished goods or is a retail outlet for its products.

Fully Diluted Shares Outstanding
The number of shares a company has outstanding after options, convertible securities, etc., are exercised.

Goodwill
The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments). Said differently, the difference between net book value and the price paid for the business. It’s the intangible value attributed to the ability of the business to generate future revenues.

Holding Company
A company formed to buy or hold majority shares in other companies.
This is an entity that doesn’t trade; it holds ownership of special
purpose vehicles (SPVs).

Horizontal Integration
Merging of companies in the same lines of business. Usually, to achieve synergies.

Hostile Takeover
The board of directors and management of the target company do not approve of the takeover. They will advise the shareholders not to accept the offer.

Identifiable Assets
An asset that can be assigned a fair value; can include both tangible and intangible assets.

Indemnities
Included in the sale and purchase agreement. The seller is indemnifying the buyer against, for example, any tax that is due, on a dollar-by-dollar basis. If there is $500,000 of tax due, then they will indemnify the buyer for $500,000.

Initial Consideration
The amount paid by the buyer on completion of the deal that makes the business legally theirs. It’s not the full consideration, just a part of it.

Intangibles
Non-physical business assets including patents, intellectual property, trademarks, brand recognition and goodwill.

Integration
Merging two or more individual businesses into a group. There are three key areas: People, Operations and Finance. Also known as consolidation.

Intrinsic Value
The estimated value of a business using discounted cash flow analysis (often on a per share basis).

Invoice Discounting
An advance against unpaid invoices. The purchaser raise the invoices and send them to their customers, who pay the purchaser, and the purchaser chase payment, if necessary. (See Debtor Finance.)

Liquidation Value
The cash value that would be realised if the assets of a company were sold.

Letter of Intent (LOI)
Sets out the terms of the purchase agreed in principle during the deal negotiation. Signing LOIs does not commit the purchaser to completing the deal.
However, there are four elements of a Letter Of Intent document that are legally binding: jurisdiction, fees, confidentiality, and exclusivity.

Merger / Statutory
The purchasing company acquires all of the target company shares/assets; the target company ceases to exist (acquirer survives).

Multiple
The price-earnings ratio is used to establish the value of a business. The bigger the business, the bigger the multiple.

Net Asset Value
The value of a company’s assets minus its liabilities. Often calculated on a per share basis.

Net Book Value of Assets (NBV)
Book value of assets minus book value of liabilities.

A method of valuing a business where you take the assets of the business and deduct the liabilities; the resulting figure is the NBV. This is typically the lowest valuation as it doesn’t take into account goodwill.
Net Book Value of Assets

Non-Compete Clause
A non-compete clause (in the sale and purchase agreement) means the seller can’t sell you the business then set up as a competitor just down the road.

Non-Disclosure Agreement (NDA)
A confidentiality agreement.

Non-Solicitation Clause
A non-solicitation clause (in the sale and purchase agreement) means the seller can’t sell you the business then solicit your staff to go and work for them in a new venture.

Normalization
Within business valuation, normalization looks at what the business makes now and then adds back in current costs that would not be there without the present owner (e.g. personal charges they put through the company). It also compensates for the cost of installing a manager for the business. (Also known as ‘add-backs’.)

Offer Price
The price offered per share by the acquirer.

Other Closing Costs
This may include due diligence fees, legal fees, accounting fees, etc., related to the deal.

Platform
The solid business on which a buy and build strategy is based.

Private Equity
The investment of equity capital in private companies. Typically, a private equity investor buys a stake in a private company with the aim of making a profit over a set period of time.(Typically 5 years)

Pre-Pack Administration
The terms of a purchase deal for an insolvent company agreed in advance with the seller and the administrator.

Price–Earnings (PE) Ratio
The most popular method of valuing a business. It’s a multiple of earnings. If the business makes $100,000 a year, we might decide to pay two and a half times those earnings – $250,000 – for the business.

Pro Forma Shares Outstanding
The number of shares outstanding after the transaction has closed and additional equity has been issued.

Purchase Price Allocation
The breakdown of the total purchase price between net identifiable assets and goodwill.

Restructuring Charges
Any fees or charges related to early debt repayments that are part of a restructuring.

Revenue Enhancements
Increases in revenue that are expected due to cross-selling, up-selling, pricing changes, etc.

Quick Ratio or Acid Test
A measure of liquidity obtained by dividing liquid assets by total
liabilities.

Sale and Purchase Agreement (SPA)
This is the binding legal contract between the buyer and seller. It might be an asset purchase agreement or a share purchase agreement.

Sensitivity Analysis
A method of testing how sensitive certain outputs in a financial model are to changes in certain assumptions.

Share Exchange Ratio
The offer price divided by the acquirer’s share price.

Share Issuance Discount
Any discount (if any) to the current market price that will be used to determine the number of shares the target receives.

Share/Stock Deal
The acquirer purchases all the shares of the target (and assumes all assets and liabilities).

Stock Consideration
The portion of the purchase price given to the target in the form of shares of the acquirer’s stock.

Share Purchase
When you buy the shares in a company, you buy everything it owns (its assets) and everything it owes (its liabilities). The ownership changes. The directors will most probably change too. Financial due diligence in this case is extremely important in order to uncover any potential or future debts.

Shareholders
People who jointly own a company. Typically, with smaller businesses, the shareholders are also the directors. In other cases, the shareholders appoint directors to run the company. Shareholders can also resign the directors. Where the shareholders and directors are different, the shareholders have the ultimate control but the directors have the
ultimate responsibility.

Shares
A company’s ownership is divided into shares. There might just be one share, there might be a million shares. The shares are owned by shareholders.

Special Purpose Vehicle (SPV)
The company set up to buy the shares or assets in the target business. The SPV(s) are owned by a holding company.

Synergies
Cost savings or revenue increases anticipated as the result of the acquisition of an additional company.

Subsidiary
Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.

Takeover Premium
The percentage above the target’s current share price (or VWAP) the offer price represents.

Target
The business that is being acquired.
Timing of Synergies
How long it is estimated to take to realize the synergies in the transaction.
Transaction Close Date
The date on which the transaction is expected to be officially completed.

Vertical Integration
Merging with companies that are in a company’s supply chain; may be composed of both forward and backward integration.

VWAP
Volume Weighted Average Price, often used in reference to the takeover premium (e.g., 15% above the 20-Day VWAP).

Warranties
The seller is effectively promising the buyer that certain things they have told them about the business are true; if they aren’t, the buyer can sue.

Weighted Average
In business valuation, financial figures taken from, say, the last four years, then a weight to each is assigned (older figures carry less weight than current figures) and a an average is calculated. A weighted average is typically something an accountant will do for the buyer.