The mergers and acquisitions industry, like many other industries, has developed a jargon and lexicon that is unique to itself and can be confusing to the general public and even small business owners.
Because we realize the process of selling a business can be complicated and detailed, we have created an M&A glossary of terms that may provide you with some guidance as you work your way through the course of selling your company. You can download a complimentary copy by following this link:
As you will see, we have taken 160 terms and phrases, all of which are critical at some point in the M&A process, and distilled their meaning down to something that a business owner can actually use to his or her benefit. Some of the terms that we get asked the most about are included, 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 in whole.
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.
Business Valuation – 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; buysell agreements; marital, partnership, and corporate dissolutions; and bankruptcy reorganizations.
Confidential Business Review (CBR) – 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 asOffering Memorandum.
Deal Structure – 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 have tax benefits to the seller.
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 predictable future of the business to be purchased. Due diligence occurs subsequent to the Letter of Intent.
Earnout – The portion of the purchase price that is contingent on future performance. It is payable to the sellers only when certain predefined levels of sales or income are achieved.
Intangible (Hidden) Assets – 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.
Limited Auction – 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’ value.
Optimal Time To Sell – When certain 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.
Private Equity Firm – 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 that’s 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.
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.
Stock Sale – A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Succession Planning – Process of identifying and training certain employees to fill key management positions within a business as they 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.
If you have ever wondered what an M&A term means, our glossary is a great tool to get you started. If you really want to get a mini-MBA on selling a company, I suggest attending a Generational Equity M&A seminar. An investment of a few hours of your time will most likely yield a tremendous benefit to you, especially if you are like most business owners and have no exit plan or strategy in place. Putting off the inevitable is not wise for you, your family, and your financial legacy.
We hold our seminars throughout North America so chances are good that we will be in your region sometime in the ensuing months. To find out more, please call us at 877-213-1792 or visit our website, provide us with your confidential contact information, and we will reach out to you.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
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