Private buyers
Deal origination – the process of searching for a target business to purchase.
Ebitda/EBITDA – earnings before interest, tax, depreciation and amortisation. Typically ebitda is derived from the annual operating profit before tax stated in the statutory accounts, then a number of adjustments are made for any one-off items pertaining to the current owners personal costs/expenditure, along with the standard adjustments for interest, tax, depreciation and amortisation.
Amortisation – the writing off of goodwill which is an intangible asset on the balance sheet. It often results from an event such as the purchase of a business or a business revaluation on the exit of an existing shareholder from the business. It is like depreciation in the it is written off over a number of years, normally 5 and it is a non cash item in the same way as depreciation is.
Bolt on – an acquisition which is compatible with certain sector/product parameters and in line with other existing businesses under common ownership
Private equity – an organisation which invests in a company in return for an equity stake. Often referred to as bringing institutional capital (eg from a large/corporate pension fund or similar) to a transaction.
High net worth individual / sophisticated investor – an individual with their own capital to invest in someone else’s business or idea, often with over £1m liquid assets at their disposal
Non Executive (Non Exec) – a senior level executive who can input time/knowledge/contacts and more often functional or sector relevance given their vast experience of business to date, to provide a sounding board for the owners. A Non Exec typically works on the business for a couple of days per month (often for a fixed monthly retainer fee or sometimes on a pro-bono basis) preparing for and attending Board meetings and contributing to any one off projects as necessary
Seed capital – more relevant to a start up or early stage business where the seed capital is supplied by friends/family or a close network contact. Seed capital enables a company to take its first steps and grow from a “seed” into something more mighty.
Maintainable ebitda – the annual profit figure adjusted back for any personal items pertaining to the current owners and which should be achievable year on year, with the same set of assets/trading conditions
Indicative terms – the terms from a funder which are normally supplied in an Indicative Term Sheet notifying of all the primary considerations concerning the funding requested
Final Term Sheet – the document outlining the funders final terms for any given funding offer which they have supplied. Often referred to as a credit backed offer.
Bullet payment – the amount to be paid off in the final year of the loan agreement from a debt funder. It is by definition larger than the other annual amounts to be repaid. This alleviates some of the pressure on the new owner of the business to repay the capital in the early years; leaving you to focus on driving the business and not having to worry (too much) about whether there is sufficient cashflow to meet the monthly repayments.
Personal capital injection / Private capital investment – the amount of cash a buyer must find from their own personal funds to invest in the transaction to enable the purchase to take place. Often this is a percentage of either (i) the value of the business or (ii) the loan from the funder required to complete the transaction. The capital typically needs to be liquid cash rather than being held in property or shares or some other form of investment. You will need to be able to evidence the fact that it is held by you in your personal name(s) and also, liquid. The investment by a private individual is commonly referred to as “hurt money” or “skin in the game”.
Due diligence (DD) – the process of examining in great detail the trading activities, assets, liabilities, systems and processes, contracts, etc of a business to be purchased. Normally undertaken by a specialist due diligence expert, who is either a corporate financier or an experienced M&A accountant
Adjusted ebitda – the ebitda figure adjusted for those items from the profit and loss account which pertain specifically to the current owners eg things such as Director/owners’ pensions, healthcare, privately operated vehicles, etc. It also includes any one-off items which won’t necessarily be incurred by a new owner. Essentially any expenditure on items paid for out of the business which are not likely to be incurred by a new owner are classed as add backs to annual operating profit to derive adjusted ebitda.
M&A – mergers and acquisitions. The process of buying and selling companies.
Earn out – a premium payment to the sellers over and above the agreed purchase price. Earn out is delivered through the achievement of some form of future KPI or specific targets, such as:
the achievement of a given level of annual profits; the achievement of a set of KPIs specific to the business or the sector; the attainment of a new Contract with a key target customer; the delivery of a new product; the breakthrough in delivery of a product or service into a new sector or some other mechanism pertinent to the business.
Management buyin (MBI) – the process whereby a private buyer/investor who is external to a business purchases that business from the existing shareholder(s). It involves the investment of personal capital by the private individual.
Management buyout (MBO) – the process whereby all or part of the management team of a business purchases that business from the existing shareholder(s). It normally involves the investment of personal capital by the private individual(s) concerned and they will continue to run the business day to day. These MBO transactions are normally funded by a debt or private equity partner.
Buyin management buyout (BIMBO) – the process whereby all or part of the management team of a business combine with an external individual to form a buyout team to purchase a business from the existing shareholder(s). It normally involves the investment of personal capital by the private individual(s) concerned and they will run the business day to day. The incoming individual may or may not get directly involved in the day to day operations but will usually focus on the strategic direction. This type of transaction is almost certainly funded by a debt or private equity partner.
Deferred consideration/deferred payments – Deferred consideration is the element of the price agreed for the target business which is not paid over to the sellers at completion and is therefore, deferred until a later date. These amounts are guaranteed to be paid to the sellers and are typically paid over 2-5 years in equal annual amounts on the anniversary of the deal completion or they may be paid on a quarterly basis over the length of the agreed term. Deferred consideration is not dependant upon anything such as future performance or reaching certain milestones etc post purchase. The money to fund the deferred consideration can often be covered by cash flow, particularly if the business grows profits in the meantime. However it may be necessary to go back to the funding market to source a new funder for this aspect. The original funder might be a consideration but equally, there will be a number of other options at the relevant time. For the buyer, the longer the period of deferment the better. The reason for this is that the longer the period, the less pressure is put on the cashflow of the business to deliver the deferred payments.
Final term sheet/credit backed offer – a final term sheet is the document from a funder which specifies their ultimate funding offer after the terms of the deal have passed through the funder’s credit committee and been granted as accepted. It is the document detailing the final version of the funding deal.
Initial term sheet/ indicative terms – an initial term sheet, often referred to as indicative terms, outlines the key terms of the deal from the funder, including the capital sum to be borrowed; the length of the term; the interest rate; any capital repayment holiday (CRH); any “bullet /one off” payment to be made at the end of the term; the fees payable to the lender for the arrangement of the loan; any other stipulation pertaining to your specific funding deal.
Teaser document – a teaser document is a very short and anonymous summary of a business for sale. Typically, it will give a few paragraphs of relevant information and specifically cover: turnover / ebitda / location / sector / sub-sector. At this early stage, the location will normally be presented in broad geographic terms such as North West/Southern England/Scotland rather than detailing the specific location, for confidentiality reasons. The teaser document is intended to help the seller “whet the appetite” of the buyer sufficiently so to encourage them to progress to signing the respective non disclosure agreement (NDA) and thereafter, receive and review the Information Memorandum (IM).
High net worth (HNW) individual – a private individual who is classed as a sophisticated investor having liquid personal funds in excess of £1m and being someone who will consider investing their own personal capital on an “at risk” basis.
Venture capital – an organisation which typically supports entrepreneurs, early stage or high growth companies. This support can often be in the form of finance and operational expertise. Investment is typically, although not exclusively, in technology-based sectors such as ICT, life sciences or fintech. Venture finance is classed as high risk and providers of this type of finance are called Venture Capital Funds or Trusts. These are classified on the basis of their utilisation at different stages of a business. The 3 main types are early stage financing, expansion financing, and acquisition/buyout financing.
SME – small and medium sized enterprises, typically companies with turnover from £1m to £25m.