Updated: Feb 27
If you are just starting out on your journey to sell your business, you may need to get to grips with some of the new language you will hear. In this blog, I have prepared a glossary of the most commonly used terms in the mergers and acquisitions process.
A transaction where a buyer (most commonly an investment or private equity firm, or a trade buyer) acquires the company shares or business assets and goodwill of a trading company.
Asset Purchase Agreement (APA)
An Asset Purchase Agreement is an agreement that sets out the terms and conditions for the sale and purchase of assets in a company.
When buying assets, the seller retains the legal entity of the busyness and the buyer purchases individual assets of the company, such as equipment, inventory, and trade names.
Balance Sheet Adjustment
A Balance Sheet Adjustment occurs when there is a significant change in the net assets of the company between the date of the offer and completion of a sale.
Business Assets and Goodwill Sale
A transaction where the company sells the business assets, which can include contracts, website as well as the machinery or equipment used for the revenue generating activities, and a goodwill value associated with the ongoing ability to generate profit. The proceeds of the sale are paid to the company.
A full analysis and report predicting the consideration you are likely to be offered for your business or company. Normally based on your past financial performance and future forecast, and experience of similar deals, business valuations enable owners and company shareholders to plan ahead and set expectations for their Business Exit. Business valuations also facilitate: Inter-director/shareholder Management Buy Out negotiations, Employee Ownership Trust formation, personal financial and tax planning, and family legal disputes.
Management Buy In, Buy Out
A Buy In Management Buy Out, is a type of corporate takeover that combines Buy In and Buy Out features. The current managers buy out the company while new managers buy in to allow a seamless transition of ownership.
Cash Free, Debt Free
When a buyer purchases a company and its assets on the basis that the seller pays off all debt and takes out all excess cash before the sale is completed, it is known as Cash Free, Debt Free.
Commercial Due Diligence
Commercial Due Diligence is carried out by a prospective buyer to assess the company’s commercial activity, its viability, and its potential.
Company Share Sale
A transaction where the business owner and /or shareholders sell some or all their shares in the company.
This is also known as a Non-Disclosure Agreement, or NDA. This agreement requires the buyer to keep information disclosed confidential. It is a legally binding contract.
Deferred payments are a financing arrangement where the seller allows the buyer to make fixed payments over an agreed period of time. These payments are not dependent on the performance of the company post completion of a sale.
A Disclosure Letter allows the seller of a business to make ‘disclosures’ regarding warranties in the acquisition agreement. The buyer usually agrees that the seller will not be liable for a breach of warranty if a matter arises that is already disclosed in the Disclosure Letter.
Due Diligence is an audit, investigation, or review to confirm details and facts about a business before agreeing contracts to buy a business.
An Earn-Out is a contract that states the seller of a business will obtain additional compensation in the future if the business achieves certain financial goals.
Earnings Before Interest Tax Depreciation and Amortisation. This is a measure extracted from a company’s Profit and Loss statement and is often used as the basis for Business Valuations alongside an industry multiple.
Employee Ownership Trust (EOT)
An Employee Ownership Trust allows a company to become owned by employees. It can be set up by a company’s existing owners as part of their exit plan. A new business can also be set up so that it is owned by employees.
Businesses are valued on their Return on Investment, which is normally based on a multiple of earnings or even revenue. These valuations do not account for the surplus cash or debt on the balance sheet and are often referred to as the Cash Free Debt Free Value, OR the Enterprise Value.
Exclusivity it when the buyer and seller agree to only talk to each other to the exclusion of others. The seller will no longer speak to other potential buyers. Exclusivity is usually granted when Heads of Terms are agreed.
Exiting your Business / Business Exit Strategy
The process by which the owners / company shareholders relinquish ownership and control of their company through selling to a third-party buyer, their management team or an Employee Ownership Trust. With SMEs the process often involves extracting the business owner from the day-to-day management of the business operations and identifying a suitable successor.
FF&E - Furniture, Fixtures and Equipment
The Furniture, Fixtures and Equipment – or FF&E – refers to moveable equipment owned by a business. This includes items such as desks, chairs, computers which are normally depreciated over their long-term use. The items do not have a permanent connection to the structure of the building.
Financial Due Diligence
Financial Due Diligence an investigative analysis into the financial performance of a company.
The financial statements – or financials – are written records about business activities and the financial performance of a company. They are often audited and include the balance sheet, cash flow statement and income statement. They provide a snapshot the business’s financial position.
When a privately owned company becomes a public company it issues shares in the business which the public can buy for the first time. . When this takes place, it is known as a Flotation.
Heads of Terms (Settlement Contract)
The Heads of Terms document sets out the main terms of the commercial agreement that is reached between the buyer and the seller in a transaction. It is then used as the instruction sheet for the commercial lawyers to draw up contracts.
Indemnities are an obligation by the seller to reimburse the buyer should a specific event take place.
An Information Memorandum is a document produced before selling a business. It is effectively your opening pitch to potential buyers and offers prospective buyers a complete overview of the business.
Joint Ventures involve two or more businesses that pool their resources and expertise to achieve a goal. The risks and rewards of the enterprise are also shared.
Legal Due Diligence
Legal Due Diligence is critical for a merger or acquisition. It is a process of collecting and assessing all the legal documents and information relating to the company, including leases, intellectual property and contracts.
When selling or buying a business you should ensure that you have the right documents that outline the legal agreements between both parties. These include confidentiality agreements, asset purchase agreements, share purchase agreements and completion documents.
Letter of Intent
A Letter of Intent is a document that declares the commitment of one party to do business with another in an exploratory way. It is not a binding document.
Leveraged Buyout (LBO)
A Leveraged Buyout is a financial transaction where a company is purchased with a combination of equity and debt so that the company’s cash flow the collateral used to secure and repay the borrowed money.
Management accounts are usually prepared by your accountant or bookkeeper on either a monthly or quarterly basis. With the adoption of online accounting software such as Xero and QuickBooks, Profit & Loss statements for the Year-To-Date, Balance Sheets, Cashflow reports, Aged Debtors and Aged Creditors can been printed off or downloaded for your review – that is provided your bookkeeper has input all the invoices and receipts and has reconciled these with the bank transactions. During a sale process it is incredibly important to be able to provide these reports on a monthly basis.
Management Buy In (MBI)
A Management Buy In is where an outside manager or management team buys a controlling stake in a company and then replaces the existing management team.
Management Buy Out (MBO)
When a company’s management team buys the assets and operations of the business they manage, it is known as a Management Buy Out, or MBO.
Buyers may ask for Marketing Information so they can get an understanding of your company’s marketing activity and processes. This includes documents such as internal data, competitive intelligence and market research.
A transaction which brings together two companies which have a joint strategic interest. Shares in one company (normally the smaller and lower value) are exchanged for shares in the other (normally the larger and higher value). If the companies are of similar size, there is often little or no monetary exchange.
A Non-Compete Clause prevents the seller from competing by setting up a new business in the same industry or with a similar business model for an agreed period of time.
Your Operations Information includes documents and guidelines written to help how your business operations. These include contracts, key performance indicators and ‘SOPS’ or Standard Operating Procedures, and potentially a handbook.
Private Equity Firm
An investment firm which raises capital from individual investors or investment funds in order to acquire a portfolio of businesses which they grow over a period of time with a view to selling at a much higher value.
A Prospective Buyer is any person or company, or any subsidiary, that is proposing to buy a business or acquire shares in it.
Sale and Purchase Agreement (SPA)
A sales and purchase agreement (SPA) is a binding legal contract between two parties that obligates a transaction between a buyer and a seller.
Seller Financing – which is sometimes referred to as Deferred Payment – is a transaction in the form of a loan from the seller to the buyer to facilitate the sales process. The buyer usually makes a down payment followed by monthly repayments at the agreed interest rate. This transaction often attracts more interest in the sale of a business.
Share Purchase Agreement (SPA)
The Share Purchase Agreement is a document that sets out the terms and conditions relating to the sale and purchase of shares in a company.
SME / SMB
The Australian Taxation Office (ATO) defines as 'small business' (whether an individual, partnership, company or trust) as a business that has an aggregated annual turnover of less than $2 million.
Stock Exchanges are places where people buy and sell shares of stock. Companies agree to have their shares listed for trade on the stock exchanges they choose. Members of each exchange are allowed to trade the stock.
Businesses that have more cash than necessary to run the company in day-to-day operations, have Surplus Cash. Most Surplus Cash is used to for future investments to grow the company or for future withdrawal by the shareholders.
Trade buyers are the most common type of buyer. Trade buyers look for businesses that can be synergised with their existing company. They look at more than the monetary value of a business because they want to add something that their business currently lacks. This is also known as a Strategic Buyer.
Warranties are included in a contractual statement offering assurances or promises by the seller regarding the sale of the business, for example what assets belong to the business. Breaching the warranty can result in a claim for damages.
With decades of experience specialising in business sales, strategic business exits, mergers, and acquisitions, plus advisory, I can collaborate with you to understand your business and assess the potential saleability. If your business or company is a target for a merger or acquisition and you could profit from working with me, feel free contact me today. Appointments can be made during or outside business hours, at your preferred location, and face to face, phone or online.