As with any type of job, how to value a business and how to manage the sale of a business have their own professional jargon. This pair of articles are designed to provide short, practical explanations in plain language for some of the common terms used, from preparation to performance.
Preparation: The process of preparing a business for sale so that it is attractive to a buyer. It can take up to two years.
Heads of Agreement – the document that establishes the price that has been agreed for the sale and the key terms, subject to due diligence and contract.
Term Headings: See the agreement headers.
Informative Memorandum – see sales pack.
Insolvency: not being able to pay debts when due or liabilities that exceed assets. The Bankruptcy Law establishes a series of tests, including the failure to comply with a legal demand or to pay a judicial debt, which a court will take as proof of insolvency.
Intellectual Property Rights IPR: Includes everything from patents and proprietary information to trademarks and trademarks.
IRR Internal Rate of Return – the discount rate at which a net present value calculation yields a result of zero, which in turn means that the discount rate is equal to the return generated by the project or investment.
IPO Initial Public Offering – The US terms for an IPO; take and list a company for the first time on a stock exchange.
Letter of Intent – see agreement heads.
Listing: float a company on a public stock exchange.
NPV Net Present Value: The value of a discounted cash flow, minus the amount of money you must pay to acquire it.
No Shame Clause – The right to share in increased sales revenue if your buyer sells their business again within a specified time.
OFEX – the ‘over-the-counter market’, which is a private listing where shares are traded on the basis of individual transactions. It is often used by small companies to raise hot money as an alternative to venture capital, but it is significantly less liquid than other stocks since there are no active market makers trading the shares.
Open Market Value – Also known as fair market value, how much an asset will fetch if it is sold on the open market. See also ERP.
PBIT – see EBIT.
P/E Ratio Price/Earnings Ratio: A measure of how many times the current level of earnings someone is willing to pay to acquire a stake in a company. A high P/E multiple generally indicates an expectation of high growth (as E is then expected to grow significantly reducing the P/E ratio to a more normal level). The inverse of business performance.
Payback Period: How long it will take to recover an investment at the current level of earnings.
Phoenix: a buyout of a company from insolvency by existing management.
Post-Acquisition Integration: The process of change planned by a buyer to absorb the acquired business into its existing organization.
Preference: putting a creditor in a better position than others. In the event of insolvency, a receiver will review the transactions leading to liquidation and, if certain conditions are met, will seek to set aside any preferential transactions.
Prospectus – a package of information prepared to provide to investors potentially interested in an IPO.
Sales Pack – A package of information prepared to provide to potentially interested parties.
Sales Order: An instruction for a corporate finance adviser to act to sell your business.
SAV Stock At Value: shares that will be purchased at the value on the day of the sale. Valuation will normally be determined by GAAP.
Secondary Buyout – The sale of a stake in a company by one VC to another. Generally unpopular with venture capitalists, as it is sometimes seen as a sign of “failure” by the first investing venture capitalist.
Section 320 – provision of the Companies Act which prevents a director from buying substantial assets (generally speaking, anything worth more than £100,000 or 10% of the net assets of the company) without first obtaining the consent of the shareholders.
Stock – 1 the heritage or social capital of a company, colloquially: shares. 2 A company’s trade stocks comprised of raw materials, work-in-progress, and stocks of finished goods.
Target: A company to be acquired.
Business Buyer: An industrial buyer of companies (as opposed to a financial buyer like a VC).
Undervalue Transaction – sale of an asset at less than its fair value. In the event of insolvency, a trustee will review significant transactions that preceded the insolvency and may act to set aside below-value transactions.
TUPE Transfer of Business Protection of Employment Regulations: The rules that govern the treatment of employees in the sale of a business and that, generally speaking, will make a buyer responsible for taking care of all employees of the business who is acquired (whether by sale of shares or and assets) under the existing terms and conditions of service. It also provides that if employees have been terminated in anticipation of, or in an attempt to prevent the Buyer from having to assume this liability, the Buyer will be liable in any event. There is a limited exception to this rule in the purchase of companies from some forms of insolvency proceedings.
VC – Venture Capital or Venture Capitalist.
Venture Capitalists: A company created to hold investors’ money and invest it in high growth opportunities. Typically aim to achieve a 30% annual return and hold investments for three to five years before selling. In general, they tend not to be interested in offers below, say, a £1.0 million investment. (See capital gap; business angel)
Laundering Agreement – Section 161 of the Companies Act is designed to prevent asset stripping by prohibiting the pledging or use of the company’s own assets for the purchase of company shares (whereby the buyer does not may promise to pay the seller out of the proceeds of the sale). the company’s assets once you have control of it, or borrow the money for the purchase by offering the company’s assets as collateral). However, in many private company sales, the only way buyers can raise funds to buy the company is by borrowing against the assets to be purchased. Therefore, an exception to rule 161 is allowed which involves the preparation of a report by the company’s auditors, known as a laundering agreement.
Yield: The amount of return received (E for profit) for the price (P) paid. It is usually displayed as a percentage.