A

Acquisition: The process by which the stock or assets of one corporation come to be owned by another entity. The transaction may take the form of a purchase of stock, purchase of assets, assumption of liabilities, reorganization, or merger.

Acquisition Agreement (Purchase Agreement): A legally binding contract for the sale of the stock or assets of a company.

Add Backs: The concept of restating financial statements to reflect the “true” profitability of the company.

Adjusted Basis: The initial basis, plus all additional expenditures, minus the accumulated depreciation and all other direct charges.

Agent:  A party authorized to act for either the buyer or the seller in the sale of a business. An agent arranges and negotiates transactions for a fee.

Allocation of Purchase Price: Assignment of the purchase price to individual tangible and intangible assets. Where a premium has been paid over the historical costs of acquired assets, acquirers often either “step-up” the value of tangible assets or apply a part of the purchase price to tangibles.

B

Basis: The historic cost of an asset.

Basket: A minimum threshold of claims that must be reached before any liability is triggered. Buyers seeking post-closing purchase price adjustments typically cannot make claims unless and until their total aggregate damages reach a specified dollar amount.

Book Value:  Net Worth. Assets minus liabilities, as recorded on a company’s balance sheet.

Brokerage Agreement: An agreement between a professional intermediary and client that fully describes the terms under which the intermediary will develop and implement a strategy to sell the client’s business.

Break Up Value: The value of a company’s assets if sold separately, as in liquidation.

Broker (Intermediary, Investment Banker): An agent who acts for either the buyer of the seller in arranging a transaction.  An intermediary is involved in searching for appropriate merger candidates, as well as negotiating and structuring the deal. An intermediary acts as a financial advisor to his or her client.

Buy/Sell (Purchase Agreement): A legally binding contract for the sale of the stock or assets of a company.

C

C Corporation: A corporation that is subject to “double taxation.” In other words, it has not elected S corporation status. The taxable income of a C corporation is subject to tax at the corporate level as income while the dividends continue to be taxes at the shareholder level. In a sale of assets, the gain from the sale is taxes at the corporate level and a second tax is imposed on the proceeds of the sale, usually as a dividend, when those proceeds are distributed to the shareholders.

Capital Gains: Profits from the sale of capital assets, The gain for tax purposes is based on the gross consideration received less the basis of the ownership.

Capital Structure: A company’s net worth plus its long-term debt, as recorded on its balance sheet. The capital structure is the “foundation” on which a company is built.

Capitalization Rate: A rate (expressed as a multiple) applied to a company’s earning that reflects both perceived risks and anticipated earnings growth.

Cash Flow: The excess of all cash sources less all cash uses. Often defined as a company’s cash profit plus all non-cash expenses. “Free cash flow” is defined as cash flow less all capital expenditures.

Cash Transaction: A transaction that is purely completed with cash.

Closing: The consummation of a transaction, when the conditions of a change in ownership are fulfilled and funds are transferred. A closing generally occurs simultaneously with the execution of a purchase agreement, though now always. A purchase agreement may be executed with a closing to follow, pending certain conditions being met.

Covenant not to compete:  A covenant not to compete is found in must purchase agreements, whereby the seller agrees not to compete with the business being sold. To enforce non-compete clauses, courts have demanded that they be specific in activity, place and time. Acquirers often seek to allocate a portion of the purchase price to a “covenant not to compete,” especially in circumstances where they are paying more than the net worth of a company’s assets.

Covenants: In a letter of intent of purchase contract, an agreement to perform or abstain from performing certain actions. Covenants can apply to either party of a transaction, both before and after a closing. A typical pre-closing buyer covenant would be to maintain the confidentiality of all negotiations. A typical post-closing seller covenant would be to not compete in the same business for five years.

D

Depreciation:  An accounting convention reporting (on the Income Statement) the decline in useful value of a fixed added due to wear and tear from use and the passage of time.

Discounted Cash Flow: The prospective future cash flows of a company discounted back to today’s dollars.

E

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA): A metric used to measure a company’s profitability.

Earn-outs:  Additional payments made to sellers contingent of their meeting certain performance goals in the future. Earn-out payments are generally predicated on meeting certain sales or profit levels. Thus, the seller “earns out” a portion of the purchase price.

Escrow: A “Holdback” of a portion of the purchase consideration pending fulfillment of certain conditions. Generally, in acquisition matters, buyers demand that a portion of the purchase price be deposited in an escrow account for a certain period pending the outcome of contingent liabilities, such as collection of receivables.

Exclusive Agreement: Provides the intermediary with the exclusive right to offer a company for sale. The intermediary will receive a fee in any transaction that occurs during the term of the agreement, whether the intermediary introduced the buyer or not.

F

Fair Market Value: The value at which an informed buyer will buy and an informed seller will sell, neither under and compulsion to do so.

G

GAAP: General Accepted Accounting Principles. Accepted accounting norms and conditions, as established by the Financial Accounting Standards Board (FASB).

Goodwill: An intangible asset, representing the excess of the cost of assets over their carried or market value. Goodwill is usually created by purchasing assets at a value higher than fair market value. Goodwill is essentially “air;” it represents nothing tangible, only the perceived value of the acquired company’s name, reputation and anticipated stream of earnings.

H

Holdback:  The retention of a portion of the purchase consideration pending the outcome or fulfillment of certain conditions.

Hurdle Date: During the “stop-shop” period (set in Letter of Intent) the seller required the buyer to prove his or her continued interest (and progress toward closing) by establishing periodic performance dates. Each of these performance dates is called a hurdle date. For example, the buyer may have to provide proof of financing two weeks after signing the LOE, a draft of the Purchase Agreement after four weeks and completion of the environmental studies after six weeks.

I

Internal Rate of Return (IRR): The compounded rate of return on an investment in an acquisition, including interest, dividends and capital gains, expressed in per annum basis,. The customary IRR expected by a senior lender in 12 to 18 percent; the IRR commanded by equity investors in acquisitions ranges from 20 to 40 percent.

Intermediary Threshold: The business value that separates those companies that are typically sold using the services of an investment banker from those sold using the service of a business broker.

L

Letter of Intent: A non-binding, written summary of the buyer’s and seller’s mutual understanding of the price and terms of an acquisition in the process of being negotiated. Since letters of intent involving public companies must be openly disclosed, transactions involving public companies often go right to contract, skipping the letter of intent stage.

Leveraged buyout: A purchase of company, using borrowed funds. The acquired company’s assets serve as security of the loans taken out by the acquiring firm.

Liabilities: Obligations that a company has toward third parties.

Liquidation: The dissolution of a company through the sale of its assets. The cash from the sale is used to first satisfy creditors with any remaining cash distributed to shareholders.

M

Management Buyout: A leveraged buyout in which all or part of a management team buys the company.

Merger: A combination of two businesses into one. In a merger, Corporation A combines and disappears into Corporation B.

Misrepresentation: False or misleading information provided to party in making an offer or contract.

Multiple: The multiplier of EBITDA (earnings before interest, taxes, depreciation, and amortization) used to estimate enterprise value.

P

Payback Period: The time required by a buyer to recoup his original investment in the company through its earnings. Generally, acquirers demand payback periods of between five to seven years, taking into account the time value of money.

Price to Earnings Ratio (P/E Ratio): A ratio or multiple derived by dividing the total consideration paid in an acquisition by the acquired company’s earnings (either current or projects). P/E ratios are generated for comparative reasons, to test the relative cost of an acquisition versus other similar deals.

Principal: One of the parties in a transaction. As generally used in the book, a principal is one who will hold significant ownership in an acquired company. A principal is often represented by an agent.

R

Recapture of Depreciation and Tax Credits: The mount of gain resulting from the disposition of property that represents the recovery of depreciation expense (and tax credits) previously deducted or credited on the seller’s income tax returns.

Recourse: An agreement by a seller to make a buyer whole on the value of any assets that prove to not be worth their stated value. Recourse arrangements generally apply to the collection of receivables or the obsolescence of inventory.

Retrading: The negotiating over money and issues (such as warranties and representations) that happens after the Term Sheet is signed but prior to closing.

S

S Corporation: In general, an S Corporation does not pay income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. This is why an S Corporation is referred to as a “pass-through” tax entity. The shareholders report the income or loss on their own individual income tax returns. There are eligibility and qualification requirements imposed by the IRS that must be met and maintained.

Seller’s Promissory Notes (Take Back): A note held by the seller to help finance an acquisition. Generally, seller’s notes are unsecured obligations, though they can be secured by a lien (usually junior) on the assets or the stock of the company.

Senior Debt: Secured debt that has the highest preference to assets in liquidation.

Shareholder loans: Loans given to the corporation via shareholders.

Statutory Merger: One corporation completely absorbs another; it is a continuation of two (or more) companies into one new corporation. All shareholders of the previous companies become shareholders of the new company. There mergers are generally governed by state statues.

Stepped-Up Basis:  The result of increasing the basis of an asset from its historic, depreciated cost to one determined by an acquirer’s cost or fair market value.

T

Take-Over: Acquiring a controlling interest in a target company, often without the consent of the target company’s management.

Target Company: A company that has been selected by a potential acquirer as an attractive candidate.

V

Value Threshold: A term coined by John Brown to describe the minimum business value necessary for an all-cash or (nearly all-cash) sale.

Vertical Integration: The acquisition of companies engage in either earlier or later stages of production or marketing. The acquisition of either a supplier of a customer would be a “vertical” acquisition.

W

Working Capital: The excess of current assets less current liabilities.