COMMON DEAL TERMS
A buyer's offering purchase price to the seller. The bid can have varying levels of realism depending on the amount of work the buyer has done and their general seriousness in the opportunity.
Refers to businesses whose primary activity is making investments or purchasing financial instruments. "Being on the buy side" of a transaction refers to the purchaser and their team of advisors.
CAPITAL EXPENDITURE (CAPEX)
Cash outflows used to purchase or maintain fixed assets such as land, buildings and equipment.
A carve out is a transaction wherein the seller sells less than the total company. The term usually applies to the sale of a business unit such as a specific division or geography.
CASH CONVERSION CYCLE
Is a metric that measures the number of days it takes for a company to convert its investment in inventory and other items, and collect on its receivables to generate cash. It is used as a way of evaluating net working capital.
To act with a high standard of care, usually referring to voluntary investigations. In a deals context, it is a prospective buyer performing a comprehensive evaluation of its potential purchase and a seller preparing for said comprehensive assessment.
Earnings before interest, taxes, depreciation and amortization. Interest, taxes, depreciation and amortization are items found on the income statement that are viewed as a reflection of management's choices on capital structure and accounting policies that will likely change post-transaction. Therefore, these items are added back to net income to arrive at a value more indicative of the operating earnings of the Company going forward.
The total value of the company; the combination of its net debt and equity.
A buyer who is purchasing predominantly for financial reasons, such as a private equity firm.
The process of combining a newly purchased company, division or asset into existing operations to gain synergies or efficiencies in the business.
A professional who works for a financial institution whom provides advice about corporate finance strategy and aids in the execution of transactions and capital raises. Provides expertise about the market and tends to operate on the sell side helping to market potential opportunities.
LETTER OF INTENT (LOI)
A legal contract that the seller and buyer enter into after the seller accepts the buyers bid. The letter outlines, among other things, the prospective purchase price and the conditions for purchase which usually contain the ability for the purchaser to conduct due diligence, confidentiality, exclusivity and timeline for the deal to follow.
In a deals context, it is the number of times a purchaser will pay for the seller's Adjusted EBITDA or cash flow to determine the Company's enterprise value. A higher multiple indicates a company of perceived higher quality.
The total of a company's debt position, less cash.
NET WORKING CAPITAL
For the purposes of a transaction, the amount of capital the business needs to fund its day-to-day operations. In other words, to finance its cash conversion cycle.
The process of determining the typical, or recurring, financial performance of a company by removing anomalies.
Refers to the deal formation step in a transaction, and is generally used in the context of indicating the deal is non-exclusive (i.e. there are multiple interested buyers still at the table).
Refers to the deal execution stage, and is used to indicate a letter of intent has been signed granting exclusivity to one buyer.
Pro forma is a term that means adjusted for; pro forma financial statements depict how the statements would look assuming a certain change or event occurs.
QUALITY OF EARNINGS
An evaluation that determines a company's Adjusted EBITDA while considering the relative recurrence and stability of earnings.
Implies that the current level of business is a good representation of future performance and usually applies to contracted or highly predictable accounts. In other words, current levels of a certain account are expected to continue into the future. "Run rate" is also a category of EBITDA adjustments, which tend to extrapolate the current run rate on an annual basis to adjust historical performance to current run rate levels in the case a major change occurred part way through the year.
Refers to businesses whose primary activity is selling investments or financial instruments. "Being on the sell side" of a deal refers to the vendor and their advisors.
STRATEGIC BUYER (STRATEGICS)
A buyer who actively operates a business outside of financial investments and is interested in purchasing the target for strategic and financial reasons.
A term to indicate the benefits of combining two companies into one; generally refers to cost savings, but can have other implications.
A general term used to refer to the Company, division or asset for sale. It is often used to facilitate the anonymity of the Company in question to protect confidentiality.
TRAILING TWELVE MONTHS (TTM)
The last twelve months for which a Company has financial results. Usually forms the primary basis for Adjusted EBITDA and Net Working Capital determinations.