Glossary of terms

Acquisition

Any deal where a buyer ends up with 50% or more of the shares of the Target is called an acquisition. A buyer or bidder is the entity that makes the purchase or the offer to purchase. The Target is the entity being purchased, or the entity in which a stake is being purchased. The Vendor is the entity that sells or disposes of the target entity.

BIMBO

A combination of management buy-out and buy-in where the team buying the business includes both existing management and new managers.

Debenture

A legal document which formalises a lender's charge over the assets of a company.

Debt

This may include bank loans, overdrafts, director's loan to Targets and lease financing and may be long or short term, secured or unsecured. The lender receives interest at an agreed rate and in the event that this is not paid may be entitled to take control of and sell certain assets owned by the company. A lender does not, however, generally have a share in the ownership of the business.

Development Capital

Also known as expansion capital. This is venture capital financing used for expansion of an already established company.

Due Diligence

This is one of the main processes which takes place before any transaction is completed. The aim is to ensure that there is nothing which contradicts the financier's understanding of the current state and potential of the business. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountant's report (trading record, net asset and taxation position) and legal due diligence (implications of litigation, title to assets and intellectual property issues).

EBIT

Earnings before interest and tax.

EBITDA

Earnings before interest, tax, depreciation and amortisation. EBITDA is measure of cash flow. By excluding interest, taxes, depreciation and amortisation the amount of cash a company is generating is identified.

Equity

Equity is the term used to describe shares in a business conveying ownership of that business. The shareholders may be entitled to dividends. If a business fails, the shareholders will only receive a distribution on winding up after the lenders and creditors have been paid. An equity investment, therefore, has a higher risk attached to it than that facing a bank lender and thus the return that the shareholders demand on their money is typically higher.

Exit (also called 'Realisation')

The point at which a shareholder turns their investment into cash. Exits generally occur via trade sales, management buy-outs, management buy-ins, BIMBOs and occasionally flotation.

Goodwill

The difference between the price which is paid for a business and the value of its assets.

IRR

Internal rate of return. The average annual compound rate of return received by an investor over the life of their investment. This is a key indicator used by institutional investors in appraising investments.

Joint Venture

Two or more parties that form a new venture.

Loan Note

A form of vendor finance or deferred payment, in which the buyer acts as a borrower, agreeing to make payments to the holder of the loan note at a specified future date.

MBI

Management Buy-In. A company is sold to a combination of a new team of managers, with the new management team taking a majority stake. This often happens with family firms who have no one to pass the company on to, so they sell the company to a management team. The old owners sometimes retain a small stake. The management team can include a professional financial shareholders (e.g. a venture capital or private equity firm).

MBO

Management Buy-Out. This is the purchase of a business by its management, usually in co-operation with outside financiers. Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners sell most or usually all of their investment to the managers and their co-investors.

Net asset value

This is the value of the company based on the valuation of the assets less any liabilities that it has in its balance sheet.

Newco

A new company formed to buy-out the Target by the Buyer, and used to acquire an operating subsidiary, by buying the controlling interest in the Target. A Buyers' equity is injected into this new company to help fund the acquisition. A new company is normally used as it is clean of historical liabilities and protects the Buyer from direct investment in the Target.

Ordinary Shares

Ordinary shareholders carry full rights to participate in the business through voting in general meetings. They are entitled to payment of a dividend out of profits and ultimately repayment of capital in the event of liquidation, but only after other claims have been met. As owners of the company the ordinary shareholders bear the greatest risk, but also enjoy the fruits of corporate success in the form of higher dividends and/or capital gains.

PBIT

Profit before interest and tax.

PE ratio

The Price Earnings ratio is one of the most commonly used measures of value in financial circles. It expresses the value in terms of a multiple of profits. For any company quoted on the Stock Exchange this figure can be easily calculated and is published daily in the Financial Times.

Preference shares

These fall between debt and equity. They usually carry no voting rights and have preferential rights over ordinary shareholders regarding dividends and ultimate repayment of capital in the event of liquidation.

Private equity

Private equity is an increasingly widely used term in Europe and is generally interchangeable with venture capital, but some commentators use it to refer only to the management buy-out and buy-in investment sector.

Second-round financing

Most companies need more than the initial injection of capital, whether to enable them to expand into new markets, develop more production capacity, or to overcome temporary problems. There can be several rounds of financing.

Senior debt

Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up.

Shares

Certificates or book entries representing ownership in a business.

Subordinated loan

Loans which rank after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender's point of view. Mezzanine finance is an example of a subordinated loan.

Vendor Finance

Can either be in the form of deferred loans from, or shares subscribed by, the vendor. The vendor may well take shares alongside the management in the new entity. This category of finance is generally used where the vendor's expectation of the value of the business is higher than that of management and the institutions backing them.

Venture capital

Equity finance in an unquoted, and usually quite young, company to enable it to start up, expand or restructure its operations entirely. It's cheaper than bank finance initially because paying dividends can be deferred; it also provides a strategic partner - but it implies handing over some control, a share of earnings and decisions over future sales.

Warranties and indemnities

Legal confirmation given by the seller, regarding matters such as tax or contingent liabilities, to assure the buyer that any undisclosed liabilities that subsequently come to light will be settled by the seller.