Terminology Often Used When Selling/Buying a Business (Part 2)

GAAP or Generally Accepted Accounting Principles–A known set of accounting principles, standards and procedures that companies usually follow when they prepare their financial statements. These methods are commonly used and consistent, so parties utilizing the financial information can be reasonably comfortable that the financial numbers presented are used regularly.

Indemnification–A provision usually found in a purchase agreement where a party to the agreement agrees to protect the other party against a loss or some sort of damage.

Intangible Assets–Assets that are not physical in nature.  These assets may or may not show up on the balance sheet of a company. Intangible assets may include trademarks, copyrights, brands, domain names, logos, goodwill, blueprints and customer lists. Goodwill is often a portion of the purchase allocation that is not attached to any particular hard asset that has tax benefits to the buyer and seller.

 Leveraged Buyout (LBO)–An acquisition of a company using a significant amount of borrowed money while using the assets of the company being acquired as collateral for the loans.

Limited Auction–A process by which several buyers are bidding on an acquisition of a company which weeds out other possible buyers and normally drives the value of the business upward.

Liquidation Value–The value or worth of a company’s assets being sold if it were to go out of business or if the selling of the assets were to occur quickly. This typically happens when the entire market of other potential buyers weren’t able to be contacted. Often the owner of the assets is very motivated to sell.

Management Buyout (MBO)–An acquisition from the existing management team.

 Non-Compete Agreement–A contract often used in employment or in the selling of a company where the seller or employees agree that, during their tenure with the  company and for a period of time thereafter,  they will not participate in a similar trade or profession as the company. Usually there is a territory restriction as part of the agreement.

 No-Shop Agreement–This language is often found in a letter of intent (LOI) where the selling company agrees not to continue to seek additional inquiries and discussions with other buyers for a specific period of time.

Representations (Reps) and Warranties–Terms  used in a purchase agreement where the buyer and seller are stating that they are  trusting each other to provide factual information and documentation to the transaction.

 Purchase Agreement–The legal contract between the buyer and seller of a business or real estate that states what the parties are buying and selling, at what price, on what terms and all of the financial and legal obligations that go with the transaction.  This may also be called a sales and purchase agreement (SPA) or asset purchase agreement (APA).

 Re-casted–Many financial statements of a business don’t cleanly tell a buyer what the business may be making or what assets and liabilities are fairly valued at and included with the sale. In that case, the balance sheets and income statements are re-casted (also referred to as restated or normalized). Often the sellers’ wages and perks will be adjusted out, as will extraordinary and nonrecurring items. This allows a buyer to determine their offering price for the business, which normally results in a much higher price for the seller than without any re-casted financials.

 Return on Investment (ROI)–A measurement of the gain or loss that one receives on their investment, usually expressed in a percentage. The calculation is done by taking the benefit or profit divided by the cost of the investment.

 Stock Sale–Different from an asset sale, the stock sale is when the stock or shares of a company are being purchased by the buyer, and the entity usually remains intact and unchanged.

 Strategic Buyer–A buyer making an acquisition who has specific reasons for the purchase, as they may be in the same or similar industry, which creates synergies and may therefore pay more than a financial buyer. This may also be called a synergistic buyer.

 Synergy or Synergies–In the M&A business, when the combination of two companies has a greater impact in sales and profits together than the sum of each independently..

 Term Sheet–An early stage and non-binding agreement where the parties my put forth the key terms and conditions to a business sale.

 Terms–The key components of a purchase agreement, such as the price, amount of cash, seller note, earn-out, payments and interest rates.

Tombstone–An announcement of the players involved in a business sale including the buyer, seller and some of their advisors with or without their logos.

Working Capital–Technically working capital is current assets less current liabilities. In letters of intent, often the working capital will state what components of working capital are to be included, such as cash, accounts receivables, prepaids, inventory, accounts payables and other liabilities.