As with any type of work, how to value a business and how to manage a business sale have their own professional jargon. This pair of articles are designed to give brief plain English and practical explanations for some of the common terms used, from Grooming to Yield.
Grooming – the process of preparing a business for sale to make it attractive to a purchaser. Can take up to two years.
Heads of Agreement – the document that sets out the price that has been agreed for the sale and the key terms, subject to due diligence and contract.
Heads of Terms – see heads of agreement.
Information Memorandum – see sales pack.
Insolvency – being unable to pay debts as they fall due or liabilities exceeding assets. The Insolvency Act sets out a number of tests including failure to deal with a statutory demand or to pay a judgement debt which will be taken by a court as proof of insolvency.
IPR Intellectual Property Rights – includes everything from patents and proprietary information to brands and trademarks.
IRR Internal Rate of Return – the discount rate at which a net present value calculation gives a zero result, which in turn means that the discount rate equates to the return generated by the project or investment.
IPO Initial Public Offering – the American terms for a flotation; taking and listing a company for the first time on a stock exchange.
Letter of Intent – see heads of agreement.
Listing – floating a company on a public stock exchange.
NPV Net Present Value – the value of a discounted cash flow, less the amount of money you have to pay to acquire it.
Non-embarrassment Clause – the right to share in any increased sales proceeds if your buyer sells your business on again within a specified time.
OFEX – the ‘over the counter market’ which is a privately traded listing where shares are dealt in on the basis of individual trades. Often used by small companies to obtain speculative money as an alternative to venture capital, but is significantly less liquid than other stock market listing as 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 sold in 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 prepared to pay to acquire an interest in a company. A high P/E multiple usually indicates an expectation of high growth (as then E is expected to grow significantly reducing the P/E ratio down to a more normal level). The inverse of the business’s yield.
Payback Period – how long it will take to recover an investment at current level of earnings.
Phoenix – a buy-out of a business from insolvency by the existing management.
Post Acquisition Integration – the process of change planned by a buyer in order to absorb the purchased business into their existing organisation.
Preference – putting one creditor in a better position than others. In the event of insolvency a liquidator will review transactions leading up to the liquidation and if certain conditions are met will seek to set aside any preferential transactions.
Prospectus – a package of information prepared for provision to potentially interested investors in a flotation.
Sales Pack – a package of information prepared for provision to potentially interested parties.
Sales Mandate – an instruction to a corporate finance advisor to act to sell your business.
SAV Stock At Value – stock to be purchased at the value on the day of sale. Valuation will normally be determined by GAAP.
Secondary Buy-out – the sale of an interest in a company by one VC to another. Generally unpopular with VCs as it is sometimes seen as a sign of ‘failure’ by the first investing VC.
Section 320 – provision in the Companies Act that prevents a director purchasing substantial assets (broadly 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 a company’s equity or share capital, colloquially: shares. 2 A company’s trading stock comprising raw materials, work in progress, and finished goods stock.
Target – a company to be acquired.
Trade Purchaser – an industrial buyer of companies (as opposed to a financial purchaser such as a VC).
Transaction at Undervalue – selling an asset at less than its fair value. In the event of an insolvency, a liquidator will review significant transactions preceding the insolvency and can act to set aside transactions at undervalue.
TUPE Transfer of Undertakings Protection of Employment Regulations – the rules which govern the treatment of employees on the sale of a business and which will broadly make a purchaser responsible for taking on all the employees of the business being acquired (whether by sale of shares or business and assets) on the existing terms and conditions of service. Also provides that if employees have been made redundant in anticipation of, or in an attempt to avoid the purchaser having to take this responsibility, the purchaser will in any event be liable. There is a limited exemption to this rule in buying businesses from some forms of insolvency proceedings.
VC – Venture Capital or Venture Capitalist.
Venture Capitalists – a firm set up to hold investors money and to invest it in high growth opportunities. Generally look to achieve a return of 30% per annum and hold investments for three to five years before selling. Generally tend not to be interested in deals below say, £1.0million investment. (See equity gap; business angel)
Whitewash 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 the company’s shares (so the purchaser cannot promise to pay the seller out of the proceeds of selling the company’s assets once he has control of it, or borrow the money for the purchase by offering the company’s assets as security). In many private company sales however, the only way that purchasers are able to raise funds to buy the company is by borrowing against the assets to be bought. An exception is therefore allowed to the 161 rule involving the preparation of a report by the company’s auditors, known as a whitewash agreement.
Yield – the amount of return received (E for earnings) for the price