Featured Clients this issue:
**Details of each client below article
- B2B Specialty Equipment Service Business #1618
- Pair of Highly Profitable Fitness Centers #318 & #418
- Outdoor Adventure Sports Outfitter #1518
Historically, the first quarter of the year is the busiest for our industry. Not only are we updating our files for 2018 financial data, but acquirers are particularly active trying to initiate transactions at the beginning of the year. With the exception of dealing with the concerns of a second potential government shut down which may impact the ability to fund SBA loans, the market remains bullish and we are seeing significant positive activity. Importantly, we are also seeing increased profits from our existing sell side clients and potential sellers exploring the options of going to market.
This month's article contains the second installment of M&A terms, which may assist you as you research the possibility of selling or buying a business.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
Glossary of M&A Terms
If you are trying to buy or sell a business, then you know that the terminology can get quite confusing. The FBB Group, Ltd. has compiled a list of terms and their respective definitions to try and clear up any questions you might have on how to buy a business or sell a business. As this list is quite extensive, we will be dividing it up into multiple parts, published in multiple eNewsletters.
- Cap: The maximum amount of damages the buyer can recover from the seller under the indemnification provisions. Many agreements include separate caps for different types of breaches.
- Capital Asset Pricing Model (CAPM): A model in which the cost of capital for any security or portfolio of securities equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the security or portfolio.
- Capital Structure: The composition of the invested capital of a business enterprise; the mix of debt and equity financing.
- Capitalization: A conversion of a single period stream of benefits into value.
- Capitalization Factor: Any multiple or divisor used to convert anticipated benefits into value.
- Capitalization Rate: Any divisor (usually expressed as a percentage) used to convert anticipated benefits into value.
- Capitalized Items: Assets with an economic life of one year or more. (The cost is moved to the balance sheet and these costs can be written down by depreciation or amortization over time.)
- Cash Flow: 1) Cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, "discretionary" or "operating") and a definition of exactly what it means in the given valuation context. 2) Profit after principal and interest are deducted from net operating income (NOI).
- Client: An entity with whom a Business Broker has a fiduciary relationship.
- Closing: When all the details of the business sale are completed and the money distributed to the seller, seller's agents, creditors and others.
- Closing Costs: The costs of seller and buyer at conveyance of business and property (These can include accounting and legal fees as commissions to a business broker or intermediary.)
- Closing Documents: The legal documents that are part of a business closing. They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreement, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.
- Closing Statement: A statement which contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.
- Collar: The ceiling and floor of the price fluctuation on an underlying asset. For example, the price fluctuation where stock in part of the consideration; or, the fluctuation in the amount of trued-up working capital compared to estimated working capital.
- Collateral: A security, such as a mortgage, given to protect debt.
- Committed Equity Capital: Equity investment funds readily available to an investor to make investments according to a pre-defined investment strategy. Related uses or terms - Capital Under Management, Capital Available for Investment
- Conditional Sales Contract: A contract in which owner retains title until buyer has met all terms and conditions; a familiar device in land sales; also called land contract or installment contract. (Buyer acquires equitable title until final payment; after delivery of deed, buyer has legal title.)
- Conditions to Closing: Certain obligations that must be fulfilled in order to legally require the other party to close the transaction. Other than conditions to closing relating to corporate approvals and governmental filings and approvals, compliance with a particular condition to closing may be waived by the party that benefits from the condition.
- Confidential Business Review ("CBR"):A CBR, sometimes called "The Book", Pitchbook, Confidential Business Profile or a Confidential Information Memorandum (CIM), is drafted by an M&A advisory firm or investment banker for a sell-side engagement to market a business to prospective buyers. This document details and showcases aspects of the business for sale while being accurate and truthful.
- Confidentiality Agreement: An agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations for a larger contract, when the parties may need to divulge information about their operations to each other. In this situation, the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever signed. Also known as a non-disclosure agreement.
- Contingency: A clause in an agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event. For example, the sale of the business is contingent upon the buyer obtaining financing.
- Contract: A voluntary and lawful agreement between two or more parties to do, or not to do, something. Elements of an enforceable contract include: (a) an offer to be bound to do or refrain from doing something, which has been accepted, (b) sufficient consideration, (c) a valid subject matter, (d) legal capacity of the parties, and (e) for those contracts to which the Statute of Fraud applies, its requirements must be met.
- Control: The power to direct the management and policies of a business enterprise.
- Control Premium: An amount (expressed in either dollar or percentage form) by which the pro rata value (calculated, in proportion value) of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise, that reflects the power of control.
- Conveyance: A transfer of title.
- Cost Approach: A general way of estimating a value indication of an individual asset by quantifying the amount of money that would be required to replace the future service capability of that asset.
- Cost of Capital: The expected rate of return (discount rate) that the market requires in order to attract funds to a particular investment.
- Cost of Goods Sold (COGS): The cost of a product or service sold to customers.
- Counter Offer: Voids first offer and creates new offer.
- Covenant -not-to-compete: An agreement made part of a purchase contract, in which the seller promises not to enter into a similar or competing business, for a specified period of time, within a designated area.
- Covenants: Negative covenants restrict the seller from taking certain actions prior to the closing without the buyer's prior consent. Negative covenants protect the buyer from the seller taking actions prior to the closing that change the business that the buyer expects to buy at the closing. Affirmative covenants obligate the seller or the buyer to take certain actions prior to the closing.
- Current Assets: Assets that are either cash, will turn into cash, or will be used up within one year.
- Current Liabilities: Debts the business must pay within one year.
- Current Market Value: What someone is willing to pay you for an item should you choose to sell it today.
- Customer: An entity to a transaction who receives services and benefits, but has no fiduciary relationship with the Business Broker.
- Debt service: The total payment of principal and interest on loans.
- Depreciation: The reduction in value of an asset over its useful life.
- Discount: A reduction in value or the act of reducing value.
- Discount for Lack of Control: An amount or percentage deducted from the pro rata share of value of one hundred percent (100%) of an equity interest in a business to reflect the absence of some or all of the powers of control.
- Discount for Lack of Marketability: An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
- Discount Rate: A rate of return (cost of capital) used to convert a monetary sum, payable or receivable in the future, into present value.
- Divestiture: Large public or private parent corporations selling off non-core business units.
- Due Diligence: A process where a buyer inspects a potential investment. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.
- Due Diligence Period: A period of time in which the buyer learns more about and investigates a business for sale in order to determine its worth (This can also be applied to the seller, especially in the case of seller financing, meaning a period of time in which the seller investigates the buyer to determine the buyer's ability to run the business and the buyer's creditworthiness. Due diligence is often performed on the acquirer as well as the target.
This Glossary of Terms was compiled using multiple sources, to include: representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Valuers, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, Private Equity Firms, Barron's, Investopedia, Divestopedia, PitchBook, IBBA, M&A Source and merger & acquisition advisors.
B2B Specialty Equipment Service Business #1618
This RELOCATABLE value-added company provides custom park and playground equipment from around the world. With a focus on fun, creativity, and safety, it services landscape architects, general contractors/developers, parks departments, amusement parks, schools, child care centers, and HOAs...not individual homeowners. Contact Mem Garrison.
- Purchase Price...TBS
- Gross Sales...$3,043,351
For more information contact Mem Garrison, firstname.lastname@example.org.
Pair of Highly Profitable Fitness Centers #318 & #418
These two well established, non-franchise fitness centers have demonstrated increased profitability year after year. Location #1 opened its doors in early 2009, became profitable very quickly, and continues to consistently generate good cash flow. Location #2 opened its doors a few years later, has been profitable the last three years, and has plenty of room for growth. Both locations have well-trained managers and staff already in place taking care of the daily operations. The management team prides itself in having a clean and friendly environment, which explains the high use and membership retention rates. The asking price reflected below is for both locations, but the sellers will entertain the sale of each location separately.
- Purchase Price...$2,795,000
- Gross Sales...$1,942,944
For more information contact Rob Amerine, email@example.com.
Outdoor Adventure Sports Outfitter #1518
This well-established, very profitable business has been recognized as one of Colorado's top-rated outfitters. Activities include not only two very different, exciting adventures, but several parcels of real estate, vacation homes, and a bar and grill. It's the full deal when looking for outdoor entertainment in the state of Colorado. Top selling entertainment for individuals, families, and groups. The business, with an exceptional team of experienced guides and a well-trained staff in place, is an ideal acquisition candidate for an investor or a synergistic acquirer.
- Purchase Price...TBS
- Gross Sales...$3,623,812
For more information contact Mem Garrison, firstname.lastname@example.org.
**Terms & Definitions
TBS (To be suggested by Purchaser) -
Seller, in his/her sole discretion, has the right to accept or reject all offers.
Seller's Discretionary Earnings (SDE):
A term used to denote a business's cash flow or the amount of pretax money a buyer can expect to earn in first-year operations.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization):
All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income (It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.)