Terms To Know
What does the term EBITDA stand for?
Earnings Before Interest Taxation Depreciation and Ammortization
What is the difference between a controlled and non-controlled investment class?
Controlled: The investor has control of the company as a majority (50%) investor
Non-Controlled: Minority Equity Investment (<=49%)
What are examples of an Intermediary?
Banker, Accounting, Strategic Advisors/Consulting Firms etc
What does the term "Asset Readiness" mean?
It means you have all of the documents and financials in line to go into DD phase immediately upon a nibble on your business when it's on the selling block
What is the difference between the NASDAQ & the NYSE
NASDAQ: is a DEALERS market, wherein market participants are not buying from and selling to one another directly but through a dealer, who, in the case of the Nasdaq, is a market maker.
NYSE is an AUCTION market, wherein individuals are typically buying and selling between one another, and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price.
What is the difference between a LOI and a CIM?
CIM: provides a prospective buyer with the information to generate an initial offer. Typically, the book will not include a purchase price for the business, but will provide the prospective buyer sufficient information to appropriately value the acquisition. It is extremely important for the CIM to clearly articulate all of the company's attributes in order to fetch a premium valuation.
Areas that should be described in detail include:
LOI: Formal Offer
What comes first: The Confidentiality Agreement or the LOI?
CA
At what level in company annual revenue should you look to use an Investment Bank to showcase your business if you chose to sell?
Anything bigger than $10M in annual revenue
Lower MM Company: $10M-$250M
Mid Market: $250M-$500M
Large Company: $500M+
During DD phase, what does "Material Information" mean & why is it important?
A seller is obligated to inform the buyer of all material events that would critically affect the firm if the buyer closed without understanding those terms as a potential risk to eventual valuation
What does EBITDA actually measure?
It measures the cash flow that a company produces from selling its goods or services. It is typically also the baseline for valuation of a price tag on a firm.
When a company is in "capital growth" mode, what does that typically mean in the M&A world?
That the company is issuing more public or private stock options for the purpose of raising capital to invest in the business. (I.E. Fundraising Mode)
When would a company need to raise more capital for growth?
When its sales aren't producing enough cash output minus daily operations but demand is high for their service or product
As soon as a PE purchases a portfolio company, what is the financial term used to judge and flaunt a potential asset for sale?
IRR Internal Rate of Return
During the Due Dilligence phase, who pays for hiring lawyers, accountants, investment bankers etc...
Each side pays their own way
If a stock is "thinly traded" what does that mean
It means that the company's shares are not high volume trading stocks on a daily basis and they are not listed on a major stock exchange
What is the difference between a Merger and an Aquisition in business terms?
Aquisition: When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer absorbs the business and the buyer's stock continues to be traded while the target company’s stock does not.
A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals."
What do buyers typically like to see when evaluating a transaction other than EBITDA?
Reoccuring Revenue Models
What is the difference between a business broker and investment banker?
Investment Banker: Works with a full team to sell your asset, higher fees for that specialization
Business Broker: Same work but few people an does a majority of the work themselves (i.e. writing the CIM, offering doc, negotiation, etc)
When is it appropriate for a buyer to ask a seller to construct a financial model or sales & marketing plan for the target company?
Never! It is 100% on the buyer's responsibility to take the docs in the VDR and do their own financial modeling, strategy sessions etc...
When might Vertical Integration be a smart option to sell your company?
When your supply chain is contemplating getting into expanding their footprint of offerings.
Define the term "Segue"
it's the business natural lifecycle i.e. going from a seed to a bulge bracket firm
What happens to the long-term debt after a sale is announced and PMI is in process?
Either the buyer assumes it or the seller is asked pre-negotiation to pay it off during post merger integration and final separation date
What is the difference between Venture Capitalists and Private Equity Owners from a financial standpoint?
Venture Capitalists: Own $ in the company; assume a larger personal risk
PE: Use other peoples $ plus their own to finance growth or change in a firm
Between which two steps in the M&A process does Due Diligence lie?
LOI & Purchase Agreement
When should a seller consider exclusivity in pre-emptive bids?
If the price is a lot higher than your expected and/or RARELY is the answer, because it shuts out other potential buyers earlier than receiving all of the other potential offers