Terms explained | Jaron Chester, corporate advisor

Twenty-eight terms

Acquisition: One business buying another, either all of it or a controlling stake. The buyer may pay in cash, shares, or a mix.
Asset sale: A sale in which the buyer takes specific assets (equipment, contracts, brands) rather than the company itself. The seller keeps the legal entity and whatever is left in it, including its liabilities.
Share sale: A sale of the company's shares. The buyer takes the whole entity, with its history, contracts and liabilities. Simpler for the seller, riskier for the buyer, which is why warranties matter.
Valuation: An estimate of what a business is worth. There are several methods, and they rarely agree. In practice, a business is worth what a willing buyer will pay for it on the day.
EBITDA: Earnings before interest, tax, depreciation and amortization. A rough measure of the cash a business generates from its operations, and the number most buyers start from when they value it.
Multiple: The number a buyer applies to earnings to arrive at a price. A business earning $2 million a year bought for $12 million has sold on a multiple of six. The multiple reflects growth, risk, size and the market at the time.
Enterprise value: The value of the whole business, before taking account of its debt and cash. What the headline price usually refers to.
Equity value: What the shareholders actually receive: enterprise value, less debt, plus cash, with adjustments for working capital. The difference between the two is where many disappointments live.
Working capital adjustment: A mechanism in the sale agreement that adjusts the price up or down depending on the stock, debtors and creditors in the business at completion, compared with an agreed normal level.
Earn-out: Part of the price paid later, and only if the business hits agreed targets after the sale. It bridges a gap between what the seller believes and what the buyer will risk. It works when the targets are clear and the seller still has some control over the result.
Deferred consideration: Part of the price paid at a fixed later date, without conditions. Only as good as the buyer's ability to pay it when the time comes.
Escrow: Money held by a neutral third party, usually a lawyer, for an agreed period after completion. It gives the buyer somewhere to claim if a warranty turns out to be wrong, and the seller gets whatever is left.
Letter of intent: A short document setting out the main terms of a proposed deal before the detailed work begins. Also called heads of terms or a term sheet. Mostly non-binding, apart from confidentiality and, often, exclusivity.
Exclusivity: A period, usually a few weeks, during which the seller agrees not to talk to other buyers. Buyers want it before spending money on due diligence. Sellers should give as little of it as they can.
Due diligence: The buyer's investigation of the business before signing: financial, legal, tax, commercial and sometimes technical. Its purpose is to confirm what the seller has said and find what the seller hasn't.
Data room: A secure online folder holding the documents a buyer needs for due diligence. A well-organized data room shortens a process and signals a well-run business.
Warranties: Statements of fact the seller makes in the sale agreement about the business: that the accounts are accurate, that there are no undisclosed disputes, and so on. If one proves wrong, the buyer may claim for the loss.
Indemnity: A promise to cover a specific known risk, pound for pound, if it crystallizes. Stronger than a warranty: the buyer does not have to prove it was misled, only that the loss occurred.
Disclosure letter: The seller's list of everything that qualifies the warranties. Anything properly disclosed cannot later be the subject of a warranty claim, which makes it one of the most important documents on the seller's side.
Conditions precedent: Things that must happen between signing and completion before the deal goes ahead, such as regulatory approval or a landlord's consent. Until they are met, either side may be able to walk away.
Completion: The day the deal closes: money moves, ownership transfers, and the agreement takes effect. Also called closing.
Term sheet: A summary of the proposed terms of an investment or loan: amount, price, structure, rights and conditions. In capital raising, the terms beyond the valuation often matter more than the valuation itself.
Preference shares: Shares that rank ahead of ordinary shares when money is paid out, whether as dividends or on a sale. Common in investment rounds. A high valuation with heavy preferences can leave founders with less than a lower valuation on clean terms.
Covenant: A promise made to a lender in a loan agreement, usually a financial ratio the business must stay within. Breaching one can let the lender call in the loan, which is why the headroom in a covenant matters as much as the interest rate.
Refinancing: Replacing existing debt with new debt, usually to get better terms, extend the repayment period, or borrow more. Best done well before the old facility expires, while the business still has options.
Joint venture: A business owned by two or more parties who contribute different things, such as capital, technology or market access. The agreement that governs it matters more than the opportunity that created it.
Management buyout: The existing management team buying the business from its owners, usually with outside funding. Attractive to owners who want continuity and to managers who know the business better than any outside buyer.
Succession: The planned transfer of ownership and leadership of a business, within a family or to others. Ownership and management are separate questions, and the best plans treat them that way.

Advice on the decisions that change a business.

See what he advises on

Twenty-eight terms

Related