Helpful Terms
A
Accretive Acquisition: In corporate finance, an acquisition that increases a company's earnings per share. This can happen when the acquired company brings in more value than the cost of acquisition.
Acqui-hiring: A strategy where a company is acquired mainly to bring in its employees, not its products or services. This is common in tech startups, where talent is the main asset.
Adjusted EBITDA: A measure of earnings before interest, taxes, depreciation, and amortization, adjusted to remove non-recurring items like personal expenses or extraordinary events, giving a clearer picture of profitability.
Anti-Dilution Clause: A provision that protects investors from their ownership percentage being reduced (or "diluted") if new shares are issued, ensuring they maintain their equity stake during future funding rounds.
Arbitrage: A risk-free trading strategy that involves buying and selling the same asset in different markets to profit from price discrepancies.
B
Basket: In mergers and acquisitions, this refers to a threshold amount of damages or losses a buyer must experience before seeking compensation from the seller.
Break-Up Fee: A fee paid by the seller to the buyer if the transaction fails due to the seller accepting a better offer or backing out of the deal.
Built to Sell: A business concept focusing on creating companies that are easy to scale and sell, as outlined in the book Built to Sell by John Warrillow.
C
Churn Rate: The percentage of customers who stop using a service over a certain period, commonly used in subscription-based businesses to measure retention.
Cliff Vesting: A vesting schedule where employees gain full ownership of their benefits after a specific period, rather than gradually over time.
Convertible Note: A type of short-term debt that converts into equity during a future financing round. It’s often used by startups as a way to delay valuation until later rounds.
Confidential Information Memorandum (CIM): A detailed document used in mergers and acquisitions that outlines the company’s operations, financial health, and future prospects to attract potential buyers or investors.
D
Downstroke: The guaranteed payment received in an acquisition deal, excluding future contingent payments like earn-outs.
Due Diligence: A thorough appraisal of a business by a prospective buyer or investor before completing an acquisition or investment. It involves reviewing financials, operations, and legal compliance.
Drag-Along Rights: A provision that allows majority shareholders to force minority shareholders to join in the sale of a company. This ensures a smoother process when selling a company.
E
Earn-Out: A financial agreement in mergers and acquisitions where the seller gets additional compensation based on the company’s future performance after the sale.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company’s profitability often used in M&A to assess a company’s operational performance.
Errors and Omissions Insurance (E&O): Liability insurance that protects businesses against claims of inadequate or negligent professional services.
F
Fund Launch: Refers to the process of creating and managing investment funds, covering structures, legal frameworks, and strategies for raising capital.
Fair Market Value (FMV): The price a business or asset would sell for on the open market between a willing buyer and seller.
G
Goodwill: The intangible value of a company, such as brand reputation or customer loyalty, which often exceeds the value of its physical assets.
General Partner (GP): In a partnership, a GP manages the operations and is personally liable for the debts and obligations of the partnership.
H
Hurdle Rate: The minimum rate of return required on an investment before it is considered acceptable, commonly used in venture capital and private equity.
Holdback: A portion of the purchase price withheld in an acquisition to cover any liabilities or obligations that may arise after the transaction.
I
Indemnification: Protection from financial loss or damages, often used in contracts to ensure one party is not held liable for specific risks.
IBBA (International Business Brokers Association): A professional association that offers certification, training, and resources for business brokers involved in buying or selling businesses.
L
Letter of Intent (LOI): A non-binding document that outlines the terms and conditions under which a buyer is willing to proceed with a deal.
Liquidation Preference: The order in which shareholders are paid in the event of a liquidation or sale. Investors with liquidation preferences are paid first before common shareholders.
M
Mezzanine Debt: A hybrid of debt and equity financing that typically converts into equity if the debt is not repaid. Often used to fund acquisitions or growth without diluting ownership.
Management Buyout (MBO): When a company’s management team purchases the company or a division of it, often with the help of external financing.
N
Net Promoter Score (NPS): A customer loyalty metric that measures the likelihood of customers recommending a company’s products or services to others.
Non-Compete Agreement: A legal agreement in which one party agrees not to enter into competition with another party for a certain period after the business relationship ends.
O
Offering Memorandum (OM): A document used in private placements to provide potential investors with detailed information about a business and its securities offering.
Option Pool: A reserved amount of a company's shares set aside for future employees or advisors, often used in startups to incentivize new talent.
P
Post-Money Valuation: The value of a company after external funding or financing has been added. This includes the investment amount.
Private Equity (PE): A form of investment where funds and investors directly invest in private companies, often taking control and helping to grow or restructure the business.
R
Reps and Warranties: Statements of fact made by the seller in an M&A transaction about the state of the business, which the buyer relies on when making the acquisition.
Retention Rate: The percentage of customers who continue to use a service or product over a specific period, important for assessing business health in recurring revenue models.
S
SaaS (Software as a Service): A software distribution model where users access applications hosted by a third party online, often on a subscription basis.
Sellers Discretionary Earnings (SDE): Earnings before the owner’s salary, interest, taxes, depreciation, and amortization, used to value small businesses.
Share Purchase Agreement (SPA): A contract that outlines the terms and conditions for the sale and purchase of shares in a company.
T
Tag-Along Rights: Rights that protect minority shareholders by allowing them to join a sale initiated by the majority shareholder under the same terms.
Total Addressable Market (TAM): The overall revenue opportunity available to a product or service, assuming full market penetration.
U
Underwriting: The process by which an underwriter evaluates and assumes the risk of a financial investment or insurance policy in exchange for a premium or fee.
Up Round: A financing round where a company’s valuation is higher than in previous rounds, indicating growth.
V
Venture Capital: A type of private equity financing provided to startups and small businesses with high growth potential, often in exchange for equity.
Vesting: The process by which an employee gains full ownership of company-contributed benefits or stock options over time.
W
Warrant: A security that gives the holder the right to buy shares of a company at a specific price within a set time period.
Waterfall Distribution: A method in private equity where profits are distributed in a tiered fashion, with certain investors or stakeholders getting priority in the payout.
X
XBRL (eXtensible Business Reporting Language): A global framework for exchanging business information, primarily used for reporting financial data.
Y
Yield: The income return on an investment, typically expressed as a percentage, and calculated as the annual dividends or interest divided by the investment’s current market value.
Z
Zero-Based Budgeting (ZBB): A budgeting method where all expenses must be justified for each new period, starting from zero rather than using prior period figures as a base.