Broker
May be an agent of the seller or buyer (not both). Generally, this is a local business or commercial real estate broker. May or may not use the Lehman formula for success fees.
Closing
The day that money changes hands.
Comfort Letter
An informal letter from the buyers banking relationship indicating a general knowledge about the proposed transaction and a willingness to lend funds to the buyer. This is not to be confused with a commitment letter.
Commitment Letter
A document that is provided by the lender to the buyer following loan committee approval of the funds to be borrowed in the transaction.
Confidentiality Agreement
A document that is generally requested of the buyer by the seller to ensure that the proposed transaction is not discussed with other parties.
Covenant Not To Compete
An agreement that most likely will be required of the seller by the buyer for at least a three (3) year period. This will preclude the seller from being involved in a similar to the one he is selling.
Definitive (Purchase) Agreement
The formal contract that will bind the sale of the business. This is usually signed on closing day but may precede it by thirty (30) days or more in some instances.
Due Diligence
That period following the signing of a letter of intent that the buyer has access to all the sellers' books and records.
Earn-Out
This term refers to that portion of the transaction value (consideration) that might be contingent on the future of success (earnings) of the company following the sale.
EBITDA
Earnings before interest, taxes and depreciation (amortization) which is a non-cash expense. This is sometimes referred to as a pre-tax cash flow. Buyers as a benchmark for the valuation of a business generally use a multiple of EBITDA.
Expression of Interest Letter
A rather informal and non-binding letter sent to the seller by the buyer indication a range of value (as he sees it) for the business.
Fair Market Value (FMV)
The net book value on the balance sheet reflects fully depreciated assets, which may or may not have a value that exceeds NBV. In most cases, real property (e.g. real estate) is the leading candidate to be restated as a balance sheet item at fair market value (FMV).
Financials
This term generally refers to those documents prepared by the outside CPA firm of a company at the end of a fiscal year. There are three (3) levels of financial reports: compilation, review, and audit. Most firms with revenues of $7.5MM+ should obtain an audit from a regional or national CPA firm.
Finder
A reduced level of broker and generally expects a referral fee in the range of 10% of a full brokerage/Lehman fee structure.
Intermediary
A consultant who performs M&A advisory services on behalf of buyers and sellers of middle market companies with values in the range of $5-$75MM. Generally works off the Lehman formula or some modification thereof.
Lehman Formula
The formula by which most intermediary success fees are calculated (e.g. 5-4-3-2-1% in $1MM increments). For example, a $5MM transaction would produce a $150K success fee (3%) under the Lehman formula.
Letter of Intent (LOI)
This is much more formal legal version of the expression of interest letter spelling out the basic terms of the transactions. This document will become the outline for the definitive (purchase) agreement between the parties.
Net Book Value (NBV)
Sometimes referred to as shareholder equity. This is the amount on the balance sheet remaining after deducting all liabilities from the net assets.
Offering Memorandum (the "Book")
This document is prepared by the seller or his agent and contains all relevant data on the company including financials, etc. This is generally given to buyer prospects following the execution of a confidentially agreement.
Operating Income (EBIT)
Earnings before interest and taxes, which are non-operating expenses.
Re-Casting (Add-Backs)
Refers to the technique of "adding-back" into the operating income (EBIT) those expenses that will not be borne by the buyer of the business post-close (e.g. excessive owner's comp and benefits).
Site Visit
This is usually the initial meeting between the buyer and seller and is generally conducted at the seller's facility.
Solicitation Letter
May be used by both proactive buyers as well as sellers to broadly describe the opportunity and stimulate interest in their projects.
Success Fee
The fee that is normally paid to an agent (broker/intermediary) upon the successful completion of a sale (or purchase) or a business by client.
Transaction Size (Consideration)
The total number of cash paid plus debt assumed in a transaction. May also include seller notes and any contingent payments that might be due to the seller because of the transaction (e.g. earn-out).