M&A Glossary of Terms
/Bob Scarlata
/WhiteHorse Partners
“A” round – a financing event whereby venture capitalists become involved in a fast growth company that was previously financed by founders and/or angels.
Actual Cash Value: The value of an entity expressed in terms of cash or its exact and immediate equivalent. May be the same as "market value," depending on the applicable definition of the latter.
Acquisition - The process by which the stock or assets of a corporation are transferred to a buyer, either through a purchase of stock or a purchase of assets.
Acquisition Requirement Form - The "Acquisition Requirement Form” assists The March Group in matching your requirements to our inventory of acquisition candidates. Our inventory of available companies changes frequently, as new companies enter the market and others transactions are completed. Our understanding of the business characteristics, size and location you require will help us match you with future candidates, as well as those presently in inventory. In addition, when presenting a potential acquirer to our clients for review, it is appropriate for us to understand and effectively portray the investment criteria and financial capability of the buyer.
Accretion - Refers to the growth of a company or other asset, either by internal expansion or acquisition.
Adjusted (recast) Book Value - The book value which results after one or more asset or liability amounts are added, deleted or changed from the respective book amounts.
Adjusted (Recast Earnings) - The earnings that result from the adjustment of historical financial statements, reflecting items that are unrelated to the ongoing business. (See also recasting.)
Adjusted Working Capital - Normal Working Capital (see definition below) excluding any debt in current liabilities. Synonymous with debt free working capital.
Aesthetic Value - The intangible, sometimes psychic, enhancement of value of an asset or asset group as a result of aesthetic factors or considerations. Examples include physical attractiveness that goes beyond functional requirements. Although frequently subjective in nature, aesthetic value can contribute to the economic value of property.
After-tax operating income – see Net operating profit after taxes.
Alternative asset class – a class of investments that includes private equity, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with an objective to diversify their portfolios.
Allocations of Purchase - The assignment of value to tangible and intangible assets of an acquired company for which a premium over historical cost has been paid
Amenity Value - That portion of value that results from benefits or satisfactions enjoyed by the owner or user of property, that are not in the form of money or convertible to monetary terms. Amenity value tends to be subjective and is sometimes closely related to aesthetic value.
Angel – a wealthy individual that invests in companies in relatively early stages of development. Usually angels invest less than $1 million per startup. The typical angel-financed startup is in concept or product development phase
Anti-dilution – a contract clause that protects an investor from a substantial reduction in percentage ownership in a company due to the issuance by the company of additional shares to other entities. The mechanism for making adjustments is called a Ratchet.
Appraisal - (Noun) The act or process of estimating value; an estimate of value. (Adjective) Of or pertaining to appraising and related functions, e.g. appraisal practice, appraisal services. It is synonymous with valuation.
Appraisal Approach - A general way of determining value using one or more specific appraisal methods. (See ASSET BASED APPROACH, MARKET APPROACH and INCOME APPROACH definitions.)
Appraisal Date - The date as of which the appraiser's opinion of value applies.
Appraisal Method - Within approaches, a specific way to determine value.
Appraisal Practice - The work or services performed by appraisers, defined by three terms in these standards: appraisal, review and consulting.
Appraisal Procedure - The act, manner and technique of performing the steps of an appraisal method.
Appraised Value - Value as determined or estimated by an appraiser, particularly one acting in behalf of a governmental authority. The term, "appraised value" is most often used in connection with real property, and those types of personal property whose ownership is subject to taxes levied by local taxing jurisdictions. Appraised value may be based on market value, or on some other basis appropriate to the type of property and to the applicable tax statutes, regulations, and customs.
Assessed Value - Value as established by governmental authorities as basis for taxation of property ownership. Usually synonymous with "appraised value. " In some jurisdictions, however, assessed value is a different (usually lower) figure than appraised value, depending on practices, procedure, and legal requirements that vary from jurisdiction to jurisdiction, from time to time, etc.
Asset Based Approach - A general way of determining a value indication of a business' assets and/or equity interest using one or more methods based directly on the value of the assets of the business less liabilities.
Asset Based Lending - A type of financing, commonly found in leveraged buyouts, based on a percentage of some value (book, liquidation, market, auction) of an asset. Asset based lenders typically analyze a target company's viability as a going concern and its ability to service debt from cash flow.
Asset Sale - A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and, in some cases, liabilities of a company to a purchaser. The corporate entity is not transferred.
“B” round – a financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the “A” round of financing. Subsequent rounds are called “C”, “D” and so on.
Balloon payment – a relatively large principal payment due at a specific time as required by a lender.
Base Year - A company's current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the year-to-date results and expectations of management
Basis point (“bp”) – one one-hundredth (1/100) of a percentage unit. For example, 50 basis points equals one half of one percent. Banks quote variable loan rates in terms of an index plus a margin and the margin is often described in basis points, such as LIBOR plus 400 basis points (or, as the experts say, “beeps”).
Basket - A dollar amount set forth as the loss that must be experienced by the buyer before it can recover damages under the indemnity provisions.
Best efforts offering – a commitment by a syndicate of investment banks to use best efforts to ensure the sale to investors of a company’s offering of securities. In a best efforts offering, the syndicate avoids any firm commitment for a specific number of shares or bonds.
Beta – a measure of volatility of a public stock relative to an index or a composite of all stocks in a market or geographical region. A beta of more than one indicates the stock has higher volatility than the index (or composite) and a beta of one indicates volatility equivalent to the index (or composite). For example, the price of a stock with a beta of 1.5 will change by 1.5% if the index value changes by 1%. Typically, the S&P500 index is used in calculating the beta of a stock.
Beta Product – a product that is being tested by potential customers prior to being formally launched into the marketplace.
Blow-out round – see Cram-down round.
Board of directors – a group of individuals, typically composed of managers, investors and experts, which have a fiduciary responsibility for the well being and proper guidance of a corporation. The board is elected by the shareholders.
Boat anchor – a person, project or activity that hinders the growth of a company.
Book – see Private placement memorandum.
Book runner – the lead bank that manages the transaction process for an equity or debt financing, including documentation, syndication, pricing, allocation and closing.
Book value – the book value of a company is the value of the common stock (total assets minus liabilities minus preferred stock minus intangible assets). The book value of an asset of a company is typically based on its original cost minus accumulated depreciation.
Book Value of Invested Capital - The sum of the book value of debt and equity as presented on a company's balance sheet
Bootstrapping – the actions of a startup to minimize expenses and build cash flow, thereby reducing or eliminating the need for outside investors.
Bp – see Basis point.
Break-up/Bust-up/Topping Fees - If the deal does not close, these fees may be paid to either the seller or the buyer by the other to help cover costs incurred during the acquisition process.
Bridge financing – temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge is usually a short term note (6 to 12 months) that converts to preferred stock. Typically, the bridge lender has the right to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round. See Wipeout bridge and Hamburger Helper bridge.
Broad-based weighted average ratchet - a type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighted average of investor A’s price and investor B’s price. A broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighted average price. See Narrow-based weighted average ratchet.
Bulk Sales Law - A state law intended to protect the creditors of a business that is being sold by requiring that the creditors be notified of the sale
Bullet payment – a payment of all principal due at a time specified by a bank or a bond issuer.
Burn rate – the rate at which a startup with little or no revenue uses available cash to cover expenses. Usually expressed on a monthly or weekly basis.
Business Appraiser - A person who by education, training and experience is qualified to make an appraisal of a business enterprise and/or its intangible assets.
Business Development Company (BDC) – a publicly traded company that invests in private companies and is required by law to provide meaningful support and assistance to its portfolio companies.
Business Enterprise - A commercial, industrial or service organization pursuing an economic activity.
Business Enterprise Value - The value of a business, using any number of valuation approaches, as an integral, operating unit rather than as a collection of individual assets and liabilities.
Business plan – a document that describes a new concept for a business opportunity. A business plan typically includes the following sections: executive summary, market need, solution, technology, competition, marketing, management, operations and financials.
Buyout – a sector of the private equity industry. Also, the purchase of a controlling interest of a company by an outside investor (in a leveraged buyout) or a management team (in a management buyout).
Buy-sell agreement – a contract that sets forth the conditions under which a shareholder must first offer his or her shares for sale to the other shareholders before being allowed to sell to entities outside the company.
Business Valuation - The act or process of arriving at an opinion or determination of the value of a business enterprise or an interest therein.
C Corporation – an ownership structure that allows any number of individuals or companies to own shares. A C corporation is a stand-alone legal entity so it offers some protection to its owners, managers and investors from liability resulting from its actions.
Call date – when a bond issuer has the right to retire part or all of a bond issuance at a specific price.
Call premium – the premium above par value that an issuer is willing to pay as part of the redemption of a bond issue prior to maturity.
Call price – the price an issuer agrees to pay to bondholders to redeem all or part of a bond issuance.
Call protection – a provision in the terms of a bond specifying the period of time during which the bond cannot be called by the issuer.
Capital Asset Pricing Model (CAPM) – a method of estimating the cost of equity capital of a company. The cost of equity capital is equal to the return of a risk-free investment plus a premium that reflects the risk of the company’s equity.
Capital call – when a private equity fund manager (usually a “general partner” in a partnership) requests that an investor in the fund (a “limited partner”) provide additional capital. Usually a limited partner will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the limited partner as opportunities arise to finance startups and buyouts.
Capital Structure - The composition of a business entity's invested capital.
Capitalization - The conversion of historic or projected income into value: The capital structure of a business enterprise, • The recognition of an expenditure as a capital asset to be depreciated over time rather than a period expense.
Capitalization Factor - (1) The conversion of income into value. (2) The capital structure of a business enterprise. (3) The recognition of an expenditure as a capital asset rather than a period expense.
Capitalization rate – the discount rate used to determine the present value of an infinitely lived asset
Capitalization table – a table showing the owners of a company’s shares and their ownership percentages as well as the debt holders. It also lists the forms of ownership, such as common stock, preferred stock, warrants, options, senior debt, and subordinated debt.
Capitalizing Net Income - Determining value for a company by dividing net income by the required Return on Investment (ROI).
Capital gains – a tax classification of investment earnings resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income.
Capital stock – a description of stock that applies when there is only one class of shares. This class is known as “common stock”.
Capped participating preferred stock – preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount. See Participating preferred stock.
Carried interest – a share in the profits of a private equity fund. Typically, a fund must return the capital given to it by limited partners plus any preferential rate of return before the general partner can share in the profits of the fund. The general partner will then receive a 20% carried interest, although some successful firms receive 25%-30%. Also known as “carry” or “promote.”
Cash Flow - Net income plus depreciation and other non‑cash charges.
Cash Flow Analysis - A study of the anticipated movement of cash into or out of an investment.
Cash Flow Lending - A type of unsecured financing based on the timing and certainty of the borrower's cash flow.
Cash Flow Statement - An analysis of all the changes that affect the cash account during an accounting period. These changes are segregated into operating, investing and financing categories.
Catch-up – a clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed upon profit split is reached.
Change of control bonus – a bonus of cash or stock given by private equity investors to members of a management group if they successfully negotiate a sale of the company for a price greater than a specified amount.
Clawback – a clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of disbursements to a general partner for profitable investments based on significant losses from later investments in a portfolio.
Client - Any party for whom an appraiser performs a service.
Closing – the conclusion of a financing round whereby all necessary legal documents are signed and capital has been transferred.
Club deal – see Co-investment.
Co-investment –either a) the right of a limited partner to invest with a general partner in portfolio companies, or b) the act of investing by two or more entities in the same target company (also known as a Club deal).
Collateral – hard assets of the borrower, such as real estate or equipment, for which a lender has a legal interest until a loan obligation is fully paid off.
Commitment – an obligation, typically the maximum amount that a limited partner agrees to invest in a fund.
Common stock – a type of security representing ownership rights in a company. Usually, company founders, management and employees own common stock while investors own preferred stock. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders. See Preferred stock.
Comparable – a publicly traded company with similar characteristics to a private company that is being valued. For example, a telecommunications equipment manufacturer whose market value is 2 times revenues can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See Liquidity discount.
Commercial Value - 1) The potential economic value of property if put to its most intensive and productive ("highest and best") use. (2) The present worth of future earnings and benefits. According to this definition, "commercial value implies consideration of the effect of future happenings on the economic potential of an asset.
Confidential Business Profile (CBP) - A brief profile of a business used to solicit buyer interest. The CBP does not reveal the name of the business profiled.
Confidential Business Review (CBR) - A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement.
Confidentiality Agreement (CA) - Signed by potential buyers, it requires them to keep the information contained in the CBR and ensuing discussions confidential.
Consulting Agreement - A form of deal structure whereby the seller provides business advice and direction for a specified period of time in return for a specific amount.
Consolidation – see Rollup.
Condemnation Value - Term sometimes applied to value for condemnation purposes. Condemnation value is not ordinarily a separate value as such; rather, value for condemnation purposes is most often a form of market value.
Consulting - The act or process of providing information, analysis of real estate data, and recommendations or conclusions on diversified problems in real estate, other than estimating value.
Contingent Liabilities - Improbable but possible obligations. Probable obligations are real liabilities and require adjustment in accounting records. Contingent liabilities require footnote disclosure only. Some examples are pending lawsuits, purchase commitments carrying default penalties, and warranties and guaranties for which no historical basis is available for assessing the possible obligation.
Contributory Value - The increment of value that an improvement or addition adds to an asset or group of assets. Term used primarily in connection with real estate valuation and appraisal.
Control – the authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders.
Control Premium - The additional value inherent in the control interest, as contrasted to a minority interest, that reflects its power of control.
Conversion – the right of an investor or lender to force a company to replace the investor’s preferred shares or the lender’s debt with common shares at a preset conversion ratio. A conversion feature was first used in railroad bonds in the 1800’s.
Convertible debt – a loan which allows the lender to exchange the debt for common shares in a company at a preset conversion ratio
Convertible preferred stock – a type of stock that gives an owner the right to convert to common shares of stock. Usually, preferred stock has certain rights that common stock doesn’t have, such as decision-making management control, a promised return on investment (dividend), or senior priority in receiving proceeds from a sale or liquidation of the company. Typically, convertible preferred stock automatically converts to common stock if the company makes an initial public offering (IPO). Convertible preferred is the most common tool for private equity funds to invest in companies.
Convertible security – a security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock, warrants or debt.
Co-sale right – a contractual right of an investor to sell some of the investor’s stock along with the founder’s or majority shareholder’s stock if either the founder or majority shareholder elects to sell stock to a third-party. Also known as Tag-along right.
Cost of capital – see Weighted average cost of capital.
Cost of revenue – the expenses generated by the core operations of a company.
Covenant – a legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company.
Covenant Not To Compete - A condition often found in acquisition agreements by which the seller agrees to abstain from business that would compete with the entity being sold. The restriction is usually for a specific time period and may be for a specific region.
Coverage ratio – describes a company’s ability to pay debt from cash flow or profits. Typical measures are EBITDA/Interest, (EBITDA minus Capital Expenditures)/Interest, and EBIT/Interest.
Cram down round – a financing event upon which new investors with substantial capital are able to demand and receive contractual terms that effectively cause the issuance of sufficient new shares by the startup company to significantly reduce (“dilute”) the ownership percentage of previous investors.
Cumulative dividends – the owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock.
Current ratio – the ratio of current assets to current liabilities.
Deal flow – a measure of the number of potential investments that a fund reviews in any given period.
Deal Killers - Issues that cannot be resolved to the satisfaction of both parties and/or Dissenters who believe their interests will be adversely affected by an acquisition and who work either overtly or covertly to subvert the transaction. May include executives fearing the loss of jobs, suppliers fearing the loss of an account, and irrational or prejudiced family members.
Deal Maker - One who facilitates mergers and acquisitions including intermediaries, finders, and investors.
Deal Structure - The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components have tax benefits to the seller.
Debt Free Cash Flow - Debt free net income plus depreciation less provisions for working capital and capital expenditures.
Debt service – the ratio of a loan payment amount to available cash flow earned during a specific period. Typically lenders insist that a company maintain a certain debt service ratio or else risk penalties such as having to pay off the loan immediately.
Decision Point - This process entails reviewing personal needs and desires. Answers to the following questions are addressed: What types of buyers are best for your business? What are your options regarding deal structuring? And, what tax strategies should be explored before moving forward?
Default – a company’s failure to comply with the terms and conditions of a financing arrangement.
Defined benefit plan – a company retirement plan in which both the employee and the employer contribute to the plan. Typically the plan is based on the employee’s salary and number of years worked. Fixed benefits are outlined when the employee retires. The employer bears the investment risk and is committed to providing the benefits to the employee. Defined benefit plan managers can invest in private equity funds.
Defined contribution plan – a company retirement plan in which the employee elects to contribute some portion of his or her salary into a retirement plan, such as a 401(k) or 403(b). With this type of plan, the employee bears the investment risk. The benefits depend solely on the amount of money made from investing the employee’s contributions. Defined contribution plan capital cannot be invested in private equity funds.
Definitive Purchase Agreement - After a successful due-diligence process, this document details all aspects of the transaction, and upon execution legally transfers the stock and/or assets of your company to the buyer in accordance with your accepted terms.
Demand rights – a type of registration right. Demand rights give an investor the right to force a startup to register its shares with the SEC and prepare for a public sale of stock (IPO).
Depreciation and Amortization - A reduction in a capital account of the value of an asset over time.
Depreciated (book) Value - Original cost of an asset less total amount charged as depreciation since the asset was acquired or created.
Depreciated replacement value - Form of replacement value. The value of a thing as based on the (estimated) cost of replacing it with another thing of similar kind and condition (utility), explicitly taking depreciation of the thing being replaced into account.
Dilution – the reduction in the ownership percentage of current investors, founders and employees caused by the issuance of new shares to new investors.
Dilution protection – see Anti-dilution and Ratchet.
Direct costs – see Cost of revenue.
Disbursement – an investment by a fund in company.
Discount rate – the interest rate used to determine the present value of a series of future cash flows.
Discounted cash flow (DCF) – a valuation methodology whereby the present value of all future cash flows expected from a company is calculated.
Discounted Cash Flow Value - The present value of future earnings taken out to infinity and discounted at a rate that approximates the risk.
Distressed debt – the bonds of a company that is either in or approaching bankruptcy. Some private equity funds specialize in purchasing such debt at deep discounts with the expectation of exerting influence in the restructuring of the company and then selling the debt once the company has meaningfully recovered.
Distribution – the transfer of cash or securities to a limited partner resulting from the sale, liquidation or IPO of one or more portfolio companies in which a general partner chose to invest.
Dividends – regular payments made by a company to the owners of certain securities. Typically, dividends are paid quarterly, by approval of the board of directors, to owners of preferred stock.
Doctrine of Fraudulent Conveyance - A conveyance of property (i.e., a business) without any consideration of value, for the purpose of deferring, hindering or defrauding creditors. Such a transfer will, when proven to the satisfaction of judge or jury, be declared void.
Documenting Value - Recasting historical financial statements, Preparing pro forma financial information, Identifying future market opportunities, and Legal Implications
Down round – a round of financing whereby the valuation of the company is lower than the value determined by investors in an earlier round.
Drag-along rights – the contractual right of an investor in a company to force all other investors to agree to a specific action, such as the sale of the company.
Drive-by VC – a venture capitalist that only appears during board meetings of a portfolio company and rarely offers advice to management.
Due diligence – the investigatory process performed by investors to assess the viability of a potential investment and the accuracy of the information provided by the target company.
Dutch auction – a method of conducting an IPO whereby newly issued shares of stock are committed to the highest bidder, then, if any shares remain, to the next highest bidder, and so on until all the shares are committed. Note that the price per share paid by all buyers is the price commitment of the buyer of the last share.
Early stage – the state of a company after the seed (formation) stage but before middle stage (generating revenues). Typically, a company in early stage will have a core management team and a proven concept or product, but no positive cash flow.
Earnings before interest and taxes (EBIT) – a measurement of the operating profit of a company. One possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBIT.
Earnings before interest, taxes, depreciation and amortization (EBITDA) – a measurement of the cash flow of a company. One possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBITDA.
Earn out- an arrangement in which sellers of a business receive additional future payments, usually based on financial performance metrics such as revenue or net income.
Economic life - The period over which property may be profitably used
Economic Value - That kind of value according to which a thing (asset) is capable of producing economic (monetary or equivalent) benefits for its owner or user.
Elevator pitch – a concise presentation, lasting only a few minutes (an elevator ride), by an entrepreneur to a potential investor about an investment opportunity.
Employee Stock Ownership Program (ESOP) – a plan established by a company to reserve shares for long-term incentive compensation for employees.
Employment Agreement - As part of deal structure the buyer may agree to continue the seller's employment in the business. Both the duration of the employment and the consideration are determined at the closing. The consideration may exceed normal compensation levels.
Enterprise - See BUSINESS ENTERPRISE
Enterprise Value (EV) – the sum of the market values of the common stock and long term debt of a company, minus cash.
Equity – the ownership structure of a company represented by common shares, preferred shares or unit interests. Equity = Assets – Liabilities.
ESOP – see Employee Stock Ownership Program.
Established Business Value - Same as GOING CONCERN VALUE
Evaluation Report - Document detailing and supporting the fair market value of a business entity.
Evergreen fund – a fund that reinvests its profits in order to ensure the availability of capital for future investments
Excess Cash - The amount of cash in excess of what a business enterprise needs to operate through a business cycle. In an M&A transaction, excess cash is normally retained by the seller at the close.
Excess Value - Value over and above market value. Term is usually confined to use in connection with real estate utilized for rental purposes, in which case "excess value is the additional value attributable to a lease that guarantees rental income of an amount in excess of "market rental" at the time of appraisal.
Exchange Value - Same as VALUE IN EXCHANGE.
Exit Plan - A definitive action plan on the part of the owner(s) of the target company to strategically exit the business through the M&A process. The exit plan should take into consideration the owner's personal and financial objectives.
Exit strategy – the plan for generating profits for owners and investors of a company. Typically, the options are to merge, be acquired or make an initial public offering (IPO). An alternative is to recapitalize (releverage the company and then pay dividends to shareholders).
Expansion stage – the stage of a company characterized by a complete management team and a substantial increase in revenues.
Face Value - Stated, or "par," value of securities such as stocks, bonds, or the like, as set forth in the documents themselves.
Fair Market Value - The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
Fairness opinion – a letter issued by an investment bank that charges a fee to assess the fairness of a negotiated price for a merger or acquisition.
Fair Value - Same as FAIR MARKET VALUE, except usually no discount.
FASB - Financial Accounting Standards Board. This Board issues rulings that govern how accounting reports are prepared.
Feasibility Analysis - A study of the cost‑benefit relationship of an economic endeavor.
Financial Buyer - A buyer interested in a target based on the financial return of the investment rather than a strategic or synergistic reason.
Firm commitment - a commitment by a syndicate of investment banks to purchase all the shares available for sale in a public offering of a company. The shares will then be resold to investors by the syndicate.
Fixed Interest Rate - An interest rate that does not fluctuate with general market conditions
Flipping – the act of selling shares immediately after an initial public offering. Investment banks that underwrite new stock issues attempt to allocate shares to new investors that indicate they will retain the shares for several months. Often management and venture investors are prohibited from selling IPO shares until a “lock-up period” (usually 6 to 12 months) has expired.
Founder – a person who participates in the creation of a company. Typically, founders manage the company until it has enough capital to hire professional managers.
Founders stock – nominally priced common stock issued to founders, officers, employees, directors, and consultants.
Free cash flow to equity (FCFE) – the cash flow available after operating expenses, interest payments on debt, taxes, net principal repayments, preferred stock dividends, reinvestment needs and changes in working capital. In a discounted cash flow model to determine the value of the equity of a firm using FCFE, the discount rate used is the cost of equity.
Free cash flow to the firm (FCFF) – the operating cash flow available after operating expenses, taxes, reinvestment needs and changes in working capital, but before any interest payments on debt are made. In a discounted cash flow model to determine the enterprise value of a firm using FCFF, the discount rate used is the weighted average cost of capital (WACC).
Friends and family financing – capital provided by the friends and family of founders of an early stage company. Founders should be careful not to create an ownership structure that may hinder the participation of professional investors once the company begins to achieve success.
Full ratchet – an anti-dilution protection mechanism whereby the price per share of the preferred stock of investor A is adjusted downward due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to match the price of investor B’s preferred stock. Usually as a result of the implementation of a ratchet, company management and employees who own a fixed amount of common shares suffer significant dilution. See Narrow-based weighted average ratchet and Broad-based weighted average ratchet.
Fully diluted basis – a methodology for calculating any per share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants and options are exercised and preferred stock.
Functional Utility Value - Somewhat obscure term generally implying a measure of the ability of a thing to provide usefulness, service, or profit.
Fund-of-funds – a fund created to invest in private equity funds. Typically, individual investors and relatively small institutional investors participate in a fund-of-funds to minimize their portfolio management efforts.
Gatekeepers- intermediaries which endowments, pension funds and other institutional investors use as advisors regarding private equity investments.
General partner (GP) – a class of partner in a partnership. The general partner retains liability for the actions of the partnership. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high net worth investors in the partnership. The GP earns a management fee and a percentage of profits (see Carried interest).
GP – see General partner.
Going Concern - An operating business enterprise.
Going Concern Value - (1) The value of an enterprise, or an interest therein, as a going concern. (2) Intangible elements of value in a business enterprise resulting from factors such as having a trained workforce, an operational plant, and the necessary licenses, systems and procedures in place.
Going-private transaction – when a public company chooses to pay off all public investors, delist from all stock exchanges, and become owned by management, employees, and select private investors.
Goodwill - That intangible asset which arises as a result of name, reputation, customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits.
Goodwill Value - (1) Value attributable to goodwill. (2) The value of the advantages that a business has developed as a result of intangibles applicable to the specific business itself, such as name, reputation, etc. (3) That part of the total value of a going enterprise which is in excess of the capital investment; an ingredient of "going concern value."
Grossing up – an adjustment of an option pool for management and employees of a company which increases the number of shares available over time. This usually occurs after a financing round whereby one or more investors receive a relatively large percentage of the company. Without a grossing up, managers and employees would suffer the financial and emotional consequences of dilution, thereby potentially affecting the overall performance of the company.
Growth stage – the state of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Also known as “middle stage.”
Hamburger helper – a colorful label for a traditional bridge loan that includes the right of the bridge lender to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round.
Hart-Scott-Rodino Act – a law requiring entities that acquire certain amounts of stock or assets of a company to inform the Federal Trade Commission and the Department of Justice and to observe a waiting period before completing the transaction.
Harvest – to generate cash or stock from the sale or IPO of companies in a private equity portfolio of investments.
High yield debt – debt issued via public offering or public placement (Rule 144A) that is rated below investment grade by S&P or Moody’s. This means that the debt is rated below the top four rating categories (i.e. S&P BB+, Moody’s Ba2 or below). The lower rating is indicative of higher risk of default, and therefore the debt carries a higher coupon or yield than investment grade debt. Also referred to as Junk bonds or Sub-investment grade debt.
Hockey stick – the general shape and form of a chart showing revenue, customers, cash or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.
Horizontal Integration - Purchasing similar businesses, including competitors.
Hot issue – stock in an initial public offering that is in high demand.
Hurdle rate – a minimum rate of return required before an investor will make an investment.
Impairment - In the context of FASB (Financial Accounting Standards Board) Statements 141 and 142, impairment is an overstatement of the goodwill values shown on a company's balance sheet, compared with their fair value. FASB 142 requires that a business test for impairment on an annual basis, as well as between annual tests if an event or circumstances change that more likely than not reduce the fair value of assets, below their carrying value.
Income Approach - A general way of determining a value indication of a business, business ownership interest, or security, using one or more methods wherein a value is determined by converting anticipated benefits.
Incorporation – the process by which a business receives a state charter, allowing it to become a corporation. Many corporations choose Delaware because its laws are business-friendly and up to date.
Incubator – a company or facility designed to host startup companies. Incubators help startups grow while controlling costs by offering networks of contacts and shared backoffice resources.
Indemnification - The section of the purchase document that sets forth the circumstances under which either party can claim damages or take other remedial action in the event the other party has breached a representation or warranty or failed to abide by the covenants.
Indenture – the terms and conditions between a bond issuer and bond buyers.
Initial public offering (IPO) – the first offering of stock by a company to the public. New public offerings must be registered with the Securities and Exchange Commission. An IPO is one of the methods that a startup that has achieved significant success can use to raise additional capital for further growth. See Qualified IPO.
Inside round – a round of financing in which the investors are the same investors as the previous round. An inside round raises liability issues since the valuation of the company has no third party verification in the form of an outside investor. In addition, the terms of the inside round may be considered self-dealing if they are onerous to any set of shareholders or if the investors give themselves additional preferential rights.
Insurable Value - That portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy.
Institutional investor – professional entities that invest capital on behalf of companies or individuals. Examples are: pension plans, insurance companies and university endowments.
Intangible (Hidden) Assets - The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce.
Intangible Value - Value of intangibles. Value not imputable to tangible assets.
Interest coverage ratio – earnings before interest and taxes (EBIT) divided by interest expense. This is a key ratio used by lenders to assess the ability of a company to produce sufficient cash to pay its debt obligation.
Internal rate of return (IRR) – the interest rate at which a certain amount of capital today would have to be invested in order to grow to a specific value at a specific time in the future.
Intrinsic Value - Value inherent in a thing itself, as the metal content of a coin or article of precious metal jewelry. Term is subject to many possible interpretations, and therefore, requires extreme care in use.
Inventory Value - Term generally referring to the book value of the inventory of a business enterprise.
Invested Capital - The sum of the debt and equity in an enterprise on a long term basis.
Investment thesis / Investment philosophy – the fundamental ideas which determine the types of investments that an investment fund will choose in order to achieve its financial goals.
Investment Value - (1) Value as determined or estimated in accordance with the Investment Value ("income") Approach. (2) The value of a thing that arises from its presumed ability to produce a profit, or return on investment, for its owners. (3) Value to a particular investment or based upon individual investment requirements as distinguished from market value, which is value to a broader market than a single investor.
IPO – see Initial public offering.
IRR – see Internal rate of return.
IRS Fair Market Value - Not actually a single definition of value, but rather a number of different definitions, similar in importance, that have been variously attributed to and/or used or accepted by the U.S. Internal Revenue Service. Most or all of these definitions of "IRS Fair Market Value" include the elements ..."Price at which property would change hands...between a willing buyer and a willing seller...neither being under any compulsion...both having knowledge of relevant facts. . . "
Issuer – the company that chooses to distribute a portion of its stock to the public.
Junk Bond – see High Yield Debt.
Just Value - Term most often used in real estate appraisal. Generally considered to be synonymous with "fair market value."
LBO – see Leveraged buyout.
Lead investor – the venture capital investor that makes the largest investment in a financing round and manages the documentation and closing of that round. The lead investor sets the price per share of the financing round, thereby determining the valuation of the company.
Leasehold Value - The value of a leasehold interest, particularly in real estate appraisal.
Letter of intent (LOI) – a document confirming the intent of an investor to participate in a round of financing for a company. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Also known as a “Term Sheet”.
Letter Stock - Unregistered shares in a small firm that are issued without underwriting.
Leverage – the use of debt to acquire assets, build operations and increase revenues. By using debt, a company is attempting to achieve results faster than if it only used its cash available from pre-leverage operations. The risk is that the increase in assets and revenues does not generate sufficient net income and cash flow to pay the interest costs of the debt.
Leveraged buyout (LBO) – the purchase of a company or a business unit of a company by an outside investor using mostly borrowed capital.
Leverage ratios – measurements of a company’s debt as a multiple of cash flow. Typical leverage ratios include Total Debt / EBITDA, Total Debt / (EBITDA minus Capital Expenditures), and Senior Debt / EBITDA.
Leveraged Valuation Approach - The leveraged valuation approach simulates the leveraged buyout of a business. It illustrates a typical buyout transaction with the corresponding deal structure and valuation driven by: 1) the leveragability of the target company's balance sheet and cash flows, 2) the coverage ratios required by senior lenders, and 3) the internal rate of return sought by the equity investor(s).
L.I.B.O.R. – see The London Interbank Offered Rate.
Limited liability company (LLC) – an ownership structure designed to limit the founders’ losses to the amount of their investment. An LLC does not pay taxes, rather its owners pay taxes on their proportion of the LLC profits at their individual tax rates.
Limited partnership – a legal entity composed of a general partner and various limited partners. The general partner manages the investments and is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment. The general partner receives a management fee and a percentage of profits (see Carried interest), while the limited partners receive income, capital gains and tax benefits.
Limited partner (LP) – an investor in a limited partnership. The general partner is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment. The limited partner receives income, capital gains and tax benefits.
Liquidation – the selling off of all assets of a company prior to the complete cessation of operations. Corporations that choose to liquidate declare Chapter 7 bankruptcy. In a liquidation, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders.
Liquidation preference – the contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. For example, a venture capital investor with a “2x liquidation preference” has the right to receive two times its original investment upon liquidation.
Liquidation Value - The (estimated) proceeds, net after provision for applicable liabilities, if any, that would result from sale of an asset or a group of assets if sold individually and not as part of the business enterprise of which they were originally a part. Sale may involve either "forced liquidation" or "orderly disposal," with the amount of the net proceeds likely different for the two situations.
Liquidity - The cash position of a business and its ability to meet maturing obligations.
Liquidity discount – a decrease in the value of a private company compared to the value of a similar but publicly traded company. Since an investor in a private company cannot readily sell his or her investment, the shares in the private company must be valued less than a comparable public company.
Liquidity event – a transaction whereby owners of a significant portion of the shares of a private company sell their shares in exchange for cash or shares in another, usually larger company. For example, an IPO is a liquidity event.
Lock-up agreement – investors, management and employees often agree not to sell their shares for a specific time period after an IPO, usually 6 to 12 months. By avoiding large sales of its stock, the company has time to build interest among potential buyers of its shares.
London Interbank Offered Rate (L.I.B.O.R.) – the average rate charged by large banks in London for loans to each other. LIBOR is a relatively volatile rate and is typically quoted in maturities of one month, three months, six months and one year.
LP – see Limited partner.
Majority - Ownership position greater than 50% of the voting interest in an enterprise.
Majority Control - The degree of control provided by a majority position.
Management buyout (MBO) – a leveraged buyout controlled by the members of the management team of a company or a division.
Management fee – a fee charged to the limited partners in a fund by the general partner. Management fees in a private equity fund typically range from 0.75% to 3% of capital under management, depending on the type and size of fund.
Management rights – the rights often required by a venture capitalist as part of the agreement to invest in a company. The venture capitalist has the right to consult with management on key operational issues, attend board meetings and review information about the company’s financial situation.
Market Analysis - A study of real estate market conditions for a specific type of property.
Market Approach - The market approach is a general way of determining a value indication of a business, business ownership interest or security using one or more methods that compare the subject to similar businesses, business ownership interests or securities that have been sold.
Market capitalization – the value of a publicly traded company as determined by multiplying the number of shares outstanding by the current price per share.
Market Multiple - A factor that can be applied to the subject company's financial, operating or physical data to generate an indication of value. The market multiple is derived from observed transactions in the marketplace where the value can be divided by the comparable companies' financial, operating or physical data to generate the market multiple.
Market Value - Market value is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. A current economic definition agreed upon by federal financial institutions in the United States of America is: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated;
2. both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market;
3. payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Substitution of another currency for United States dollars in the fourth condition is appropriate in countries or in reports addressed to clients from other countries.
Persons performing appraisal services that may be subject to litigation are cautioned to seek the exact legal definition of market value in the jurisdiction in which the services are being performed.
Marketability Discount - An amount of percentage deducted from an equity interest to reflect lack of marketability.
Mass Appraisal - The process of valuing a universe of properties as of a given date utilizing standard methodology, employing common data, and allowing for statistical testing.
Mass Appraisal Model - A mathematical expression of how supply and demand factors interact in a market.
Maximizing Value - Addressing the following: How market conditions affect value, exposing value myths, Impact of off-balance assets on value, Value vs. price, Identifying value enhancers, Minimizing risk considerations.
MBO – see Management buyout.
Merger - The combining of one corporation with another.
Mezzanine – a layer of financing that has intermediate priority (seniority) in the capital structure of a company. For example, mezzanine debt has lower priority than senior debt but usually has a higher interest rate and often includes warrants. In venture capital, a mezzanine round is generally the round of financing that is designed to help a company have enough resources to reach an IPO.
Middle stage – the state of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Also known as “growth stage.”
Minority Discount - The reduction, from the pro rata share of the value of the entire business, which reflects the absence of the power of control.
Minority Interest - Ownership position less than 50% of the voting interest in an enterprise.
Mortgage Value - Value of an asset for mortgage borrowing purposes.
Multiples – a valuation methodology that compares public and private companies in terms of a ratio of value to an operations figure such as revenue or net income. For example, if several publicly traded computer hardware companies are valued at approximately 2 times revenues, then it is reasonable to assume that a startup computer hardware company that is growing fast has the potential to achieve a valuation of 2 times its revenues. Before the startup issues its IPO, it will likely be valued at less than 2 times revenue because of the lack of liquidity of its shares. See Liquidity discount.
"Multiple Buyer" Process - The process of involving multiple buyers in the purchase of a business. The process typically increases the price paid for the target and/or improves the deal structure.
NDA – see Non-disclosure agreement.
Net Assets - Total assets less total liabilities.
Net Cash Flow - Cash available for distribution after taxes and after the effects of financing. Calculated as net income plus depreciation less expenditures required for working capital, capital items and debt repayment. (See also cash flow.)
Net Income - Revenue less expenses, including taxes.
Net operating income (NOI) – a measure of cash flow that excludes the effects of financing decisions. NOI is calculated as earnings before interest and taxes multiplied by one minus the tax rate. Also known as profit after taxes (NOPAT).
Net Present Value - In investment theory, the difference between the cost of an investment, including improvements, and the discounted present value of all anticipated future benefits from that investment.
Net Operating Loss - For tax purposes, an excess of expenses over revenue results in a net operating loss. Under certain, limited, circumstances a NOL may provide a tax benefit to a buyer.
Net to Owner - The amount realized by the owners of a business from a sale. Usually equal to the Business Enterprise Value of the business less debt retained in the business, plus the net of assets and liabilities not included in the sale and retained by the owners.
Net Realizable Value - Same as LIQUIDATION VALUE.
Nine Year Ramp - The financial presentation of the target company that a buyer requires an intermediary to provide as part of the M&A process. Specifically, the nine-year ramp includes the latest three historical years, a base year and five pro forma years.
Non-compete – an agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment.
Non-cumulative dividends – dividends that are payable to owners of preferred stock at a specific point in time only if there is sufficient cash flow available after all company expenses have been paid. If cash flow is insufficient, the owners of the preferred stock will not receive the dividends owed for that time period and will have to wait until the board of directors declares another set of dividends.
Non-disclosure agreement (NDA) – an agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties.
Non-identifiable Intangible Value - Synonym for GOODWILL VALUE.
Non-interference – an agreement often signed by employees and management whereby they agree not to interfere with the company’s relationships with employees, clients, suppliers and sub-contractors within a certain time period after termination of employment.
Non Operating Assets - Assets shown on the company's balance sheet that are not used in the operation of the business. That is, ""extra"" assets that are not necessary to generate the revenue and cash flow stream being valued. These would be recast when valuing the business.
Non-solicitation – an agreement often signed by employees and management whereby they agree not to solicit other employees of the company regarding job opportunities.
Normal Working Capital - The amount of working capital needed by the company to sustain operations throughout the year. Calculated as the average of current assets (which include a normal amount of necessary cash) minus current liabilities on a monthly basis over the most recent twelve months.
No-Shop Agreement - A provision in the letter of intent or purchase document that inhibits the target from soliciting or encouraging other bids.
Nuisance Value - In appraising, the price that would probably be paid for the avoidance of, or relief from, an objectionable condition or situation.
OID – see Original issue discount.
Operating cash flow – the cash flow produced from the operation of a business, not from investing activities (such as selling assets) or financing activities (such as issuing debt). Calculated as net operating income (NOI) plus depreciation.
Optics – the way a concept is presented. Sometimes entrepreneurs’ presentations are strong on optics but weak in content.
Options – see Stock options.
Option pool – a group of options set aside for long term, phased compensation to management and employees.
Original issue discount (OID) – a discount from par value of a bond or debt-like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash flow stream as, in essence, a zero coupon bond upon which tax payments are due yearly based on “phantom income” imputed from the difference between the original investment and “guaranteed” eventual payout. Although complex, the solution is to include enough clauses in the investment agreements to create the possibility of a material change in the cash flows of owners of the preferred stock under different scenarios of events such as a buyout, dissolution or IPO.
Orphan – a startup company that does not have a venture capitalist as an investor.
Outstanding shares – the total amount of common shares of a company, not including treasury stock, convertible preferred stock, warrants and options.
Oversubscription – when demand exceeds supply for shares of an IPO or a private placement.
Pari passu – a legal term referring to the equal treatment of two or more parties in an agreement. For example, a venture capitalist may agree to have registration rights that are pari passu with the other investors in a financing round.
Participating dividends – the right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock or other assets.
Participating preferred stock – a unit of ownership composed of preferred stock and common stock. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company. Participating preferred stock has been characterized as “having your cake and eating it too.”
PE ratio – see Price earnings ratio.
Personal Property - Identifiable portable and tangible objects which are considered by the general public as being "personal," e.g. furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all property that is not classified as real estate.
Piggyback rights – rights of an investor to have his or her shares included in a registration of a startup’s shares in preparation for an IPO.
PIPEs – see Private investment in public equities.
Placement agent – a company that specializes in finding institutional investors that are willing and able to invest in a private equity fund. Sometimes a private equity fund will hire a placement agent so the fund partners can focus on making and managing investments in companies rather than on raising capital.
Pooling of Interests - One method of accounting for a company merger, in which the balance sheets of the two companies are combined line by line without a tax impact. Only allowed under certain circumstances.
Portfolio company – a company that has received an investment from a private equity fund.
Post-Acquisition Planning - Strategic steps taken prior to the acquisition to plan for the successful integration of target and acquirer, including how to exploit synergies, merge management, and support corporate culture.
Post-money valuation – the valuation of a company including the capital provided by the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post-money valuation of $7 million.
Potential Value - Value, or an increment thereof, that is dependent on the actual occurrence of stated possibilities or probabilities.
PPM – see Private placement memorandum.
Preference – seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.
Preferred stock – a type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, anti-dilution protection and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.
Pre-money valuation – the valuation of a company prior to the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million pre-money. As a result, the startup will have a “post-money” valuation of $7 million.
Present Value - In investment theory, the current monetary value, frequently in the sense of the current value of future benefits. Discounted value of aggregate future payments.
Pretax Income - The income earned by a business prior to the provision for federal or state income taxes.
Price earnings ratio (PE ratio) – the ratio of a public company’s price per share and its net income after taxes on a per share basis.
Primary shares – shares sold by a corporation (not by individual shareholders).
Private equity – equity investments in non-public companies.
Private investment in public equities (PIPES) – investments by a private equity fund in a publicly traded company, usually at a discount.
Private placement – the sale of a security directly to a limited number of institutional and qualified individual investors. If structured correctly, a private placement avoids registration with the Securities and Exchange Commission.
Private placement memorandum (PPM) – a document explaining the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a startup may issue a PPM when it needs growth capital. Also known as “Offering Memorandum.”
Private securities – securities that are not registered with the Securities andExchange Commission and do not trade on any exchanges. The price per share is negotiated between the buyer and the seller (the “issuer”).
Product/Service Extension - Adding a product or service that can be sold in the acquirer's current geographic areas and/or to current customers.
Pro Forma Statements - Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.
Promote – see Carried interest.
Prospectus – a formal document that gives sufficient detail about a business opportunity for a prospective investor to make a decision. A prospectus must disclose any material risks and be filed with the Securities and Exchange Commission.
Prospecting - Understanding why buyers buy, which buyers to avaoid and how to find the right buyer
Prudent man rule – a fundamental principle for professional money management which serves as a basis for the Prudent Investor Act. The principle is based on a statement by Judge Samuel Putnum in 1830: “Those with the responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income.”
Purchase (accounting) method – a merger accounting treatment whereby a buyer purchases the assets (and liability obligations) of a company at their market price and then records the difference between the purchase price and the book value of the assets as goodwill. This goodwill need not be amortized but must be valued annually and any decreases or increases in value must be reflected in the buyer’s financial statements.
Purchase Documents - The legal document transferring ownership from seller to buyer. Drafted by buyer, it sets forth structure and terms; discloses legal, financial, and other pertinent information about buyer and seller; obligates both parties to complete the transaction; and governs what happens if problems arise.
Qualified IPO – a public offering of securities valued at or above a total amount specified in a financing agreement. This amount is usually specified to be sufficiently large to guarantee that the IPO shares will trade in a major exchange (NASDAQ or New York Stock Exchange). Usually upon a qualified IPO preferred stock is forced to convert to common stock.
Ratchet – a mechanism to prevent dilution. An anti-dilution clause is a contract clause that protects an investor from a reduction in percentage ownership in a company due to the future issuance by the company of additional shares to other entities.
Rate of Return - An amount of income realized or expected on an investment, expressed as a percentage of that investment.
Real Estate - An identified parcel or tract of land, including improvements, if any.
Real Property - The interests, benefits and rights inherent in the ownership of real estate. (Comment: In some jurisdictions, the terms real estate and real property have the same legal meaning. The separate definitions recognize the traditional distinction between the two concepts in appraisal theory.)
Real Value - (1) Synonym for MARKET VALUE. (2) True value of property whose owner may regard it as being worth more or less than it is actually worth
Realization ratio – the ratio of cumulative distributions to paid-in capital. The realization ratio is used as a measure of the distributions from investment results of a private equity partnership compared to the capital under management.
Realizable Value - Same as ADJUSTED BOOK VALUE.
Recapitalization – the reorganization of a company’s capital structure.
Recasting - Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability, and allows meaningful comparisons with other investment opportunities.
Red herring – a preliminary prospectus filed with the Securities and Exchange Commission and containing the details of an IPO offering. The name refers to the disclosure warning printed in red letters on the cover of each preliminary prospectus advising potential investors of the risks involved.
Redeemable preferred – preferred stock that can be redeemed by the owner (usually a venture capital investor) in exchange for a specific sum of money.
Redemption rights – the right of an investor to force the startup company to buy back the shares issued as a result of the investment. In effect, the investor has the right to take back his/her investment and may even negotiate a right to receive an additional sum in excess of the original investment.
Registration – the process whereby shares of a company are registered with the Securities and Exchange Commission under the Securities Act of 1933 in preparation for a sale of the shares to the public.
Registration rights – the rights of an investor in a startup regarding the registration of a portion of the startup’s shares for sale to the public. Piggyback rights give the shareholders the right to have their shares included in a registration. Demand rights give the shareholders the option to force management to register the company’s shares for a public offering. Often, registration rights are hotly negotiated among venture capitalists in multiple rounds of financing.
Regulatory Barriers - Federal, state, or local statutes or regulations in a variety of areas, including antitrust, securities, employee benefits, bulk sales, foreign ownership, and the transfer of title to stock or assets.
Regulation D – an SEC regulation that governs private placements. Private placements are investment offerings for institutional and accredited individual investors but not for the general public. There is an exception that 35 non- accredited investors can participate.
Rental Value - Particularly in real estate, the monetary income reasonably expectable in return for the right to utilize property in an agreed manner.
Replacement Cost New - The current cost of a similar new item having the nearest equivalent utility as the item being appraised.
Replacement Value - (1) The value of a business, asset, or asset group as determined or estimated by the Replacement Cost Approach. (2) Value as determined on the basis of the estimated cost of replacing the asset(s) in question with other items of like kind and condition, and capable of producing equivalent benefits (results) for the user. Replacement value can be either "depreciated replacement value" or "replacement value new."
Representations (Reps) - Intended to disclose all material legal, and any material financial aspects of the business to the buyer. Buyer makes similar reps about its legal and financial ability to complete the transaction.
Report - Any communication, written or oral, of an appraisal, review, or analysis; the document that is transmitted to the client upon completion of an assignment. (Comment: Most reports are written and most clients mandate written reports. Oral report guidelines [See Standards Rule 24] and restrictions [see Ethics Provision: Record Keeping] are included to cover court testimony and other oral communications of an appraisal, review or consulting service).
Report Date - The date of the report. May be the same or different than the APPRAISAL DATE.
Reproduction Cost New - The current cost of an identical new item.
Restricted shares – shares that cannot be traded in the public markets.
Retained Assets - Assets personally kept by the owner(s) of a company upon the sale of the business.
Return on Equity - A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income divided by book value, expressed as a percentage.
Return on investment (ROI) – the proceeds from an investment, during a specific time period, calculated as a percentage of the original investment. Also, net profit after taxes divided by average total assets.
Reverse Triangular Merger - An acquisition by merger where the acquiring corporation forms a subsidiary to effect the merger through a stock exchange. As a result of the merger, the newly established subsidiary ceases to exist while the target survives.
Review - The act or process of critically studying a report prepared by another.
Rights offering – an offering of stock to current shareholders that entitles them to purchase the new issue, usually at a discount.
Rights of co-sale with founders – a clause in venture capital investment agreements that allows the VC fund to sell shares at the same time that the founders of a startup chose to sell.
Right of first refusal – a contractual right to participate in a transaction. For example, a venture capitalist may participate in a first round of investment in a startup and request a right of first refusal in any following rounds of investment.
Road show – presentations made in several cities to potential investors and other interested parties. For example, a company will often make a road show to generate interest among institutional investors prior to its IPO.
ROI – see Return on investment.
Rollup – the purchase of relatively smaller companies in a sector by a rapidly growing company in the same sector. The strategy is to create economies of scale. For example, the movie theater industry underwent significant consolidation in the 1960’s and 1970’s.
Round – a financing event usually involving several private equity investors.
Rule 144 – a rule of the Securities and Exchange Commission that specifies the conditions under which the holder of shares acquired in a private transaction may sell those shares in the public markets.
Rule of Thumb - A mathematical relationship between or among a number of variables based on experience, observation, hearsay or a combination of these, usually applicable to a specific industry.
S corporation – an ownership structure that limits its number of owners to 100. An S corporation does not pay taxes, rather its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates.
SBIC – see Small Business Investment Company.
Scalability – a characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the startups they select to finance.
Scale-down –a schedule for phased decreases in management fees for general partners in a limited partnership as the fund reduces its investment activities toward the end of its term.
Scale-up – the process of a company growing quickly while maintaining operational and financial controls in place. Also, a schedule for phased increases in management fees for general partners in a limited partnership as the fund increases its investment activities over time.
Scrap Value - The value of an article or articles in event of sale for removal and reclamation of the material(s) of which the article is composed. Similar to, but not necessarily the same as, SALVAGE VALUE.
SEC – see Securities and Exchange Commission.
Secondary market – a market for the sale of limited partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.
Secondary shares – shares sold by a shareholder (not by the corporation).
Secured debt – debt that has seniority in case the borrowing company defaults or is dissolved and its assets sold to pay creditors.
Secured and Unsecured Note - A form of deal structure whereby the buyer owes money for the purchase and this debt is secured by real property, equipment or other assets. In contrast, an unsecured note is not backed by the pledge of collateral.
Security – a document that represents an interest in a company. Shares of stock, notes and bonds are examples of securities.
Securities and Exchange Commission (SEC) – the regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934.
Seed capital – investment provided by angels, friends and family to the founders of a startup in seed stage.
Seed stage – the state of a company when it has just been incorporated and its founders are developing their product or service.
Senior debt – a loan that has a higher priority in case of a liquidation of the asset or company.
Seniority – higher priority.
Sentimental Value - "Value" arising from an emotional relationship between a person (usually the owner) and a thing. Not ordinarily a form of economic value.
Series A preferred stock – preferred stock issued by a fast growth company in exchange for capital from investors in the “A” round of financing. This preferred stock is usually convertible to common shares upon the IPO or sale of the company.
Shareholder Value - Business Enterprise Value less the debt retained in the business and assumed by the new owners.
Situation Analysis - A general assessment of a company's past, present and future. A situation analysis often times provides a benchmark to the business' future growth potential.
Small Business Investment Company (SBIC) – a company licensed by the Small Business Administration to receive government capital in the form of debt or equity in order to use in private equity investing.
Sound Value - In appraising, depreciated cost for (fire) insurance purposes.
Special Purpose Value - Value of a thing as related to its use for a special purpose, and that would not exist or would be substantially less if the thing were used for some other purpose.
Speculative Value - Synonym for POTENTIAL VALUE.
Spin out – a division of an established company that becomes an independent entity.
Stabilized Value - In appraising, a value figure or estimate that excludes consideration of transitory conditions, such as abnormal relations between supply and demand, unusual and presumably temporary fluctuations in the cost of materials or labor, or the like.
Stock – a share of ownership in a corporation.
Stock option – a right to purchase or sell a share of stock at a specific price within a specific period of time. Stock purchase options are commonly used as long term incentive compensation for employees and management of fast growth companies.
Stock Sale - A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Strategic investor – a relatively large corporation that agrees to invest in a young company in order to have access to a proprietary technology, product or service. By having this access, the corporation can potentially achieve its strategic goals.
Subjective Value - (1) Value as related primarily or substantially to a state of mind. (2) The value of a thing as based on or related to its ability to satisfy desires or wants (as distinct from needs). "Subjective Value" is also sometimes called, "Personal Value."
Subordinated debt – a loan that has a lower priority than a senior loan in case of a liquidation of the asset or company. Also known as “junior debt”.
Sweat equity – ownership of shares in a company resulting from work rather than investment of capital.
S.W.O.T. Analysis - Refers to an analysis of a company's strengths, weaknesses, opportunities and threats. A S.W.O.T. analysis is necessarily key to understanding a target company's competitive positioning and long-term growth potential.
Syndicate – a group of investors that agree to participate in a round of funding for a company. Alternatively, a syndicate can refer to a group of investment banks that agree to participate in the sale of stock to the public as part of an IPO.
Syndication – the process of arranging a syndicate.
Synergistic Buyer - A buyer willing to pay a premium above economic value based on projected additional growth and profit to be achieved through the benefits of consolidation.
Synergistic Value - A premium value offered by a synergistic buyer above economic value, the difference being attributed to potential additional growth and profit beyond that which the target can achieve on its own and benefits the buyer brings.
Tag-along right – the right of a minority investor to receive the same benefits as a majority investor. Usually applies to a sale of securities by investors.
Takedown – a schedule of the transfer of capital in phases in order to complete a commitment of funds. Typically, a takedown is used by a general partner of a private equity fund to plan the transfer of capital from the limited partners.
Takeover – the transfer of control of a company.
Tangible Assets - Assets clearly having physical existence, such as cash, real estate, and machinery.
Target - Company being acquired.
Taxable Value - Same as ASSESSED VALUE.
Tax-Free Reorganization - A stock swap. The seller accepts stock of the buyer's company in lieu of cash, which is a nontaxable event. Only when the seller divests of the stock are taxes paid.
Ten bagger – an investment that returns 10 times the initial capital.
Tender offer – an offer to public shareholders of a company to purchase their shares.
Terms - Details of an agreement such as price, payment schedule, interest rate, and due date.
Term loan – a bank loan for a specific period of time, usually up to ten years in leveraged buyout structures.
Term sheet – a document confirming the intent of an investor to participate in a round of financing for a company. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Also known as “Letter of Intent”.
Terminal Value - The value of the company at the end of the five-year pro forma period. Terminal value is determined by dividing the fifth year pro forma cash flow (normalized for depreciation and capital expenditures) by the required Return on Investment. Terminal value is sometimes referred to as residual value.
Tombstone - An advertisement, usually in financial publications such as The Wall Street Journal, announcing an acquisition, securities offering, or underwriting. Also, a commemorative plaque announcing the transaction.
Trade secret – something that is not generally known, is kept in secrecy and gives its owners a competitive business advantage.
Tranche – a portion of a set of securities. Each tranche may have different rights or risk characteristics.
Turnaround – a process resulting in a substantial increase in a company’s revenues, profits and reputation.
Two x – an expression referring to 2 times the original amount. For example, a preferred stock may have a “two x” liquidation preference, so in case of liquidation of the company, the preferred stock investor would receive twice his or her original investment.
Underwriter – an investment bank that chooses to be responsible for the process of selling new securities to the public. An underwriter usually chooses to work with a syndicate of investment banks in order to maximize the distribution of the securities.
Unit Value - Value of an asset or group of assets expressed in terms of a unit of measurement of the quantity of the asset(s) in question.
Unsecured debt – debt which does not have any priority in case of dissolution of the company and sale of its assets.
Use Value - Same as VALUE IN USE.
User-In-Possession Value - (1) Synonymous with VALUE IN PLACE. (2) May include, in addition to "value in place," value that may result from special use by the existing user, resulting in total value greater than that to any other user or potential user.
Utility Value - Generally a synonym for VALUE IN USE.
V
Valuation - See APPRAISAL
Valuation Approach - A general way of determining value using one or more specific valuation methods. (See also Asset Based Approach, Leveraged Valuation Approach, Market Approach and Income Approach.)
Valuation Method - Within valuation approaches, a specific technique to determine value.
Valuation Multiple - A factor wherein a value or price serves as the numerator and financial, operating or physical data of the company being valued serve as the denominator.
Valuation Ratio - A factor wherein a value or price serves as the numerator and financial, operating, or physical data serve as the denominator.
Value - The quality of a thing according to which it is thought of as being more or less desirable, useful, estimable, or important. The true "worth" of a thing according to some standard of worth.
Value After The Taking - In condemnation proceedings, the value of the remaining portion of a formerly integrated or unified asset or asset group, after taking a part of the whole through condemnation proceedings.
Value Before the Taking - In condemnation proceedings, the value of an integrated or unified asset or asset group, part of which is to be taken through condemnation proceedings.
Value In Exchange - (1) Value resulting from the quality(ies) of a thing such that it can be exchanged ("sold") for something else of monetary or equivalent value. Distinct from VALUE IN USE. (2) Market value as determined by comparison of the thing being appraised with other comparable things, particularly when the subject thing and the comparable thing fit the description of "general purpose" items as opposed to single use or "special purpose" items.
Value In Place - Value of an asset, such as machinery and/or equipment, that is already installed and ready for use, such as in a factory.
Value In Use - (1) Value resulting from the quality of a thing such that its use can produce economic benefits for its owner or user. Includes value arising from the fact that the asset is already "in place" and "operating". Sometimes different from VALUE IN EXCHANGE. Also termed, UTILITY VALUE. (2) Market value of a special‑purpose asset that has only a single use, and therefore, has a very limited market value to other than the current user.
Value To Owner - The special value of a thing to its owner, in that it suits his specific needs and requirements uniquely. (May sometimes include SENTIMENTAL VALUE).
Variable Interest Rate - An interest rate that moves at a pre-defined level above or below an index rate. A commonly used index is the bank prime rate.
Venture capital – a segment of the private equity industry which focuses on investing in new companies with high growth rates.
Venture capital method – a valuation method whereby an estimate of the future value of a company is discounted by a certain interest rate and adjusted for future anticipated dilution in order to determine the current value. Usually, discount rates for the venture capital method are considerably higher than public stock return rates, representing the fact that venture capitalists must achieve significant returns on investment in order to compensate for the risks they take in funding unproven companies.
Vertical Integration - A strategy to achieve economies of scale in purchasing, sales, and distribution. Vertical backward integration is buying a supplier. Vertical forward integration is buying a customer.
Vintage – the year that a private equity fund stops accepting new investors and begins to make investments on behalf of those investors.
Voice Over Internet Protocol - is a protocol optimized for the transmission of voice through the Internet or other packet-switched networks. VoIP is often used abstractly to refer to the actual transmission of voice (rather than the protocol implementing it). This latter concept is also referred to as IP telephony, Internet telephony, voice over broadband, broadband telephony, and broadband phone.
Voting rights – the rights of holders of preferred and common stock in a company to vote on certain acts affecting the company. These matters may include payment of dividends, issuance of a new class of stock, merger or liquidation.
Warranties - See Representations (Reps) and Warranties.
Washout round – a financing round whereby previous investors, the founders and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company.
Weighted average cost of capital (WACC) – the average of the cost of equity and the after-tax cost of debt. This average is determined using weight factors based on the ratio of equity to debt plus equity and the ratio of debt to debt plus equity.
Weighted average ratchet – an anti-dilution protection mechanism whereby the conversion rate of preferred stock is adjusted in order to reduce an investor’s loss due to an increase in the number of shares in a company. Without a ratchet, an investor would suffer from a dilution of his or her percentage ownership. Usually as a result of the implementation of a weighted average ratchet, company management and employees who own a fixed amount of common shares suffer significant dilution, but not as badly as in the case of a full ratchet.
Wipeout round – see Washout round.
Wipeout bridge – a short term financing that has onerous features whereby if the company does not secure additional long term financing within a certain time frame, the bridge investor gains ownership control of the company. See Bridge financing.
Working Capital - The amount by which current assets exceed current liabilities.
Write-down – a decrease in the reported value of an asset or a company.
Write-off – a decrease in the reported value of an asset or a company to zero.
Write-up – an increase in the reported value of an asset or a company.
Business and Securities Valuation, by George Ovens and Donald I. Beach. Methuen Publications.1972.
Canada Valuation Service, by Ian R. Campbell. Richard DeBoo Limited.
Webster's New World Dictionary, The World Publishing Co. 1958.
American Society of Appraisers, Business Valuation Standard. BVS‑I
Uniform Standards of Professional Appraisal Practice, The Appraisal Foundation, Definitions.
Contributed by Bob Scarlata, Sr. Managing Director
bscarlata@whitehorse-partners.com
Actual Cash Value: The value of an entity expressed in terms of cash or its exact and immediate equivalent. May be the same as "market value," depending on the applicable definition of the latter.
Acquisition - The process by which the stock or assets of a corporation are transferred to a buyer, either through a purchase of stock or a purchase of assets.
Acquisition Requirement Form - The "Acquisition Requirement Form” assists The March Group in matching your requirements to our inventory of acquisition candidates. Our inventory of available companies changes frequently, as new companies enter the market and others transactions are completed. Our understanding of the business characteristics, size and location you require will help us match you with future candidates, as well as those presently in inventory. In addition, when presenting a potential acquirer to our clients for review, it is appropriate for us to understand and effectively portray the investment criteria and financial capability of the buyer.
Accretion - Refers to the growth of a company or other asset, either by internal expansion or acquisition.
Adjusted (recast) Book Value - The book value which results after one or more asset or liability amounts are added, deleted or changed from the respective book amounts.
Adjusted (Recast Earnings) - The earnings that result from the adjustment of historical financial statements, reflecting items that are unrelated to the ongoing business. (See also recasting.)
Adjusted Working Capital - Normal Working Capital (see definition below) excluding any debt in current liabilities. Synonymous with debt free working capital.
Aesthetic Value - The intangible, sometimes psychic, enhancement of value of an asset or asset group as a result of aesthetic factors or considerations. Examples include physical attractiveness that goes beyond functional requirements. Although frequently subjective in nature, aesthetic value can contribute to the economic value of property.
After-tax operating income – see Net operating profit after taxes.
Alternative asset class – a class of investments that includes private equity, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with an objective to diversify their portfolios.
Allocations of Purchase - The assignment of value to tangible and intangible assets of an acquired company for which a premium over historical cost has been paid
Amenity Value - That portion of value that results from benefits or satisfactions enjoyed by the owner or user of property, that are not in the form of money or convertible to monetary terms. Amenity value tends to be subjective and is sometimes closely related to aesthetic value.
Angel – a wealthy individual that invests in companies in relatively early stages of development. Usually angels invest less than $1 million per startup. The typical angel-financed startup is in concept or product development phase
Anti-dilution – a contract clause that protects an investor from a substantial reduction in percentage ownership in a company due to the issuance by the company of additional shares to other entities. The mechanism for making adjustments is called a Ratchet.
Appraisal - (Noun) The act or process of estimating value; an estimate of value. (Adjective) Of or pertaining to appraising and related functions, e.g. appraisal practice, appraisal services. It is synonymous with valuation.
Appraisal Approach - A general way of determining value using one or more specific appraisal methods. (See ASSET BASED APPROACH, MARKET APPROACH and INCOME APPROACH definitions.)
Appraisal Date - The date as of which the appraiser's opinion of value applies.
Appraisal Method - Within approaches, a specific way to determine value.
Appraisal Practice - The work or services performed by appraisers, defined by three terms in these standards: appraisal, review and consulting.
Appraisal Procedure - The act, manner and technique of performing the steps of an appraisal method.
Appraised Value - Value as determined or estimated by an appraiser, particularly one acting in behalf of a governmental authority. The term, "appraised value" is most often used in connection with real property, and those types of personal property whose ownership is subject to taxes levied by local taxing jurisdictions. Appraised value may be based on market value, or on some other basis appropriate to the type of property and to the applicable tax statutes, regulations, and customs.
Assessed Value - Value as established by governmental authorities as basis for taxation of property ownership. Usually synonymous with "appraised value. " In some jurisdictions, however, assessed value is a different (usually lower) figure than appraised value, depending on practices, procedure, and legal requirements that vary from jurisdiction to jurisdiction, from time to time, etc.
Asset Based Approach - A general way of determining a value indication of a business' assets and/or equity interest using one or more methods based directly on the value of the assets of the business less liabilities.
Asset Based Lending - A type of financing, commonly found in leveraged buyouts, based on a percentage of some value (book, liquidation, market, auction) of an asset. Asset based lenders typically analyze a target company's viability as a going concern and its ability to service debt from cash flow.
Asset Sale - A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and, in some cases, liabilities of a company to a purchaser. The corporate entity is not transferred.
B
“B” round – a financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the “A” round of financing. Subsequent rounds are called “C”, “D” and so on.
Balloon payment – a relatively large principal payment due at a specific time as required by a lender.
Base Year - A company's current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the year-to-date results and expectations of management
Basis point (“bp”) – one one-hundredth (1/100) of a percentage unit. For example, 50 basis points equals one half of one percent. Banks quote variable loan rates in terms of an index plus a margin and the margin is often described in basis points, such as LIBOR plus 400 basis points (or, as the experts say, “beeps”).
Basket - A dollar amount set forth as the loss that must be experienced by the buyer before it can recover damages under the indemnity provisions.
Best efforts offering – a commitment by a syndicate of investment banks to use best efforts to ensure the sale to investors of a company’s offering of securities. In a best efforts offering, the syndicate avoids any firm commitment for a specific number of shares or bonds.
Beta – a measure of volatility of a public stock relative to an index or a composite of all stocks in a market or geographical region. A beta of more than one indicates the stock has higher volatility than the index (or composite) and a beta of one indicates volatility equivalent to the index (or composite). For example, the price of a stock with a beta of 1.5 will change by 1.5% if the index value changes by 1%. Typically, the S&P500 index is used in calculating the beta of a stock.
Beta Product – a product that is being tested by potential customers prior to being formally launched into the marketplace.
Blow-out round – see Cram-down round.
Board of directors – a group of individuals, typically composed of managers, investors and experts, which have a fiduciary responsibility for the well being and proper guidance of a corporation. The board is elected by the shareholders.
Boat anchor – a person, project or activity that hinders the growth of a company.
Book – see Private placement memorandum.
Book runner – the lead bank that manages the transaction process for an equity or debt financing, including documentation, syndication, pricing, allocation and closing.
Book value – the book value of a company is the value of the common stock (total assets minus liabilities minus preferred stock minus intangible assets). The book value of an asset of a company is typically based on its original cost minus accumulated depreciation.
Book Value of Invested Capital - The sum of the book value of debt and equity as presented on a company's balance sheet
Bootstrapping – the actions of a startup to minimize expenses and build cash flow, thereby reducing or eliminating the need for outside investors.
Bp – see Basis point.
Break-up/Bust-up/Topping Fees - If the deal does not close, these fees may be paid to either the seller or the buyer by the other to help cover costs incurred during the acquisition process.
Bridge financing – temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge is usually a short term note (6 to 12 months) that converts to preferred stock. Typically, the bridge lender has the right to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round. See Wipeout bridge and Hamburger Helper bridge.
Broad-based weighted average ratchet - a type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighted average of investor A’s price and investor B’s price. A broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighted average price. See Narrow-based weighted average ratchet.
Bulk Sales Law - A state law intended to protect the creditors of a business that is being sold by requiring that the creditors be notified of the sale
Bullet payment – a payment of all principal due at a time specified by a bank or a bond issuer.
Burn rate – the rate at which a startup with little or no revenue uses available cash to cover expenses. Usually expressed on a monthly or weekly basis.
Business Appraiser - A person who by education, training and experience is qualified to make an appraisal of a business enterprise and/or its intangible assets.
Business Development Company (BDC) – a publicly traded company that invests in private companies and is required by law to provide meaningful support and assistance to its portfolio companies.
Business Enterprise - A commercial, industrial or service organization pursuing an economic activity.
Business Enterprise Value - The value of a business, using any number of valuation approaches, as an integral, operating unit rather than as a collection of individual assets and liabilities.
Business plan – a document that describes a new concept for a business opportunity. A business plan typically includes the following sections: executive summary, market need, solution, technology, competition, marketing, management, operations and financials.
Buyout – a sector of the private equity industry. Also, the purchase of a controlling interest of a company by an outside investor (in a leveraged buyout) or a management team (in a management buyout).
Buy-sell agreement – a contract that sets forth the conditions under which a shareholder must first offer his or her shares for sale to the other shareholders before being allowed to sell to entities outside the company.
Business Valuation - The act or process of arriving at an opinion or determination of the value of a business enterprise or an interest therein.
C
C Corporation – an ownership structure that allows any number of individuals or companies to own shares. A C corporation is a stand-alone legal entity so it offers some protection to its owners, managers and investors from liability resulting from its actions.
Call date – when a bond issuer has the right to retire part or all of a bond issuance at a specific price.
Call premium – the premium above par value that an issuer is willing to pay as part of the redemption of a bond issue prior to maturity.
Call price – the price an issuer agrees to pay to bondholders to redeem all or part of a bond issuance.
Call protection – a provision in the terms of a bond specifying the period of time during which the bond cannot be called by the issuer.
Capital Asset Pricing Model (CAPM) – a method of estimating the cost of equity capital of a company. The cost of equity capital is equal to the return of a risk-free investment plus a premium that reflects the risk of the company’s equity.
Capital call – when a private equity fund manager (usually a “general partner” in a partnership) requests that an investor in the fund (a “limited partner”) provide additional capital. Usually a limited partner will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the limited partner as opportunities arise to finance startups and buyouts.
Capital Structure - The composition of a business entity's invested capital.
Capitalization - The conversion of historic or projected income into value: The capital structure of a business enterprise, • The recognition of an expenditure as a capital asset to be depreciated over time rather than a period expense.
Capitalization Factor - (1) The conversion of income into value. (2) The capital structure of a business enterprise. (3) The recognition of an expenditure as a capital asset rather than a period expense.
Capitalization rate – the discount rate used to determine the present value of an infinitely lived asset
Capitalization table – a table showing the owners of a company’s shares and their ownership percentages as well as the debt holders. It also lists the forms of ownership, such as common stock, preferred stock, warrants, options, senior debt, and subordinated debt.
Capitalizing Net Income - Determining value for a company by dividing net income by the required Return on Investment (ROI).
Capital gains – a tax classification of investment earnings resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income.
Capital stock – a description of stock that applies when there is only one class of shares. This class is known as “common stock”.
Capped participating preferred stock – preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount. See Participating preferred stock.
Carried interest – a share in the profits of a private equity fund. Typically, a fund must return the capital given to it by limited partners plus any preferential rate of return before the general partner can share in the profits of the fund. The general partner will then receive a 20% carried interest, although some successful firms receive 25%-30%. Also known as “carry” or “promote.”
Cash Flow - Net income plus depreciation and other non‑cash charges.
Cash Flow Analysis - A study of the anticipated movement of cash into or out of an investment.
Cash Flow Lending - A type of unsecured financing based on the timing and certainty of the borrower's cash flow.
Cash Flow Statement - An analysis of all the changes that affect the cash account during an accounting period. These changes are segregated into operating, investing and financing categories.
Catch-up – a clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed upon profit split is reached.
Change of control bonus – a bonus of cash or stock given by private equity investors to members of a management group if they successfully negotiate a sale of the company for a price greater than a specified amount.
Clawback – a clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of disbursements to a general partner for profitable investments based on significant losses from later investments in a portfolio.
Client - Any party for whom an appraiser performs a service.
Closing – the conclusion of a financing round whereby all necessary legal documents are signed and capital has been transferred.
Club deal – see Co-investment.
Co-investment –either a) the right of a limited partner to invest with a general partner in portfolio companies, or b) the act of investing by two or more entities in the same target company (also known as a Club deal).
Collateral – hard assets of the borrower, such as real estate or equipment, for which a lender has a legal interest until a loan obligation is fully paid off.
Commitment – an obligation, typically the maximum amount that a limited partner agrees to invest in a fund.
Common stock – a type of security representing ownership rights in a company. Usually, company founders, management and employees own common stock while investors own preferred stock. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders. See Preferred stock.
Comparable – a publicly traded company with similar characteristics to a private company that is being valued. For example, a telecommunications equipment manufacturer whose market value is 2 times revenues can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See Liquidity discount.
Commercial Value - 1) The potential economic value of property if put to its most intensive and productive ("highest and best") use. (2) The present worth of future earnings and benefits. According to this definition, "commercial value implies consideration of the effect of future happenings on the economic potential of an asset.
Confidential Business Profile (CBP) - A brief profile of a business used to solicit buyer interest. The CBP does not reveal the name of the business profiled.
Confidential Business Review (CBR) - A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement.
Confidentiality Agreement (CA) - Signed by potential buyers, it requires them to keep the information contained in the CBR and ensuing discussions confidential.
Consulting Agreement - A form of deal structure whereby the seller provides business advice and direction for a specified period of time in return for a specific amount.
Consolidation – see Rollup.
Condemnation Value - Term sometimes applied to value for condemnation purposes. Condemnation value is not ordinarily a separate value as such; rather, value for condemnation purposes is most often a form of market value.
Consulting - The act or process of providing information, analysis of real estate data, and recommendations or conclusions on diversified problems in real estate, other than estimating value.
Contingent Liabilities - Improbable but possible obligations. Probable obligations are real liabilities and require adjustment in accounting records. Contingent liabilities require footnote disclosure only. Some examples are pending lawsuits, purchase commitments carrying default penalties, and warranties and guaranties for which no historical basis is available for assessing the possible obligation.
Contributory Value - The increment of value that an improvement or addition adds to an asset or group of assets. Term used primarily in connection with real estate valuation and appraisal.
Control – the authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders.
Control Premium - The additional value inherent in the control interest, as contrasted to a minority interest, that reflects its power of control.
Conversion – the right of an investor or lender to force a company to replace the investor’s preferred shares or the lender’s debt with common shares at a preset conversion ratio. A conversion feature was first used in railroad bonds in the 1800’s.
Convertible debt – a loan which allows the lender to exchange the debt for common shares in a company at a preset conversion ratio
Convertible preferred stock – a type of stock that gives an owner the right to convert to common shares of stock. Usually, preferred stock has certain rights that common stock doesn’t have, such as decision-making management control, a promised return on investment (dividend), or senior priority in receiving proceeds from a sale or liquidation of the company. Typically, convertible preferred stock automatically converts to common stock if the company makes an initial public offering (IPO). Convertible preferred is the most common tool for private equity funds to invest in companies.
Convertible security – a security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock, warrants or debt.
Co-sale right – a contractual right of an investor to sell some of the investor’s stock along with the founder’s or majority shareholder’s stock if either the founder or majority shareholder elects to sell stock to a third-party. Also known as Tag-along right.
Cost of capital – see Weighted average cost of capital.
Cost of revenue – the expenses generated by the core operations of a company.
Covenant – a legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company.
Covenant Not To Compete - A condition often found in acquisition agreements by which the seller agrees to abstain from business that would compete with the entity being sold. The restriction is usually for a specific time period and may be for a specific region.
Coverage ratio – describes a company’s ability to pay debt from cash flow or profits. Typical measures are EBITDA/Interest, (EBITDA minus Capital Expenditures)/Interest, and EBIT/Interest.
Cram down round – a financing event upon which new investors with substantial capital are able to demand and receive contractual terms that effectively cause the issuance of sufficient new shares by the startup company to significantly reduce (“dilute”) the ownership percentage of previous investors.
Cumulative dividends – the owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock.
Current ratio – the ratio of current assets to current liabilities.
D
Data room – a specific location where potential buyers / investors can review confidential information about a target company. This information may include detailed financial statements, client contracts, intellectual property, property leases, and compensation agreements.Deal flow – a measure of the number of potential investments that a fund reviews in any given period.
Deal Killers - Issues that cannot be resolved to the satisfaction of both parties and/or Dissenters who believe their interests will be adversely affected by an acquisition and who work either overtly or covertly to subvert the transaction. May include executives fearing the loss of jobs, suppliers fearing the loss of an account, and irrational or prejudiced family members.
Deal Maker - One who facilitates mergers and acquisitions including intermediaries, finders, and investors.
Deal Structure - The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components have tax benefits to the seller.
Debt Free Cash Flow - Debt free net income plus depreciation less provisions for working capital and capital expenditures.
Debt service – the ratio of a loan payment amount to available cash flow earned during a specific period. Typically lenders insist that a company maintain a certain debt service ratio or else risk penalties such as having to pay off the loan immediately.
Decision Point - This process entails reviewing personal needs and desires. Answers to the following questions are addressed: What types of buyers are best for your business? What are your options regarding deal structuring? And, what tax strategies should be explored before moving forward?
Default – a company’s failure to comply with the terms and conditions of a financing arrangement.
Defined benefit plan – a company retirement plan in which both the employee and the employer contribute to the plan. Typically the plan is based on the employee’s salary and number of years worked. Fixed benefits are outlined when the employee retires. The employer bears the investment risk and is committed to providing the benefits to the employee. Defined benefit plan managers can invest in private equity funds.
Defined contribution plan – a company retirement plan in which the employee elects to contribute some portion of his or her salary into a retirement plan, such as a 401(k) or 403(b). With this type of plan, the employee bears the investment risk. The benefits depend solely on the amount of money made from investing the employee’s contributions. Defined contribution plan capital cannot be invested in private equity funds.
Definitive Purchase Agreement - After a successful due-diligence process, this document details all aspects of the transaction, and upon execution legally transfers the stock and/or assets of your company to the buyer in accordance with your accepted terms.
Demand rights – a type of registration right. Demand rights give an investor the right to force a startup to register its shares with the SEC and prepare for a public sale of stock (IPO).
Depreciation and Amortization - A reduction in a capital account of the value of an asset over time.
Depreciated (book) Value - Original cost of an asset less total amount charged as depreciation since the asset was acquired or created.
Depreciated replacement value - Form of replacement value. The value of a thing as based on the (estimated) cost of replacing it with another thing of similar kind and condition (utility), explicitly taking depreciation of the thing being replaced into account.
Dilution – the reduction in the ownership percentage of current investors, founders and employees caused by the issuance of new shares to new investors.
Dilution protection – see Anti-dilution and Ratchet.
Direct costs – see Cost of revenue.
Disbursement – an investment by a fund in company.
Discount rate – the interest rate used to determine the present value of a series of future cash flows.
Discounted cash flow (DCF) – a valuation methodology whereby the present value of all future cash flows expected from a company is calculated.
Discounted Cash Flow Value - The present value of future earnings taken out to infinity and discounted at a rate that approximates the risk.
Distressed debt – the bonds of a company that is either in or approaching bankruptcy. Some private equity funds specialize in purchasing such debt at deep discounts with the expectation of exerting influence in the restructuring of the company and then selling the debt once the company has meaningfully recovered.
Distribution – the transfer of cash or securities to a limited partner resulting from the sale, liquidation or IPO of one or more portfolio companies in which a general partner chose to invest.
Dividends – regular payments made by a company to the owners of certain securities. Typically, dividends are paid quarterly, by approval of the board of directors, to owners of preferred stock.
Doctrine of Fraudulent Conveyance - A conveyance of property (i.e., a business) without any consideration of value, for the purpose of deferring, hindering or defrauding creditors. Such a transfer will, when proven to the satisfaction of judge or jury, be declared void.
Documenting Value - Recasting historical financial statements, Preparing pro forma financial information, Identifying future market opportunities, and Legal Implications
Down round – a round of financing whereby the valuation of the company is lower than the value determined by investors in an earlier round.
Drag-along rights – the contractual right of an investor in a company to force all other investors to agree to a specific action, such as the sale of the company.
Drive-by VC – a venture capitalist that only appears during board meetings of a portfolio company and rarely offers advice to management.
Due diligence – the investigatory process performed by investors to assess the viability of a potential investment and the accuracy of the information provided by the target company.
Dutch auction – a method of conducting an IPO whereby newly issued shares of stock are committed to the highest bidder, then, if any shares remain, to the next highest bidder, and so on until all the shares are committed. Note that the price per share paid by all buyers is the price commitment of the buyer of the last share.
E
Early stage – the state of a company after the seed (formation) stage but before middle stage (generating revenues). Typically, a company in early stage will have a core management team and a proven concept or product, but no positive cash flow.
Earnings before interest and taxes (EBIT) – a measurement of the operating profit of a company. One possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBIT.
Earnings before interest, taxes, depreciation and amortization (EBITDA) – a measurement of the cash flow of a company. One possible valuation methodology is based on a comparison of private and public companies’ value as a multiple of EBITDA.
Earn out- an arrangement in which sellers of a business receive additional future payments, usually based on financial performance metrics such as revenue or net income.
Economic life - The period over which property may be profitably used
Economic Value - That kind of value according to which a thing (asset) is capable of producing economic (monetary or equivalent) benefits for its owner or user.
Elevator pitch – a concise presentation, lasting only a few minutes (an elevator ride), by an entrepreneur to a potential investor about an investment opportunity.
Employee Stock Ownership Program (ESOP) – a plan established by a company to reserve shares for long-term incentive compensation for employees.
Employment Agreement - As part of deal structure the buyer may agree to continue the seller's employment in the business. Both the duration of the employment and the consideration are determined at the closing. The consideration may exceed normal compensation levels.
Enterprise - See BUSINESS ENTERPRISE
Enterprise Value (EV) – the sum of the market values of the common stock and long term debt of a company, minus cash.
Equity – the ownership structure of a company represented by common shares, preferred shares or unit interests. Equity = Assets – Liabilities.
ESOP – see Employee Stock Ownership Program.
Established Business Value - Same as GOING CONCERN VALUE
Evaluation Report - Document detailing and supporting the fair market value of a business entity.
Evergreen fund – a fund that reinvests its profits in order to ensure the availability of capital for future investments
Excess Cash - The amount of cash in excess of what a business enterprise needs to operate through a business cycle. In an M&A transaction, excess cash is normally retained by the seller at the close.
Excess Value - Value over and above market value. Term is usually confined to use in connection with real estate utilized for rental purposes, in which case "excess value is the additional value attributable to a lease that guarantees rental income of an amount in excess of "market rental" at the time of appraisal.
Exchange Value - Same as VALUE IN EXCHANGE.
Exit Plan - A definitive action plan on the part of the owner(s) of the target company to strategically exit the business through the M&A process. The exit plan should take into consideration the owner's personal and financial objectives.
Exit strategy – the plan for generating profits for owners and investors of a company. Typically, the options are to merge, be acquired or make an initial public offering (IPO). An alternative is to recapitalize (releverage the company and then pay dividends to shareholders).
Expansion stage – the stage of a company characterized by a complete management team and a substantial increase in revenues.
F
Face Value - Stated, or "par," value of securities such as stocks, bonds, or the like, as set forth in the documents themselves.
Fair Market Value - The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
Fairness opinion – a letter issued by an investment bank that charges a fee to assess the fairness of a negotiated price for a merger or acquisition.
Fair Value - Same as FAIR MARKET VALUE, except usually no discount.
FASB - Financial Accounting Standards Board. This Board issues rulings that govern how accounting reports are prepared.
Feasibility Analysis - A study of the cost‑benefit relationship of an economic endeavor.
Financial Buyer - A buyer interested in a target based on the financial return of the investment rather than a strategic or synergistic reason.
Firm commitment - a commitment by a syndicate of investment banks to purchase all the shares available for sale in a public offering of a company. The shares will then be resold to investors by the syndicate.
Fixed Interest Rate - An interest rate that does not fluctuate with general market conditions
Flipping – the act of selling shares immediately after an initial public offering. Investment banks that underwrite new stock issues attempt to allocate shares to new investors that indicate they will retain the shares for several months. Often management and venture investors are prohibited from selling IPO shares until a “lock-up period” (usually 6 to 12 months) has expired.
Founder – a person who participates in the creation of a company. Typically, founders manage the company until it has enough capital to hire professional managers.
Founders stock – nominally priced common stock issued to founders, officers, employees, directors, and consultants.
Free cash flow to equity (FCFE) – the cash flow available after operating expenses, interest payments on debt, taxes, net principal repayments, preferred stock dividends, reinvestment needs and changes in working capital. In a discounted cash flow model to determine the value of the equity of a firm using FCFE, the discount rate used is the cost of equity.
Free cash flow to the firm (FCFF) – the operating cash flow available after operating expenses, taxes, reinvestment needs and changes in working capital, but before any interest payments on debt are made. In a discounted cash flow model to determine the enterprise value of a firm using FCFF, the discount rate used is the weighted average cost of capital (WACC).
Friends and family financing – capital provided by the friends and family of founders of an early stage company. Founders should be careful not to create an ownership structure that may hinder the participation of professional investors once the company begins to achieve success.
Full ratchet – an anti-dilution protection mechanism whereby the price per share of the preferred stock of investor A is adjusted downward due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to match the price of investor B’s preferred stock. Usually as a result of the implementation of a ratchet, company management and employees who own a fixed amount of common shares suffer significant dilution. See Narrow-based weighted average ratchet and Broad-based weighted average ratchet.
Fully diluted basis – a methodology for calculating any per share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants and options are exercised and preferred stock.
Functional Utility Value - Somewhat obscure term generally implying a measure of the ability of a thing to provide usefulness, service, or profit.
Fund-of-funds – a fund created to invest in private equity funds. Typically, individual investors and relatively small institutional investors participate in a fund-of-funds to minimize their portfolio management efforts.
G
Gatekeepers- intermediaries which endowments, pension funds and other institutional investors use as advisors regarding private equity investments.
General partner (GP) – a class of partner in a partnership. The general partner retains liability for the actions of the partnership. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high net worth investors in the partnership. The GP earns a management fee and a percentage of profits (see Carried interest).
GP – see General partner.
Going Concern - An operating business enterprise.
Going Concern Value - (1) The value of an enterprise, or an interest therein, as a going concern. (2) Intangible elements of value in a business enterprise resulting from factors such as having a trained workforce, an operational plant, and the necessary licenses, systems and procedures in place.
Going-private transaction – when a public company chooses to pay off all public investors, delist from all stock exchanges, and become owned by management, employees, and select private investors.
Goodwill - That intangible asset which arises as a result of name, reputation, customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits.
Goodwill Value - (1) Value attributable to goodwill. (2) The value of the advantages that a business has developed as a result of intangibles applicable to the specific business itself, such as name, reputation, etc. (3) That part of the total value of a going enterprise which is in excess of the capital investment; an ingredient of "going concern value."
Grossing up – an adjustment of an option pool for management and employees of a company which increases the number of shares available over time. This usually occurs after a financing round whereby one or more investors receive a relatively large percentage of the company. Without a grossing up, managers and employees would suffer the financial and emotional consequences of dilution, thereby potentially affecting the overall performance of the company.
Growth stage – the state of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Also known as “middle stage.”
H
Hamburger helper – a colorful label for a traditional bridge loan that includes the right of the bridge lender to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round.
Hart-Scott-Rodino Act – a law requiring entities that acquire certain amounts of stock or assets of a company to inform the Federal Trade Commission and the Department of Justice and to observe a waiting period before completing the transaction.
Harvest – to generate cash or stock from the sale or IPO of companies in a private equity portfolio of investments.
High yield debt – debt issued via public offering or public placement (Rule 144A) that is rated below investment grade by S&P or Moody’s. This means that the debt is rated below the top four rating categories (i.e. S&P BB+, Moody’s Ba2 or below). The lower rating is indicative of higher risk of default, and therefore the debt carries a higher coupon or yield than investment grade debt. Also referred to as Junk bonds or Sub-investment grade debt.
Hockey stick – the general shape and form of a chart showing revenue, customers, cash or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.
Horizontal Integration - Purchasing similar businesses, including competitors.
Hot issue – stock in an initial public offering that is in high demand.
Hurdle rate – a minimum rate of return required before an investor will make an investment.
I
Impairment - In the context of FASB (Financial Accounting Standards Board) Statements 141 and 142, impairment is an overstatement of the goodwill values shown on a company's balance sheet, compared with their fair value. FASB 142 requires that a business test for impairment on an annual basis, as well as between annual tests if an event or circumstances change that more likely than not reduce the fair value of assets, below their carrying value.
Income Approach - A general way of determining a value indication of a business, business ownership interest, or security, using one or more methods wherein a value is determined by converting anticipated benefits.
Incorporation – the process by which a business receives a state charter, allowing it to become a corporation. Many corporations choose Delaware because its laws are business-friendly and up to date.
Incubator – a company or facility designed to host startup companies. Incubators help startups grow while controlling costs by offering networks of contacts and shared backoffice resources.
Indemnification - The section of the purchase document that sets forth the circumstances under which either party can claim damages or take other remedial action in the event the other party has breached a representation or warranty or failed to abide by the covenants.
Indenture – the terms and conditions between a bond issuer and bond buyers.
Initial public offering (IPO) – the first offering of stock by a company to the public. New public offerings must be registered with the Securities and Exchange Commission. An IPO is one of the methods that a startup that has achieved significant success can use to raise additional capital for further growth. See Qualified IPO.
Inside round – a round of financing in which the investors are the same investors as the previous round. An inside round raises liability issues since the valuation of the company has no third party verification in the form of an outside investor. In addition, the terms of the inside round may be considered self-dealing if they are onerous to any set of shareholders or if the investors give themselves additional preferential rights.
Insurable Value - That portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy.
Institutional investor – professional entities that invest capital on behalf of companies or individuals. Examples are: pension plans, insurance companies and university endowments.
Intangible (Hidden) Assets - The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce.
Intangible Value - Value of intangibles. Value not imputable to tangible assets.
Interest coverage ratio – earnings before interest and taxes (EBIT) divided by interest expense. This is a key ratio used by lenders to assess the ability of a company to produce sufficient cash to pay its debt obligation.
Internal rate of return (IRR) – the interest rate at which a certain amount of capital today would have to be invested in order to grow to a specific value at a specific time in the future.
Intrinsic Value - Value inherent in a thing itself, as the metal content of a coin or article of precious metal jewelry. Term is subject to many possible interpretations, and therefore, requires extreme care in use.
Inventory Value - Term generally referring to the book value of the inventory of a business enterprise.
Invested Capital - The sum of the debt and equity in an enterprise on a long term basis.
Investment thesis / Investment philosophy – the fundamental ideas which determine the types of investments that an investment fund will choose in order to achieve its financial goals.
Investment Value - (1) Value as determined or estimated in accordance with the Investment Value ("income") Approach. (2) The value of a thing that arises from its presumed ability to produce a profit, or return on investment, for its owners. (3) Value to a particular investment or based upon individual investment requirements as distinguished from market value, which is value to a broader market than a single investor.
IPO – see Initial public offering.
IRR – see Internal rate of return.
IRS Fair Market Value - Not actually a single definition of value, but rather a number of different definitions, similar in importance, that have been variously attributed to and/or used or accepted by the U.S. Internal Revenue Service. Most or all of these definitions of "IRS Fair Market Value" include the elements ..."Price at which property would change hands...between a willing buyer and a willing seller...neither being under any compulsion...both having knowledge of relevant facts. . . "
Issuer – the company that chooses to distribute a portion of its stock to the public.
J
Junior debt – a loan that has a lower priority than a senior loan in case of a liquidation of the asset or borrowing company. Also known as “subordinated debt”.Junk Bond – see High Yield Debt.
Just Value - Term most often used in real estate appraisal. Generally considered to be synonymous with "fair market value."
L
Later stage – the state of a company that has proven its concept, achieved significant revenues compared to its competition, and is approaching cash flow break even or positive net income. Typically, a later stage company is about 6 to 12 months away from a liquidity event such as an IPO or buyout. The rate of return for venture capitalists that invest in later stage, less risky ventures is lower than in earlier stage ventures.LBO – see Leveraged buyout.
Lead investor – the venture capital investor that makes the largest investment in a financing round and manages the documentation and closing of that round. The lead investor sets the price per share of the financing round, thereby determining the valuation of the company.
Leasehold Value - The value of a leasehold interest, particularly in real estate appraisal.
Letter of intent (LOI) – a document confirming the intent of an investor to participate in a round of financing for a company. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Also known as a “Term Sheet”.
Letter Stock - Unregistered shares in a small firm that are issued without underwriting.
Leverage – the use of debt to acquire assets, build operations and increase revenues. By using debt, a company is attempting to achieve results faster than if it only used its cash available from pre-leverage operations. The risk is that the increase in assets and revenues does not generate sufficient net income and cash flow to pay the interest costs of the debt.
Leveraged buyout (LBO) – the purchase of a company or a business unit of a company by an outside investor using mostly borrowed capital.
Leverage ratios – measurements of a company’s debt as a multiple of cash flow. Typical leverage ratios include Total Debt / EBITDA, Total Debt / (EBITDA minus Capital Expenditures), and Senior Debt / EBITDA.
Leveraged Valuation Approach - The leveraged valuation approach simulates the leveraged buyout of a business. It illustrates a typical buyout transaction with the corresponding deal structure and valuation driven by: 1) the leveragability of the target company's balance sheet and cash flows, 2) the coverage ratios required by senior lenders, and 3) the internal rate of return sought by the equity investor(s).
L.I.B.O.R. – see The London Interbank Offered Rate.
Limited liability company (LLC) – an ownership structure designed to limit the founders’ losses to the amount of their investment. An LLC does not pay taxes, rather its owners pay taxes on their proportion of the LLC profits at their individual tax rates.
Limited partnership – a legal entity composed of a general partner and various limited partners. The general partner manages the investments and is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment. The general partner receives a management fee and a percentage of profits (see Carried interest), while the limited partners receive income, capital gains and tax benefits.
Limited partner (LP) – an investor in a limited partnership. The general partner is liable for the actions of the partnership while the limited partners are generally protected from legal actions and any losses beyond their original investment. The limited partner receives income, capital gains and tax benefits.
Liquidation – the selling off of all assets of a company prior to the complete cessation of operations. Corporations that choose to liquidate declare Chapter 7 bankruptcy. In a liquidation, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders.
Liquidation preference – the contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. For example, a venture capital investor with a “2x liquidation preference” has the right to receive two times its original investment upon liquidation.
Liquidation Value - The (estimated) proceeds, net after provision for applicable liabilities, if any, that would result from sale of an asset or a group of assets if sold individually and not as part of the business enterprise of which they were originally a part. Sale may involve either "forced liquidation" or "orderly disposal," with the amount of the net proceeds likely different for the two situations.
Liquidity - The cash position of a business and its ability to meet maturing obligations.
Liquidity discount – a decrease in the value of a private company compared to the value of a similar but publicly traded company. Since an investor in a private company cannot readily sell his or her investment, the shares in the private company must be valued less than a comparable public company.
Liquidity event – a transaction whereby owners of a significant portion of the shares of a private company sell their shares in exchange for cash or shares in another, usually larger company. For example, an IPO is a liquidity event.
Lock-up agreement – investors, management and employees often agree not to sell their shares for a specific time period after an IPO, usually 6 to 12 months. By avoiding large sales of its stock, the company has time to build interest among potential buyers of its shares.
London Interbank Offered Rate (L.I.B.O.R.) – the average rate charged by large banks in London for loans to each other. LIBOR is a relatively volatile rate and is typically quoted in maturities of one month, three months, six months and one year.
LP – see Limited partner.
M
Majority Control - The degree of control provided by a majority position.
Management buyout (MBO) – a leveraged buyout controlled by the members of the management team of a company or a division.
Management fee – a fee charged to the limited partners in a fund by the general partner. Management fees in a private equity fund typically range from 0.75% to 3% of capital under management, depending on the type and size of fund.
Management rights – the rights often required by a venture capitalist as part of the agreement to invest in a company. The venture capitalist has the right to consult with management on key operational issues, attend board meetings and review information about the company’s financial situation.
Market Analysis - A study of real estate market conditions for a specific type of property.
Market Approach - The market approach is a general way of determining a value indication of a business, business ownership interest or security using one or more methods that compare the subject to similar businesses, business ownership interests or securities that have been sold.
Market capitalization – the value of a publicly traded company as determined by multiplying the number of shares outstanding by the current price per share.
Market Multiple - A factor that can be applied to the subject company's financial, operating or physical data to generate an indication of value. The market multiple is derived from observed transactions in the marketplace where the value can be divided by the comparable companies' financial, operating or physical data to generate the market multiple.
Market Value - Market value is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. A current economic definition agreed upon by federal financial institutions in the United States of America is: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated;
2. both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market;
3. payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Substitution of another currency for United States dollars in the fourth condition is appropriate in countries or in reports addressed to clients from other countries.
Persons performing appraisal services that may be subject to litigation are cautioned to seek the exact legal definition of market value in the jurisdiction in which the services are being performed.
Marketability Discount - An amount of percentage deducted from an equity interest to reflect lack of marketability.
Mass Appraisal - The process of valuing a universe of properties as of a given date utilizing standard methodology, employing common data, and allowing for statistical testing.
Mass Appraisal Model - A mathematical expression of how supply and demand factors interact in a market.
Maximizing Value - Addressing the following: How market conditions affect value, exposing value myths, Impact of off-balance assets on value, Value vs. price, Identifying value enhancers, Minimizing risk considerations.
MBO – see Management buyout.
Merger - The combining of one corporation with another.
Mezzanine – a layer of financing that has intermediate priority (seniority) in the capital structure of a company. For example, mezzanine debt has lower priority than senior debt but usually has a higher interest rate and often includes warrants. In venture capital, a mezzanine round is generally the round of financing that is designed to help a company have enough resources to reach an IPO.
Middle stage – the state of a company when it has received one or more rounds of financing and is generating revenue from its product or service. Also known as “growth stage.”
Minority Discount - The reduction, from the pro rata share of the value of the entire business, which reflects the absence of the power of control.
Minority Interest - Ownership position less than 50% of the voting interest in an enterprise.
Mortgage Value - Value of an asset for mortgage borrowing purposes.
Multiples – a valuation methodology that compares public and private companies in terms of a ratio of value to an operations figure such as revenue or net income. For example, if several publicly traded computer hardware companies are valued at approximately 2 times revenues, then it is reasonable to assume that a startup computer hardware company that is growing fast has the potential to achieve a valuation of 2 times its revenues. Before the startup issues its IPO, it will likely be valued at less than 2 times revenue because of the lack of liquidity of its shares. See Liquidity discount.
"Multiple Buyer" Process - The process of involving multiple buyers in the purchase of a business. The process typically increases the price paid for the target and/or improves the deal structure.
N
Narrow-based weighted average ratchet – a type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighed average of investor A’s price and investor B’s price. A narrow-based ratchet uses only common stock outstanding in the denominator of the formula for determining the new weighted average price.NDA – see Non-disclosure agreement.
Net Assets - Total assets less total liabilities.
Net Cash Flow - Cash available for distribution after taxes and after the effects of financing. Calculated as net income plus depreciation less expenditures required for working capital, capital items and debt repayment. (See also cash flow.)
Net Income - Revenue less expenses, including taxes.
Net operating income (NOI) – a measure of cash flow that excludes the effects of financing decisions. NOI is calculated as earnings before interest and taxes multiplied by one minus the tax rate. Also known as profit after taxes (NOPAT).
Net Present Value - In investment theory, the difference between the cost of an investment, including improvements, and the discounted present value of all anticipated future benefits from that investment.
Net Operating Loss - For tax purposes, an excess of expenses over revenue results in a net operating loss. Under certain, limited, circumstances a NOL may provide a tax benefit to a buyer.
Net to Owner - The amount realized by the owners of a business from a sale. Usually equal to the Business Enterprise Value of the business less debt retained in the business, plus the net of assets and liabilities not included in the sale and retained by the owners.
Net Realizable Value - Same as LIQUIDATION VALUE.
Nine Year Ramp - The financial presentation of the target company that a buyer requires an intermediary to provide as part of the M&A process. Specifically, the nine-year ramp includes the latest three historical years, a base year and five pro forma years.
Non-compete – an agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment.
Non-cumulative dividends – dividends that are payable to owners of preferred stock at a specific point in time only if there is sufficient cash flow available after all company expenses have been paid. If cash flow is insufficient, the owners of the preferred stock will not receive the dividends owed for that time period and will have to wait until the board of directors declares another set of dividends.
Non-disclosure agreement (NDA) – an agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties.
Non-identifiable Intangible Value - Synonym for GOODWILL VALUE.
Non-interference – an agreement often signed by employees and management whereby they agree not to interfere with the company’s relationships with employees, clients, suppliers and sub-contractors within a certain time period after termination of employment.
Non Operating Assets - Assets shown on the company's balance sheet that are not used in the operation of the business. That is, ""extra"" assets that are not necessary to generate the revenue and cash flow stream being valued. These would be recast when valuing the business.
Non-solicitation – an agreement often signed by employees and management whereby they agree not to solicit other employees of the company regarding job opportunities.
Normal Working Capital - The amount of working capital needed by the company to sustain operations throughout the year. Calculated as the average of current assets (which include a normal amount of necessary cash) minus current liabilities on a monthly basis over the most recent twelve months.
No-Shop Agreement - A provision in the letter of intent or purchase document that inhibits the target from soliciting or encouraging other bids.
Nuisance Value - In appraising, the price that would probably be paid for the avoidance of, or relief from, an objectionable condition or situation.
O
Offering memorandum – a legal document that provides details of an investment to potential investors. See Private placement memorandum.OID – see Original issue discount.
Operating cash flow – the cash flow produced from the operation of a business, not from investing activities (such as selling assets) or financing activities (such as issuing debt). Calculated as net operating income (NOI) plus depreciation.
Optics – the way a concept is presented. Sometimes entrepreneurs’ presentations are strong on optics but weak in content.
Options – see Stock options.
Option pool – a group of options set aside for long term, phased compensation to management and employees.
Original issue discount (OID) – a discount from par value of a bond or debt-like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash flow stream as, in essence, a zero coupon bond upon which tax payments are due yearly based on “phantom income” imputed from the difference between the original investment and “guaranteed” eventual payout. Although complex, the solution is to include enough clauses in the investment agreements to create the possibility of a material change in the cash flows of owners of the preferred stock under different scenarios of events such as a buyout, dissolution or IPO.
Orphan – a startup company that does not have a venture capitalist as an investor.
Outstanding shares – the total amount of common shares of a company, not including treasury stock, convertible preferred stock, warrants and options.
Oversubscription – when demand exceeds supply for shares of an IPO or a private placement.
P
Pay to play – a clause in a financing agreement whereby any investor that does not participate in a future round agrees to suffer significant dilution compared to other investors. The most onerous version of “pay to play” is automatic conversion to common shares, which in essence ends any preferential rights of an investor, such as the right to influence key management decisions.Pari passu – a legal term referring to the equal treatment of two or more parties in an agreement. For example, a venture capitalist may agree to have registration rights that are pari passu with the other investors in a financing round.
Participating dividends – the right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock or other assets.
Participating preferred stock – a unit of ownership composed of preferred stock and common stock. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company. Participating preferred stock has been characterized as “having your cake and eating it too.”
PE ratio – see Price earnings ratio.
Personal Property - Identifiable portable and tangible objects which are considered by the general public as being "personal," e.g. furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all property that is not classified as real estate.
Piggyback rights – rights of an investor to have his or her shares included in a registration of a startup’s shares in preparation for an IPO.
PIPEs – see Private investment in public equities.
Placement agent – a company that specializes in finding institutional investors that are willing and able to invest in a private equity fund. Sometimes a private equity fund will hire a placement agent so the fund partners can focus on making and managing investments in companies rather than on raising capital.
Pooling of Interests - One method of accounting for a company merger, in which the balance sheets of the two companies are combined line by line without a tax impact. Only allowed under certain circumstances.
Portfolio company – a company that has received an investment from a private equity fund.
Post-Acquisition Planning - Strategic steps taken prior to the acquisition to plan for the successful integration of target and acquirer, including how to exploit synergies, merge management, and support corporate culture.
Post-money valuation – the valuation of a company including the capital provided by the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post-money valuation of $7 million.
Potential Value - Value, or an increment thereof, that is dependent on the actual occurrence of stated possibilities or probabilities.
PPM – see Private placement memorandum.
Preference – seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.
Preferred stock – a type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, anti-dilution protection and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.
Pre-money valuation – the valuation of a company prior to the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million pre-money. As a result, the startup will have a “post-money” valuation of $7 million.
Present Value - In investment theory, the current monetary value, frequently in the sense of the current value of future benefits. Discounted value of aggregate future payments.
Pretax Income - The income earned by a business prior to the provision for federal or state income taxes.
Price earnings ratio (PE ratio) – the ratio of a public company’s price per share and its net income after taxes on a per share basis.
Primary shares – shares sold by a corporation (not by individual shareholders).
Private equity – equity investments in non-public companies.
Private investment in public equities (PIPES) – investments by a private equity fund in a publicly traded company, usually at a discount.
Private placement – the sale of a security directly to a limited number of institutional and qualified individual investors. If structured correctly, a private placement avoids registration with the Securities and Exchange Commission.
Private placement memorandum (PPM) – a document explaining the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a startup may issue a PPM when it needs growth capital. Also known as “Offering Memorandum.”
Private securities – securities that are not registered with the Securities andExchange Commission and do not trade on any exchanges. The price per share is negotiated between the buyer and the seller (the “issuer”).
Product/Service Extension - Adding a product or service that can be sold in the acquirer's current geographic areas and/or to current customers.
Pro Forma Statements - Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.
Promote – see Carried interest.
Prospectus – a formal document that gives sufficient detail about a business opportunity for a prospective investor to make a decision. A prospectus must disclose any material risks and be filed with the Securities and Exchange Commission.
Prospecting - Understanding why buyers buy, which buyers to avaoid and how to find the right buyer
Prudent man rule – a fundamental principle for professional money management which serves as a basis for the Prudent Investor Act. The principle is based on a statement by Judge Samuel Putnum in 1830: “Those with the responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income.”
Purchase (accounting) method – a merger accounting treatment whereby a buyer purchases the assets (and liability obligations) of a company at their market price and then records the difference between the purchase price and the book value of the assets as goodwill. This goodwill need not be amortized but must be valued annually and any decreases or increases in value must be reflected in the buyer’s financial statements.
Purchase Documents - The legal document transferring ownership from seller to buyer. Drafted by buyer, it sets forth structure and terms; discloses legal, financial, and other pertinent information about buyer and seller; obligates both parties to complete the transaction; and governs what happens if problems arise.
Q
Quartile – one fourth of the data points in a data set. Often, private equity investors are measured by the results of their investments during a particular period of time. Institutional investors often prefer to invest in private equity funds that demonstrate consistent results over time, placing in the upper quartile of the investment results for all funds.Qualified IPO – a public offering of securities valued at or above a total amount specified in a financing agreement. This amount is usually specified to be sufficiently large to guarantee that the IPO shares will trade in a major exchange (NASDAQ or New York Stock Exchange). Usually upon a qualified IPO preferred stock is forced to convert to common stock.
R
Ratable Value - That portion of the total value of an asset or asset group that is represented by the ownership interest of each of several owners. Could also be called, "pro‑rata value”Ratchet – a mechanism to prevent dilution. An anti-dilution clause is a contract clause that protects an investor from a reduction in percentage ownership in a company due to the future issuance by the company of additional shares to other entities.
Rate of Return - An amount of income realized or expected on an investment, expressed as a percentage of that investment.
Real Estate - An identified parcel or tract of land, including improvements, if any.
Real Property - The interests, benefits and rights inherent in the ownership of real estate. (Comment: In some jurisdictions, the terms real estate and real property have the same legal meaning. The separate definitions recognize the traditional distinction between the two concepts in appraisal theory.)
Real Value - (1) Synonym for MARKET VALUE. (2) True value of property whose owner may regard it as being worth more or less than it is actually worth
Realization ratio – the ratio of cumulative distributions to paid-in capital. The realization ratio is used as a measure of the distributions from investment results of a private equity partnership compared to the capital under management.
Realizable Value - Same as ADJUSTED BOOK VALUE.
Recapitalization – the reorganization of a company’s capital structure.
Recasting - Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability, and allows meaningful comparisons with other investment opportunities.
Red herring – a preliminary prospectus filed with the Securities and Exchange Commission and containing the details of an IPO offering. The name refers to the disclosure warning printed in red letters on the cover of each preliminary prospectus advising potential investors of the risks involved.
Redeemable preferred – preferred stock that can be redeemed by the owner (usually a venture capital investor) in exchange for a specific sum of money.
Redemption rights – the right of an investor to force the startup company to buy back the shares issued as a result of the investment. In effect, the investor has the right to take back his/her investment and may even negotiate a right to receive an additional sum in excess of the original investment.
Registration – the process whereby shares of a company are registered with the Securities and Exchange Commission under the Securities Act of 1933 in preparation for a sale of the shares to the public.
Registration rights – the rights of an investor in a startup regarding the registration of a portion of the startup’s shares for sale to the public. Piggyback rights give the shareholders the right to have their shares included in a registration. Demand rights give the shareholders the option to force management to register the company’s shares for a public offering. Often, registration rights are hotly negotiated among venture capitalists in multiple rounds of financing.
Regulatory Barriers - Federal, state, or local statutes or regulations in a variety of areas, including antitrust, securities, employee benefits, bulk sales, foreign ownership, and the transfer of title to stock or assets.
Regulation D – an SEC regulation that governs private placements. Private placements are investment offerings for institutional and accredited individual investors but not for the general public. There is an exception that 35 non- accredited investors can participate.
Rental Value - Particularly in real estate, the monetary income reasonably expectable in return for the right to utilize property in an agreed manner.
Replacement Cost New - The current cost of a similar new item having the nearest equivalent utility as the item being appraised.
Replacement Value - (1) The value of a business, asset, or asset group as determined or estimated by the Replacement Cost Approach. (2) Value as determined on the basis of the estimated cost of replacing the asset(s) in question with other items of like kind and condition, and capable of producing equivalent benefits (results) for the user. Replacement value can be either "depreciated replacement value" or "replacement value new."
Representations (Reps) - Intended to disclose all material legal, and any material financial aspects of the business to the buyer. Buyer makes similar reps about its legal and financial ability to complete the transaction.
Report - Any communication, written or oral, of an appraisal, review, or analysis; the document that is transmitted to the client upon completion of an assignment. (Comment: Most reports are written and most clients mandate written reports. Oral report guidelines [See Standards Rule 24] and restrictions [see Ethics Provision: Record Keeping] are included to cover court testimony and other oral communications of an appraisal, review or consulting service).
Report Date - The date of the report. May be the same or different than the APPRAISAL DATE.
Reproduction Cost New - The current cost of an identical new item.
Restricted shares – shares that cannot be traded in the public markets.
Retained Assets - Assets personally kept by the owner(s) of a company upon the sale of the business.
Return on Equity - A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income divided by book value, expressed as a percentage.
Return on investment (ROI) – the proceeds from an investment, during a specific time period, calculated as a percentage of the original investment. Also, net profit after taxes divided by average total assets.
Reverse Triangular Merger - An acquisition by merger where the acquiring corporation forms a subsidiary to effect the merger through a stock exchange. As a result of the merger, the newly established subsidiary ceases to exist while the target survives.
Review - The act or process of critically studying a report prepared by another.
Rights offering – an offering of stock to current shareholders that entitles them to purchase the new issue, usually at a discount.
Rights of co-sale with founders – a clause in venture capital investment agreements that allows the VC fund to sell shares at the same time that the founders of a startup chose to sell.
Right of first refusal – a contractual right to participate in a transaction. For example, a venture capitalist may participate in a first round of investment in a startup and request a right of first refusal in any following rounds of investment.
Road show – presentations made in several cities to potential investors and other interested parties. For example, a company will often make a road show to generate interest among institutional investors prior to its IPO.
ROI – see Return on investment.
Rollup – the purchase of relatively smaller companies in a sector by a rapidly growing company in the same sector. The strategy is to create economies of scale. For example, the movie theater industry underwent significant consolidation in the 1960’s and 1970’s.
Round – a financing event usually involving several private equity investors.
Rule 144 – a rule of the Securities and Exchange Commission that specifies the conditions under which the holder of shares acquired in a private transaction may sell those shares in the public markets.
Rule of Thumb - A mathematical relationship between or among a number of variables based on experience, observation, hearsay or a combination of these, usually applicable to a specific industry.
S
Salvage Value - The value in event of sale for scrap or similar purposes of property that has become uneconomic or useless for other purposes, of whose use for other purposes has been, or is to be, discontinued. Similar to, but not necessarily the same as, SCRAP VALUE.S corporation – an ownership structure that limits its number of owners to 100. An S corporation does not pay taxes, rather its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates.
SBIC – see Small Business Investment Company.
Scalability – a characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the startups they select to finance.
Scale-down –a schedule for phased decreases in management fees for general partners in a limited partnership as the fund reduces its investment activities toward the end of its term.
Scale-up – the process of a company growing quickly while maintaining operational and financial controls in place. Also, a schedule for phased increases in management fees for general partners in a limited partnership as the fund increases its investment activities over time.
Scrap Value - The value of an article or articles in event of sale for removal and reclamation of the material(s) of which the article is composed. Similar to, but not necessarily the same as, SALVAGE VALUE.
SEC – see Securities and Exchange Commission.
Secondary market – a market for the sale of limited partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.
Secondary shares – shares sold by a shareholder (not by the corporation).
Secured debt – debt that has seniority in case the borrowing company defaults or is dissolved and its assets sold to pay creditors.
Secured and Unsecured Note - A form of deal structure whereby the buyer owes money for the purchase and this debt is secured by real property, equipment or other assets. In contrast, an unsecured note is not backed by the pledge of collateral.
Security – a document that represents an interest in a company. Shares of stock, notes and bonds are examples of securities.
Securities and Exchange Commission (SEC) – the regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934.
Seed capital – investment provided by angels, friends and family to the founders of a startup in seed stage.
Seed stage – the state of a company when it has just been incorporated and its founders are developing their product or service.
Senior debt – a loan that has a higher priority in case of a liquidation of the asset or company.
Seniority – higher priority.
Sentimental Value - "Value" arising from an emotional relationship between a person (usually the owner) and a thing. Not ordinarily a form of economic value.
Series A preferred stock – preferred stock issued by a fast growth company in exchange for capital from investors in the “A” round of financing. This preferred stock is usually convertible to common shares upon the IPO or sale of the company.
Shareholder Value - Business Enterprise Value less the debt retained in the business and assumed by the new owners.
Situation Analysis - A general assessment of a company's past, present and future. A situation analysis often times provides a benchmark to the business' future growth potential.
Small Business Investment Company (SBIC) – a company licensed by the Small Business Administration to receive government capital in the form of debt or equity in order to use in private equity investing.
Sound Value - In appraising, depreciated cost for (fire) insurance purposes.
Special Purpose Value - Value of a thing as related to its use for a special purpose, and that would not exist or would be substantially less if the thing were used for some other purpose.
Speculative Value - Synonym for POTENTIAL VALUE.
Spin out – a division of an established company that becomes an independent entity.
Stabilized Value - In appraising, a value figure or estimate that excludes consideration of transitory conditions, such as abnormal relations between supply and demand, unusual and presumably temporary fluctuations in the cost of materials or labor, or the like.
Stock – a share of ownership in a corporation.
Stock option – a right to purchase or sell a share of stock at a specific price within a specific period of time. Stock purchase options are commonly used as long term incentive compensation for employees and management of fast growth companies.
Stock Sale - A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Strategic investor – a relatively large corporation that agrees to invest in a young company in order to have access to a proprietary technology, product or service. By having this access, the corporation can potentially achieve its strategic goals.
Subjective Value - (1) Value as related primarily or substantially to a state of mind. (2) The value of a thing as based on or related to its ability to satisfy desires or wants (as distinct from needs). "Subjective Value" is also sometimes called, "Personal Value."
Subordinated debt – a loan that has a lower priority than a senior loan in case of a liquidation of the asset or company. Also known as “junior debt”.
Sweat equity – ownership of shares in a company resulting from work rather than investment of capital.
S.W.O.T. Analysis - Refers to an analysis of a company's strengths, weaknesses, opportunities and threats. A S.W.O.T. analysis is necessarily key to understanding a target company's competitive positioning and long-term growth potential.
Syndicate – a group of investors that agree to participate in a round of funding for a company. Alternatively, a syndicate can refer to a group of investment banks that agree to participate in the sale of stock to the public as part of an IPO.
Syndication – the process of arranging a syndicate.
Synergistic Buyer - A buyer willing to pay a premium above economic value based on projected additional growth and profit to be achieved through the benefits of consolidation.
Synergistic Value - A premium value offered by a synergistic buyer above economic value, the difference being attributed to potential additional growth and profit beyond that which the target can achieve on its own and benefits the buyer brings.
T
Tag-along right – the right of a minority investor to receive the same benefits as a majority investor. Usually applies to a sale of securities by investors.
Takedown – a schedule of the transfer of capital in phases in order to complete a commitment of funds. Typically, a takedown is used by a general partner of a private equity fund to plan the transfer of capital from the limited partners.
Takeover – the transfer of control of a company.
Tangible Assets - Assets clearly having physical existence, such as cash, real estate, and machinery.
Target - Company being acquired.
Taxable Value - Same as ASSESSED VALUE.
Tax-Free Reorganization - A stock swap. The seller accepts stock of the buyer's company in lieu of cash, which is a nontaxable event. Only when the seller divests of the stock are taxes paid.
Ten bagger – an investment that returns 10 times the initial capital.
Tender offer – an offer to public shareholders of a company to purchase their shares.
Terms - Details of an agreement such as price, payment schedule, interest rate, and due date.
Term loan – a bank loan for a specific period of time, usually up to ten years in leveraged buyout structures.
Term sheet – a document confirming the intent of an investor to participate in a round of financing for a company. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Also known as “Letter of Intent”.
Terminal Value - The value of the company at the end of the five-year pro forma period. Terminal value is determined by dividing the fifth year pro forma cash flow (normalized for depreciation and capital expenditures) by the required Return on Investment. Terminal value is sometimes referred to as residual value.
Tombstone - An advertisement, usually in financial publications such as The Wall Street Journal, announcing an acquisition, securities offering, or underwriting. Also, a commemorative plaque announcing the transaction.
Trade secret – something that is not generally known, is kept in secrecy and gives its owners a competitive business advantage.
Tranche – a portion of a set of securities. Each tranche may have different rights or risk characteristics.
Turnaround – a process resulting in a substantial increase in a company’s revenues, profits and reputation.
Two x – an expression referring to 2 times the original amount. For example, a preferred stock may have a “two x” liquidation preference, so in case of liquidation of the company, the preferred stock investor would receive twice his or her original investment.
U
Under water option – an option is said to be under water if the current fair market value of a stock is less than the option exercise price.Underwriter – an investment bank that chooses to be responsible for the process of selling new securities to the public. An underwriter usually chooses to work with a syndicate of investment banks in order to maximize the distribution of the securities.
Unit Value - Value of an asset or group of assets expressed in terms of a unit of measurement of the quantity of the asset(s) in question.
Unsecured debt – debt which does not have any priority in case of dissolution of the company and sale of its assets.
Use Value - Same as VALUE IN USE.
User-In-Possession Value - (1) Synonymous with VALUE IN PLACE. (2) May include, in addition to "value in place," value that may result from special use by the existing user, resulting in total value greater than that to any other user or potential user.
Utility Value - Generally a synonym for VALUE IN USE.
V
Valuation Approach - A general way of determining value using one or more specific valuation methods. (See also Asset Based Approach, Leveraged Valuation Approach, Market Approach and Income Approach.)
Valuation Method - Within valuation approaches, a specific technique to determine value.
Valuation Multiple - A factor wherein a value or price serves as the numerator and financial, operating or physical data of the company being valued serve as the denominator.
Valuation Ratio - A factor wherein a value or price serves as the numerator and financial, operating, or physical data serve as the denominator.
Value - The quality of a thing according to which it is thought of as being more or less desirable, useful, estimable, or important. The true "worth" of a thing according to some standard of worth.
Value After The Taking - In condemnation proceedings, the value of the remaining portion of a formerly integrated or unified asset or asset group, after taking a part of the whole through condemnation proceedings.
Value Before the Taking - In condemnation proceedings, the value of an integrated or unified asset or asset group, part of which is to be taken through condemnation proceedings.
Value In Exchange - (1) Value resulting from the quality(ies) of a thing such that it can be exchanged ("sold") for something else of monetary or equivalent value. Distinct from VALUE IN USE. (2) Market value as determined by comparison of the thing being appraised with other comparable things, particularly when the subject thing and the comparable thing fit the description of "general purpose" items as opposed to single use or "special purpose" items.
Value In Place - Value of an asset, such as machinery and/or equipment, that is already installed and ready for use, such as in a factory.
Value In Use - (1) Value resulting from the quality of a thing such that its use can produce economic benefits for its owner or user. Includes value arising from the fact that the asset is already "in place" and "operating". Sometimes different from VALUE IN EXCHANGE. Also termed, UTILITY VALUE. (2) Market value of a special‑purpose asset that has only a single use, and therefore, has a very limited market value to other than the current user.
Value To Owner - The special value of a thing to its owner, in that it suits his specific needs and requirements uniquely. (May sometimes include SENTIMENTAL VALUE).
Variable Interest Rate - An interest rate that moves at a pre-defined level above or below an index rate. A commonly used index is the bank prime rate.
Venture capital – a segment of the private equity industry which focuses on investing in new companies with high growth rates.
Venture capital method – a valuation method whereby an estimate of the future value of a company is discounted by a certain interest rate and adjusted for future anticipated dilution in order to determine the current value. Usually, discount rates for the venture capital method are considerably higher than public stock return rates, representing the fact that venture capitalists must achieve significant returns on investment in order to compensate for the risks they take in funding unproven companies.
Vertical Integration - A strategy to achieve economies of scale in purchasing, sales, and distribution. Vertical backward integration is buying a supplier. Vertical forward integration is buying a customer.
Vintage – the year that a private equity fund stops accepting new investors and begins to make investments on behalf of those investors.
Voice Over Internet Protocol - is a protocol optimized for the transmission of voice through the Internet or other packet-switched networks. VoIP is often used abstractly to refer to the actual transmission of voice (rather than the protocol implementing it). This latter concept is also referred to as IP telephony, Internet telephony, voice over broadband, broadband telephony, and broadband phone.
Voting rights – the rights of holders of preferred and common stock in a company to vote on certain acts affecting the company. These matters may include payment of dividends, issuance of a new class of stock, merger or liquidation.
W
Warrant – a security which gives the holder the right to purchase shares in a company at a pre-determined price. A warrant is a long term option, usually valid for several years or indefinitely. Typically, warrants are issued concurrently with preferred stocks or bonds in order to increase the appeal of the stocks or bonds to potential investors.Warranties - See Representations (Reps) and Warranties.
Washout round – a financing round whereby previous investors, the founders and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company.
Weighted average cost of capital (WACC) – the average of the cost of equity and the after-tax cost of debt. This average is determined using weight factors based on the ratio of equity to debt plus equity and the ratio of debt to debt plus equity.
Weighted average ratchet – an anti-dilution protection mechanism whereby the conversion rate of preferred stock is adjusted in order to reduce an investor’s loss due to an increase in the number of shares in a company. Without a ratchet, an investor would suffer from a dilution of his or her percentage ownership. Usually as a result of the implementation of a weighted average ratchet, company management and employees who own a fixed amount of common shares suffer significant dilution, but not as badly as in the case of a full ratchet.
Wipeout round – see Washout round.
Wipeout bridge – a short term financing that has onerous features whereby if the company does not secure additional long term financing within a certain time frame, the bridge investor gains ownership control of the company. See Bridge financing.
Working Capital - The amount by which current assets exceed current liabilities.
Write-down – a decrease in the reported value of an asset or a company.
Write-off – a decrease in the reported value of an asset or a company to zero.
Write-up – an increase in the reported value of an asset or a company.
Z
Zombie – a company that has received capital from investors but has only generated sufficient revenues and cash flow to maintain its operations without significant growth. Typically, a venture capitalist has to make a difficult decision as to whether to kill off a zombie or continue to invest funds in the hopes that the zombie will become a winner.Sources:
Business and Securities Valuation, by George Ovens and Donald I. Beach. Methuen Publications.1972.
Canada Valuation Service, by Ian R. Campbell. Richard DeBoo Limited.
Webster's New World Dictionary, The World Publishing Co. 1958.
American Society of Appraisers, Business Valuation Standard. BVS‑I
Uniform Standards of Professional Appraisal Practice, The Appraisal Foundation, Definitions.
Contributed by Bob Scarlata, Sr. Managing Director
bscarlata@whitehorse-partners.com