Glossary

• A
• B
• C
• D
• E
• F
• G
• H
• I
• L
• M
• N
• P
• R
• S
• T
• V
• W

A

Adjusted EBITDA

EBITDA after a lender has stripped out one-off items and put back a realistic cost for anything the accounts do not currently carry, most often a proper salary for whoever will do the seller's job after completion. This is the figure debt is actually serviced from, and it is usually lower than the one in the sale particulars.

Amortisation

The repayment of capital over the life of a loan. A fully amortising facility is repaid to nothing by the end of the term; one with a balloon leaves a lump outstanding at the end.

Asset finance

Funding for a specific item of equipment or a vehicle, secured on the item itself. See asset finance.

Asset-based lending

Borrowing secured against the assets of a business, typically debtors, stock, plant and property, with the amount available moving as those assets move. See asset-based lending.

B

Balloon payment

A larger final payment at the end of a facility, used to keep monthly payments down. It has to be refinanced or paid, and the plan for that should exist before the facility is taken.

BIMBO

A buy-in management buy-out: existing managers buy the business alongside an incoming manager or team. See MBO, MBI and BIMBO explained.

Bolt-on

An acquisition made by a business that already trades, usually to add customers, coverage or capability. See bolt-on acquisitions.

Bridging finance

Short term borrowing taken to cover a gap, repaid from a known future event such as a sale or a longer term facility. See bridging.

C

Clawback

A contractual right to recover part of the price if something agreed does not hold, most often if clients or contracts leave after completion. A clawback is only worth what it can actually recover, so the measurement period has to outlast the risk.

Commercial mortgage

A long term loan secured on business premises. See commercial mortgages.

Completion

The point at which ownership transfers and the money moves. See completion.

Completion accounts

Accounts drawn up shortly after completion to establish the actual position on the day, used to adjust the price where the agreement provides for it.

Conditions precedent

Things that must be in place before a lender will release funds. Insurance, security registration, landlord consent and signed contracts are common examples. They are a frequent cause of delay because they are left until the end.

Covenant

A promise in a facility agreement, either to do something or to keep a financial measure within a limit. Breaching one usually gives the lender rights it would not otherwise have, even if payments are up to date.

D

Debenture

A document granting a lender security over the assets of a company, usually including both fixed and floating charges.

Debt service cover ratio

The relationship between the cash a business generates and the debt payments it has to make. The single most important number in most acquisition lending decisions, and the one a buyer should calculate before agreeing a price.

Deferred consideration

Part of the purchase price paid after completion, on agreed dates or against agreed conditions. See deferred consideration and earn-outs.

Due diligence

The investigation a buyer carries out before committing: financial, legal and commercial. See due diligence.

E

Earn-out

Deferred payment whose amount depends on how the business performs after completion. Lenders treat earn-outs differently from fixed deferred payments because the amount is uncertain.

EBITDA

Earnings before interest, tax, depreciation and amortisation. A rough proxy for the cash a business generates from trading. What matters to a lender is adjusted EBITDA, not the headline figure.

Equity contribution

The money a buyer puts in themselves, as against what is borrowed. See equity contribution.

Escrow

Money held by a third party until agreed conditions are met, often used to secure warranty claims or a retention.

F

Facility agreement

The contract between borrower and lender setting out the amount, the term, the interest, the security and the covenants.

Fixed charge

Security over a specific identified asset, such as a property. The borrower cannot dispose of it without the lender's consent.

Floating charge

Security over a class of assets that changes in the ordinary course of business, such as stock or debtors. It crystallises into a fixed charge on certain events.

G

Gearing

The relationship between borrowed money and the owner's own money in a business. Higher gearing means more of the risk sits with the lender, which is why it drives both appetite and price.

Goodwill

The part of a purchase price that is not represented by identifiable assets. In the sectors on this site it is usually most of the price, because the value is in contracts and relationships.

Growth Guarantee Scheme

A government-backed scheme under which a lender receives a guarantee on part of a facility. The borrower remains fully liable for the debt. See government-backed lending.

H

Heads of terms

The written outline of an agreed deal, usually not binding on the commercial terms but binding on things like exclusivity and confidentiality. See heads of terms.

I

Intercreditor agreement

An agreement between two or more lenders setting out who ranks where, who can enforce and when. Essential where facilities are stacked. See stacking facilities.

Invoice discounting

A form of invoice finance where the business keeps control of its own credit collection and customers are usually unaware of the facility.

Invoice finance

Borrowing against unpaid sales invoices. See invoice finance.

L

Loan note

A document recording a debt, commonly used where a seller leaves part of the price in the business. See vendor finance.

M

Management accounts

Internal financial statements produced between statutory year ends. Lenders read them closely and distrust them when they do not reconcile to the last set of audited or filed accounts.

Management buy-in

An acquisition by a manager or team from outside the business.

Management buy-out

An acquisition by the existing management team. See MBO, MBI and BIMBO explained.

Mezzanine finance

Borrowing that ranks behind senior debt and is priced accordingly. See mezzanine.

N

NewCo

A company formed specifically to make an acquisition. Buying through a company rather than personally is the normal structure for these deals, and it is the structure this site is written around.

Novation

Replacing one party to a contract with another, with the agreement of everyone involved. Contracts that cannot be novated are a common reason a share purchase is chosen over an asset purchase.

P

Personal guarantee

A promise by an individual to meet a company's obligation if the company does not. See personal guarantees explained.

R

Recurring revenue

Income that renews rather than having to be won again. Lenders test how contracted it really is. See how lenders assess recurring revenue.

Refinance

Replacing existing borrowing with new borrowing, usually to reduce cost, extend the term or release value. See refinance.

Restrictive covenant

A contractual restriction on what a seller may do after completion, such as setting up in competition or approaching former clients. Worth having drafted properly, because an unenforceable one is decoration.

Retention

Money held back from a payment until a condition is met. In contracting it is money a customer holds back until defects are made good; in an acquisition it is money held back against attrition or warranty claims.

Revolving credit facility

A borrowing limit that can be drawn, repaid and drawn again, used for working capital rather than for buying something.

S

Security

The assets a lender can look to if a borrower does not pay. In the sectors on this site there is often little of it, which is why the quality of the income matters so much.

Senior debt

Borrowing that ranks first for repayment and for security. Usually the largest and cheapest part of an acquisition structure. See senior term debt.

Share purchase agreement

The contract by which shares in a company are bought and sold, carrying the warranties and indemnities the buyer relies on.

Standstill agreement

An agreement by a junior creditor not to take action for a period, giving the senior lender room to deal with a problem first. Common where vendor finance sits behind a bank facility.

Subordination

Agreeing that one debt ranks behind another. A lender will often require a seller's loan note to be subordinated to its own facility.

T

Term loan

Borrowing for a fixed period repaid on an agreed schedule.

V

Vendor finance

Where the seller leaves part of the price outstanding, effectively lending it to the buyer. See vendor and seller finance for the product and vendor finance for how it sits in a structure.

W

Warranty

A statement of fact in a sale agreement that the seller stands behind. If it turns out to be untrue the buyer may have a claim, which is only worth what the seller can pay.

Work in progress

Work done and not yet billed. Real value, and the number in contracting that is easiest to be wrong about, because it depends on judging how complete and how profitable a job will turn out to be.

Working capital

The money a business needs to fund the gap between paying its costs and collecting its income. Routinely underfunded on acquisitions. See working capital.