GLOSSARY


DEFINITIONS

  • Balance Sheet: company’s assets and liabilities at a specific point in time
  • Book Value: value of an asset or liability at the time it was acquired
  • Cash Flow Statement: represents company’s sources and uses of cash over a period of time; Operating CF + Investing CF + Financial CF = Net Change in Cash Flow (CF)
  • Current Asset: any asset that is expected to be liquidated within one year or one operating cycle, whichever is longer (i.e. cash, accounts receivable, inventory)
  • Disclosure: anything material needs to be disclosed to the buyer prior to due diligence (i.e. lawsuits, criminal activity, weakened customer relationships)
  • Due Diligence: investigation of a potential investment prior to signing a contract
  • Gross Profit = Net Revenue - COGS
  • Growth: sustained increases of revenue, gross profit, and profit
  • Income Statement: represents revenues and expenses over a period of time; Revenue - Expenses = Net Income
  • Internal Rate of Return: rate at which net present value of costs equal the net present value of the benefits of an investment
  • Investor Protection Clauses: outlines consent rights, rights to board representation, and noncompete restrictions
  • Letter of Intent: legal document drafted by the buyer, informing the seller of the terms under which they intend to buy the business and the associated conditions that must be met over a specific period of time in order to close the deal
  • Net Income = Revenue - Expenses
  • Net Working Capital = Current Assets - Current Liabilities 
  • Non-Owner Management: current employees with significant day-to-day responsibilities and knowledge of the business who do not have an ownership stake in the company and intend to stay on post-sale
  • Normalized Capital Expenditures: annual money spent to keep the business going at its current growth trajectory
  • Off-Balance-Sheet Items: disclosures not present on the Balance Sheet, but which still have substantial impact on finances
  • Offering Memorandum (OM): seller disclosure of products, services, financials, risk factors, competitors
  • On-Site Visit: buyer visits seller's location(s) of business, conducting off-site discussions and facility tours over 1 to 3 days prior to signing LOI
  • Operating Depreciation: actual depreciation of the workable life of an asset
  • Operating Profit/EBIT: Earnings before interest and taxes
  • Return on Invested Capital (ROIC): Net Operating Profit After Taxes/Invested Capital
  • Tax Depreciation: maximum depreciation that can be listed as an expense on a tax return for a given reporting period under the applicable tax laws
  • Term Sheet: non-binding document outlining terms, including conditions precedent
  • Usable Inventory: inventory that can be sold within a short period of time

ACRONYMS

  • D/E: Debt-to-Equity
  • DCF: Discounted Cash Flow
  • EBIT: Earnings before Interest and Taxes; a.k.a. Operating Profit
  • EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization
  • FYE: Fiscal Year Ending/Ended
  • GPM: Gross Profit Margin
  • IRR: Internal Rate of Return
  • LOI: Letter of Intent
  • OM: Offering Memorandum
  • P/E: Price-to-Earnings
  • ROIC: Return on Invested Capital
  • SDE: Seller’s Discretionary Earnings