Here are some key terms you will commonly encounter during a business acquisition transaction, ranging from initial deal sourcing through to funding, completion and post-deal structuring.
Deal origination – the process of searching for a target business to purchase.
Ebitda/EBITDA – earnings before interest, tax, depreciation and amortisation.
Typically, EBITDA is derived from the annual operating profit before tax stated in the statutory accounts. Several adjustments are then made for any one‑off items relating to the current owner's personal costs/expenditure, along with the standard adjustments for interest, tax, depreciation and amortisation.
Amortisation – the writing off of goodwill, which is an intangible asset on the balance sheet.
It often results from an event such as the purchase of a business or a business revaluation on the exit of an existing shareholder. It is similar to depreciation in that it is written off over a number of years (normally five) and is a non‑cash item, in the same way as depreciation.
Bolt‑on – an acquisition which is compatible with defined sector/product parameters and is in line with other existing businesses under common ownership.
Private equity – an organisation which invests in a company in return for an equity stake.
This is often referred to as bringing institutional capital (e.g. from a large/corporate pension fund or similar) to a transaction.
High net worth individual/sophisticated investor – an individual with their own capital to invest in someone else’s business or idea, often with over £1m in liquid assets at their disposal.
Non‑Executive (Non‑Exec) – a senior‑level executive who provides time, knowledge, contacts and, typically, functional or sector‑specific expertise to act as a sounding board for the owners.
A Non‑Exec typically works on the business for a couple of days per month (often for a fixed monthly retainer fee or sometimes on a pro bono basis), preparing for and attending Board meetings and contributing to any one‑off projects as necessary.
Seed capital – more relevant to a start‑up or early‑stage business, where the seed capital is supplied by friends, family or a close network contact.
Seed capital enables a company to take its first steps and grow from a “seed” into something larger.
Maintainable EBITDA – the annual profit figure adjusted back for any personal items relating to the current owners and which should be achievable year on year, assuming the same asset base and trading conditions.
Indicative terms – the provisional terms from a funder, normally supplied in an Indicative Term Sheet, setting out the primary considerations relating to the funding requested.
Final Term Sheet – the document outlining the funder's final terms for a specific funding offer.
Often referred to as a credit‑backed offer.
Bullet payment – the amount to be paid off in the final year of a loan agreement from a debt funder.
By definition, it is larger than the other annual amounts to be repaid. This can alleviate some of the pressure on the new owner to repay capital in the early years, allowing more focus on driving the business rather than worrying about whether there is sufficient cash flow to meet monthly repayments.
Personal capital injection / private capital investment – the amount of cash a buyer must contribute from their own personal funds to enable the purchase to take place.
Often, this is a percentage of either:
(i) The value of the business, or
(ii) The loan from the funder is required to complete the transaction.
The capital typically needs to be liquid cash rather than being held in property, shares or other investments. You will need to provide evidence that it is held by you personally and is liquid. This personal investment is commonly referred to as “hurt money” or “skin in the game”.
Due diligence (DD) – the process of examining in detail the trading activities, assets, liabilities, systems and processes, contracts, etc. of a business to be purchased.
This is normally undertaken by a specialist due diligence expert, who is either a corporate financier or an experienced M&A accountant.
Adjusted EBITDA – the EBITDA figure adjusted for items in the profit and loss account which relate specifically to the current owners (e.g. Directors’ pensions, healthcare, privately operated vehicles).
It also includes any one‑off items which are unlikely to be incurred by a new owner. Any expenditure that is not expected to recur under new ownership is treated as an “add‑back” to operating profit to derive adjusted EBITDA.
M&A – mergers and acquisitions; the process of buying and selling companies.
Earn‑out – a premium payment to the sellers over and above the agreed purchase price.
An earn‑out is delivered through the achievement of defined future KPIs or specific targets, such as:
achieving a given level of annual profits
hitting a defined set of business‑ or sector‑specific KPIs
securing a new contract with a key target customer
delivering a new product
breaking into a new sector with an existing product or service
or any other mechanism relevant to the business.
Management buy‑in (MBI) – where a private buyer/investor who is external to a business purchases that business from the existing shareholder(s).
It involves the investment of personal capital by the private individual.
Management buyout (MBO) – where all or part of the management team of a business purchases that business from the existing shareholder(s).
It normally involves the investment of personal capital by the individual managers, who will then continue to run the business day-to-day. MBO transactions are usually funded by a debt or private equity partner.
Buy‑in management buyout (BIMBO) – where all or part of the existing management team combines with an external individual to form a buyout team to purchase the business from the existing shareholder(s).
It usually involves the investment of personal capital by the individuals concerned, who will run the business day-to-day. The incoming individual may or may not be directly involved in day‑to‑day operations but will usually focus on strategic direction. This type of transaction is almost always funded by a debt or private equity partner.
Deferred consideration / deferred payments – the element of the agreed price for the target business which is not paid to the sellers at completion and is deferred until a later date.
Key features:
Amounts are guaranteed to be paid to the sellers.
Typically paid over 2–5 years in equal annual amounts on the anniversary of completion, or in quarterly instalments.
Deferred consideration is not contingent on future performance or milestones.
The money to fund deferred consideration can often be generated from cash flow, particularly if profits grow. However, it may be necessary to return to the funding market to refinance this element. For the buyer, the longer the deferral period, the less pressure on the business’s cash flow to meet these payments.
Final term sheet / credit‑backed offer – the document from a funder specifying their final funding offer after the deal terms have passed through the funder’s credit committee and been approved.
It details the final version of the funding package.
Initial term sheet / indicative terms – an initial term sheet, often referred to as indicative terms, sets out the key proposed terms of the deal from the funder, including:
capital sum to be borrowed
length of the term
interest rate
any capital repayment holiday (CRH)
any “bullet” / one‑off payment at the end of the term
arrangement fees payable to the lender
any other stipulations specific to your funding deal
Teaser document – a very short and anonymous summary of a business for sale.
Typically, it includes a few paragraphs covering:
turnover
EBITDA
location (e.g. “North West”, “Southern England”, “Scotland”)
sector and sub‑sector
Locations are kept broad for confidentiality. The teaser is intended to “whet the appetite” of potential buyers sufficiently to encourage them to sign a non‑disclosure agreement (NDA) and then review the full Information Memorandum (IM).
High net worth (HNW) individual – a private individual classed as a sophisticated investor, having liquid personal funds in excess of £1m and willing to invest their own capital on an “at-risk” basis.
Venture capital – an organisation which typically supports entrepreneurs and early‑stage or high‑growth companies.
Support is often provided through finance and operational expertise. Investment is typically, although not exclusively, in technology‑based sectors such as ICT, life sciences or fintech. Venture finance is classed as high risk; providers are called Venture Capital Funds or Trusts. These are usually categorised by stage:
early‑stage financing
expansion financing
acquisition/buyout financing
SME – small and medium‑sized enterprises, typically companies with turnover from £1m to £25m.