From the back of the book
Glossary
There is also a glossary back there for any term that is new to you. Nothing in these pages needs a dictionary of jargon to follow, but when a piece of deal language shows up, you can look it up in a sentence.
39 terms
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- 338(h)(10) election
- A tax election that treats a legal stock sale as an asset sale for tax purposes, giving the buyer a step-up in basis. It is generally available only when the target is a qualifying S corporation or corporate subsidiary, and it requires both sides’ consent.
- 754 election
- A partnership tax election that lets the buyer of a partnership or LLC interest step up their share of the underlying asset basis.
A
- Add-backs
- Expenses added back to reported profit because they are not part of the true, ongoing cost of the business, such as the owner’s personal expenses or one-time costs. See normalized EBITDA.
- Asset sale
- A deal in which the buyer purchases the company’s assets rather than its ownership shares. Usually better for the buyer on taxes and liability.
B
- Basket
- A threshold of claims that must be reached before a buyer can recover from the seller after closing. A deductible basket means the seller pays only above the threshold; a tipping basket means the seller pays from the first dollar once it is crossed.
C
- Confidential Information Memorandum (CIM)
- The main marketing and information document about the business, sent to serious buyers after they sign a nondisclosure agreement. The buyer builds their offer from it.
- Confirmatory diligence
- The buyer’s deep, final review of the business after the letter of intent is signed, to verify everything before closing.
- Customer concentration
- How much of your revenue comes from a single customer or a small handful. High concentration lowers value because it raises the buyer’s risk.
D
- Data room
- The secure online space where the company’s documents are organized for buyers to review during the process and diligence.
- Definitive agreement
- The binding contract that governs the sale, often a purchase agreement (an asset purchase agreement or stock purchase agreement). It replaces the non-binding letter of intent.
- Diligence (due diligence)
- The buyer’s investigation of the business, its finances, contracts, operations, and risks, to confirm what they are buying.
E
- Earnout
- Part of the price paid later, and only if the business hits agreed performance targets after closing. Contingent, not guaranteed.
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization. A common measure of a company’s core operating profit, and the base most valuations are built on.
- Enterprise value
- The total value of the business itself, before adjusting for cash, debt, and the specific terms of the deal.
- Escrow (holdback)
- Part of the purchase price set aside with a third party after closing to cover potential claims against the seller, then released over time.
- Exclusivity
- A period, usually granted in the letter of intent, during which the seller agrees to deal with only one buyer. It ends the competition.
F
- F reorganization
- A tax-driven restructuring, common in S-corporation sales, that gives the buyer a step-up in tax basis and lets the seller roll equity tax-free.
- Family office
- A private firm that invests a wealthy family’s money. Often a patient, conservative buyer that pays fair prices for stable businesses.
- Funds flow
- The closing document that spells out exactly who gets paid what, and in what order, when the money moves.
I
- Indemnification
- The seller’s promise to cover certain losses the buyer suffers after closing if something the seller represented turns out to be wrong.
- Indication of Interest (IOI)
- A buyer’s early, non-binding expression of interest, including a preliminary price range and structure. A signal, not a firm offer.
L
- Letter of Intent (LOI)
- A mostly non-binding document that lays out the buyer’s offer, price, structure, and exclusivity, before the final contract. Signing it is a turning point.
M
- Management presentation
- The meeting where buyers meet the leadership team and hear the business’s story in person. A major driver of a buyer’s conviction.
- Materiality scrape
- A provision that removes “materiality” qualifiers from the seller’s representations, widening what the seller can be held responsible for. Sellers resist it.
N
- Normalized EBITDA
- EBITDA adjusted to reflect the true, ongoing earning power of the business, after add-backs for owner and one-time items. The number buyers actually value.
O
- Owner dependency
- How much the business relies on the owner personally. High dependency lowers value, because the buyer fears it falls apart when the owner leaves.
P
- Private equity (PE)
- Investment firms that buy companies to grow and resell them. A platform is a first, anchor acquisition; an add-on is a smaller company bolted onto a platform.
Q
- QSBS (Section 1202)
- Qualified small business stock. A federal provision that can exclude a large share of the gain on qualifying C-corporation stock from tax, if set up years in advance.
- Quality of earnings (QoE)
- A detailed accounting study that tests whether reported earnings are real and sustainable. A sell-side QoE is one the seller commissions on themselves before going to market.
R
- Rep and warranty insurance (RWI)
- Insurance that covers a breach of the seller’s representations, which can shrink or eliminate the escrow and cap the seller’s exposure.
- Representations and warranties (reps)
- The seller’s formal statements in the contract that the business is as described. Breaching one can trigger indemnification.
- Retrade
- When a buyer lowers a price or worsens terms already agreed, usually late in the process when the seller has the least leverage.
- Rollover equity
- Part of the price taken as ownership in the buyer’s new company instead of cash. Real ownership, with real upside and real risk.
S
- Seller note
- A loan from the seller to the buyer for part of the price, repaid over time. The seller becomes a lender, usually behind the buyer’s bank.
- Stock sale
- A deal in which the buyer purchases the ownership shares of the company. Usually better for the seller on taxes and simplicity.
- Strategic buyer
- An operating company that buys another for synergies, market entry, or capability. Often pays the highest prices.
- Survival period
- How long after closing the seller can still be held responsible for a breach of a representation. Shorter is better for the seller.
T
- Transition Services Agreement (TSA)
- An agreement under which the seller keeps providing certain support to the buyer for a set time after closing.
W
- Working capital peg
- The target level of day-to-day operating capital the seller must deliver at closing. Landing above or below it adjusts the cash the seller receives.