9 Terms Every Selling CEO Needs to Know

Whether a CEO is proactively considering a sale or fielding incoming inquiries from interested bankers and buyers, learning the language of M&A can be challenging. In the first of a series of posts aimed to help company owners understand the transactional terminology that will be used as they explore growth options or exit opportunities for their business. Today we’ll start with 10 basic terms every CEO should know before going to market with their business:

Multiple

Simply put, the multiple is a value ratio that reflects revenues, net incomes, and EBITDA. The multiple is a measurement that estimates the present value and the potential future value of a company, in comparison to similar companies (or to a buyer, other investment options). Commonly, a buyer will use multiples to evaluate pre-debt metrics like EBITDA to gain a greater perspective of a company’s value. In other words, the higher the multiple, the lower the perceived risk for a buyer.

Working Capital

This term is used to define current assets minus current liabilities. The amount of working capital a company has represents what is available to pay your company’s current debts, and the margin of protection you can give creditors. Working capital helps give buyers a sense of the company’s underlying operational efficiency. Buyers will often look into this metric on a 2-3 year snapshot of a company prior to sale.

EBITDA

This commonly used M&A term refers to earnings from operations before deducting interest from long term debt, taxes, and depreciation and amortization on tangible and intangible assets. This is a calculation that determines how well a company has performed, while also useful as a comparison to companies in similar markets. EBITDA enables buyers and sellers to assess a company’s ability to generate operating cash flow if net working capital is maintained from year to year.

Valuation

Often refers to the process of calculating the fair market value of a company. It’s important to note that the valuation of a company is limited by three factors – it is time specific, it does not take into account negotiation from a buyer and it does not take into account any influences from the market. In this way, valuations are highly subjective and there are a number of methods to “value” a company based on certain inputs such as income, assets, market economics as well

Asset Sale

An asset sale is a type of sale process where only the assets of a company are acquired. While the seller retains ownership of the legal entity of the company, the buyer may incorporate a new company or use an existing company to acquire selected assets such as equipment, leaseholds, licenses, goodwill, inventory and sometimes management and contracts. This means the seller must pay all of the existing liabilities and debts before taking the net cash proceeds.

Non-Disclosure Agreement

The non-disclosure agreement (or NDA) is a confidentiality agreement between buyer and seller put into place at the start of a transaction process to prevent the details of the potential acquisition and the information provided to the buyer by the company being disclosed to the marketplace.

Due Diligence

This is a broad term that refers to the research process a buyer or seller puts into their business. It will evaluate everything from the quality of earnings, assets, liabilities, and competitive advantages of the company. The entire due diligence process is conducted to assess risk and value.

Buyout

Simply put, this is where the final, legally-binding contractual agreement is in place between a buyer and seller. The buyer acquires the seller’s company. However, a buyout can also refer to when a private equity firm obtain control of a company, rather than receiving ownership equity.

Auction Process

This refers to a process in which competition is creating amongst several buyers for the best deal terms and most favorable price for the business. An auction process includes receiving bids for a company from a wide net of potential buyers in an effort to determine the best price a company might receive for the transaction.