M&A Glossary

An amount calculated by subtracting total liabilities from total assets on the balance sheet of a company, all in conformity with Generally Accepted Accounting Principles (GAAP)

A person or firm in the business of buying and selling securities. A firm may act as both broker (agent) and dealer (principal) but not in the same transaction. Broker-dealers must register with the Securities and Exchange Commission (SEC), the appropriate self-regulating organization (SRO), and any state in which they conduct business.

A non-licensed individual (or company) that solicits to represent business owners that are wanting to sell their business and acts as broker of a deal between sellers (business owners) and buyers

The agreed-upon levels of current assets and current liabilities remaining in the business upon closing of the transaction. It is calculated by subtracting total current liabilities from total current assets immediately after the closing of the deal.

The segment of the securities market that deals in instruments with more than one year to maturity—that is, long-term debt and equity securities

A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be readily converted to cash.

A company’s debts or obligations that are due within one year. Current liabilities appear on the company’s balance sheet and include short-term debt, accounts payable, accrued liabilities, and other debts.

A measure of a corporation’s liquidity—that is, its ability to transfer assets into cash to meet current short-term obligations. It is calculated by dividing total current assets by total current liabilities.

The binding contract that makes the divestiture official, subject to the final change of ownership

Offering circular of property or securities used when a prospectus is not required

EBITDA plus or minus non-operating or non-recurring expenses that a privately owned enterprise may have that would not exist in a publicly traded entity

A process where a buyer inspects a potential investment to better understand the business and potential underlying risks or issues. It may include a detailed review of accounting history and practices, operating practices, customer and supplier references, management references, and market reviews.

A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals. An earn-out is a mutually beneficial tool to getting a deal done if it is structured appropriately. It maximizes the selling price for the seller, and it matches the company’s future earnings with payments made to the seller. An earn-out becomes easier for a seller to accept as he/she gets more comfortable with the buyer. Trust must be established between the parties with face-to-face time.

A financial term that is a rough proxy for free cash flow; formally defined as Earnings before Interest and Taxes plus Depreciation and Amortization

A financial metric representing the entire value of a company

A strategy to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for when that business owner is no longer involved in the operations of the company. A properly prepared strategy begins years prior to actually exiting the business.

An outside CPA firm performs procedures and audits of management’s financial statements in order to be able to express an opinion that the financial statements are presented fairly in all material aspects, in conformity with GAAP.

An outside CPA firm performs only limited analytical procedures on management’s financial statements to provide comfort that, based on the CPA’s reviews, it is not aware of any material modifications that should be made to the financial statements to be in conformity with GAAP. No opinion is expressed.

An outside CPA firm assists management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements. No analytical procedures or audit is performed.

The Financial Industry Regulatory Authority (FINRA) resulted from the merger of the New York Stock Exchange’s regulatory committee and the National Association of Security Dealers. As a regulatory body, FINRA is tasked with governing all business dealings conducted between dealers, brokers, and public investors. The consolidation of these two regulators aims to do away with overlapping regulation and inefficient costs. At its origin, FINRA was known as SIRA, the Securities Industry Regulatory Authority, but there were numerous complaints because the name carried a strong similarity to the Arabic term, Sirah, a term used for biological texts about Muhammad.

The common set of accounting principles, standards, and procedures that companies use to compile their financial statements. GAAP is a combination of authoritative standards (set by accounting policy boards) setting forth the commonly accepted ways of recording and reporting accounting information. GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous companies to distort figures. So, even when a company presents GAAP financials, you still need to scrutinize its financial statements.

That intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified

A property owned that is not physical such as a formula, copyright, or goodwill

An individual who works in a financial institution that is in the business of advising clients on transactions such as selling a business, buying a business, or raising capital. Investment bankers are mandated to be licensed, which requires them to be a registered representative of a broker-dealer, registered with the SEC, and a member of an SRO such as FINRA. Investment bankers are required to pass a series of lengthy exams and are under constant supervision by the broker-dealer and the SRO.

In common use, the term bulge bracket refers loosely (in the U.S.) to the group of investment banks considered to be the largest and most profitable in the world, as measured by various league table standings. Since the criteria for this judgment are unclear, there is debate over which banks form part of the bulge bracket. In early 2008, the largest bulge bracket firms on Wall Street, by market capitalization, included Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. In late 2008, as a result of the subprime mortgage crisis, Bear Stearns was purchased by JPMorgan Chase, Lehman Brothers filed for bankruptcy, Merrill Lynch was purchased by Bank of America, and Goldman Sachs and Morgan Stanley moved to become bank holding companies. As bank holding companies, their capitalization and operating rules dramatically changed.

Firms that provide corporate finance activities such as advisory, mergers and acquisitions, underwriting, and financial restructuring services to clients with revenue of more than $25 million but less than $1 billion

Firms that provide corporate finance activities such as advisory, mergers and acquisitions, underwriting, and financial restructuring services to clients with revenue of more than $25 million but less than $500 million

The word “boutique” can be misleading, because some of these firms employ hundreds of associates, have multiple offices, and conduct billions of dollars worth of transactions each year. The common thread running through all of them is a higher level of limited services and specialization, especially in particular industries and services. Transactions may be smaller as well, generally ranging from $10 million to $500 million.

A written offer based on the representations of the seller that is usually non-binding (except for confidentiality and “no-shop” provisions) and subject to due diligence

The acquisition of a business utilizing equity or investment capital and third-party debt financing; typically includes a change of control of ownership

The average of the interbank-offered interest rates for dollar deposits in the London market based on the quotations at five major banks. LIBOR is sometimes substituted (with a different “spread”) for prime rate as a way to price interest rates.

A stock, a bond, or another security that satisfies certain minimum requirements and is traded on a regional or national securities exchange such as the New York Stock Exchange

A general term that refers to the consolidation of companies or assets. A merger means a combination of two companies to form a new company, while an acquisition is one company taking controlling interest over another in which no new company is formed. An add-on acquisition is a strategic acquisition fit for an existing platform/portfolio company.

Current assets minus current liabilities, excluding cash and funded debt

An investor not meeting the net worth requirements of Regulation D. The solicitation of nonaccredited investors is counted for purposes of the 35-investor limitation for Regulation D private placements. A nonaccredited investor lacks both a minimum net worth of at least $1 million and average yearly income of at least $200k.

Company-specific risk

A company acquired and owned by a private equity fund. Private equity funds that own a portfolio company may act as a strategic buyer when acquiring or purchasing certain target companies.

A stockholder’s legal right to maintain his or her proportionate ownership by purchasing newly issued shares before or as the new stock is offered to the public

An equity security that represents ownership in a corporation. It is issued with the stated dividend, which must be paid before dividends are paid to common stockholders. It generally carries no voting rights but may have preferential treatment in dissolution or sale.

A tool for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of each corporation’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

An investment of non-public securities of (typically) private companies. It is also an investment asset class typically reserved for large institutional investors such as pension funds as well as high-net-worth individuals. Examples include venture capital, leveraged buyout, growth capital, and distressed investments.

An offering of new issue securities that complies with Regulation D of the Securities Act of 1933. According to Regulation D, a security is generally not required to be registered with the SEC if it is offered to an unlimited number of accredited investors.

Changing the capital structure of a corporation by issuing, converting, or redeeming securities

The provision of the Securities Act of 1933 that exempts registration offerings sold to a maximum of 35 non-accredited investors during a 12-month period

A security representing a stockholder’s entitlement to the first opportunity to purchase shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued for a limited time only, after which they expire.

Federal legislation requiring the full and fair disclosure of all material information about the issuance of new securities

Commission created by Congress to regulate the securities markets and protect investors. It is composed of five commissioners appointed by the president of the United States and approved by the Senate. The SEC enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

Federal legislation that establishes the Securities and Exchange Commission. The act aims to protect investors by regulating the exchanges, the over-the-counter market, the extension of credit by the Federal Reserve Board, broker-dealers, insider transactions, trading activities, client accounts, and net capital.

Other than an insurance policy of fixed annuity, any piece of securitized paper that can be traded for value. Under the Securities Exchange Act of 1934, this includes any vote, stock, bond, investment contract, debenture, certificate of interest in a profit-sharing or partnership agreement, certificate of deposit, collateral trust certificate, preorganization certificate, opinion of security, or other instrument of investment commonly known as a security.

A non-governmental organization that has the power to create and enforce industry regulations and standards. The priority is to protect investors through the establishment of rules that promote ethics and equality.

The general securities registered representative license, which entitles the holder to sell all types of securities products, with the exception of commodities futures (which requires a Series 3 license). The Series 7 is the most comprehensive of the FINRA representative licenses and serves as a prerequisite for most of the principals examinations.

The General Securities Principal License, which entitles the holder to supervise the business of a broker-dealer. A Series 7 or a Series 62 qualification is a prerequisite for this license.

The uniform securities agent state law exam

Investment banking representative exam. This examination qualifies an individual to advise on or facilitate debt or equity offerings through a private placement or public offering or to advise or facilitate mergers or acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations, or business combination transactions, including stock and asset sales.

A type of buyer in an acquisition that has a specific reason for wanting to purchase the company

The concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts

Industry or overall market risk

A printed advertisement that announces the completion of a capital transaction or solicits indications of interest in a securities offering

The portion of total risk specific to an individual security that can be avoided through diversification

The act or process of determining the value of a business, business ownership interest, security, or intangible asset

A measure of a corporation’s liquidity—that is, its ability to transfer assets into cash to meet current short-term obligations. It is calculated by subtracting total current liabilities from total current assets.