Monthly Update – April 2019

eNewsletter
April 2019

Featured Clients this issue:
**Details of each client below article

– Rapidly Growing CBD National Operation #519
– Technology Research Services #2418
– Two Profitable “Franchise” Automotive Businesses #2218/2318

At the time that this article is published, I will be in Denver attending the ACG Rocky Mountain Corporate Growth Conference. This annual conference was started in 1998 and attracts approximately 800 attendees mostly in the M&A industry. In May I will be attending another conference in Florida that will attract dozens of Private Equity Groups. You may be asking ‘why does Ron and all of the other attendees spend their time at these conferences?’ The answer is simple. There is almost two trillion (Yes, that is a T) of capital available to be invested in transactions. I attend these conferences to meet investors that might be candidates to acquire one or more of FBB’s client companies. The investors, such as Private Equity Groups and Family Offices, attend the conferences in order to meet me and other intermediaries who could be representing attractive companies to acquire. Our firm has had some strong success stories from these efforts in the past.
This month’s featured article is a continuation of our glossary of industry terms. Hopefully, you will find it informative.

The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.   

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Ronald V. Chernak
President

Inspiring business relationships since 1982!

  

Glossary of M&A Terms
Third Installment

 

If you are trying to buy or sell a business, then you know that the terminology can get quite confusing. The FBB Group, Ltd. has compiled a list of terms and their respective definitions to try and clear up any questions you might have on how to buy a business or sell a business. As this list is quite extensive, we will be dividing it up into multiple parts, published in multiple eNewsletters.
  • Earnest Money: A sum of money given to bind an agreement or an offer.
     
  • Earn-Outs: An agreement in the sale of a company where the buyer agrees to pay the seller consideration in the future (typically cash or stock) based upon certain future events or performance of the business post-close. Because earn-out payments are contingent on the future performance of the acquired company, they are not included in the purchase price.
     
  • EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization): All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income (It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.)
     
  • Economic Life: The period of time over which property may generate economic benefits.
     
  • Enterprise Value: Enterprise value (EV) is a financial metric representing the entire value of a company after taking into account both holders of debt and equity. EV is calculated as the company’s market capitalization plus debt, minus cash.
     
  • Equity: The investment in the business by the owner(s).
     
  • Equity Net Cash Flows: Those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and reflecting increases or decreases in debt financing.
     
  • Equity Risk Premium: A rate of return in addition to a risk-free rate to compensate for investing in equity instruments because they have a higher degree of probable risk than risk free instruments (a component of the cost of equity capital or equity discount rate).
     
  • Escrow: The holding of something of value by a person (escrowee or escrow agent) for the benefit of other parties.
     
  • Escrow Period: The length of time (in months) after the closing date that the escrow is held before being released to the seller.
     
  • Excess Earnings: That amount of anticipated benefits that exceeds a fair rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated benefits.
     
  • Excess Earnings Method:  A specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of the value of the assets obtained by capitalizing excess earnings and the value of the selected asset base. Also frequently used to value intangible assets. See Excess Earnings.
     
  • Exclusive Right to Sell:  An agreement and contract giving the broker the right to receive a commission if the property or business is sold by anyone including the seller during the term of the agreement.
     
  • Exit Plan: A strategy, planned or unplanned, to depart an existing situation. The creation of an overall strategy that prepares a business owner and his/her company for the time when that business owner is no longer involved in the operations of the company. Examples of unplanned exits include death, divorce, incapacity, disability, management disputes, influx of competition, technological obsolescence, loss of a major customer, or other unforeseen economic events.
     
  • Fair Market Value (“FMV”):  The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. {NOTE: In Canada, the term “price” should be replaced with the term “highest price”.}
     
  • Family Succession: In family successions or retirement transitions, ownership transfers from passive owners to active family members or outside shareholders. Facilitators are particularly sensitive to estate planning issues, family business dynamics, and the need for discretion and trust to make these transactions seamless and successful.
     
  • FF&E (furniture, fixtures, and equipment): Items of value that are part of a business but are considered personal property.
     
  • Fiduciary: A position of trust (e.g. broker to principal).
     
  • FINANCING STATEMENT:  A recorded document filed generally in the secretary of state’s office of the state and shows that there is a lien against the fixtures and equipment (personal property) of the business.
     
  • Forced Liquidation Value: Liquidation value at which the asset or assets are sold as quickly as possible, such as at an auction.
     
  • Franchise: An agreement under which the franchiser (owner of the rights) licenses the franchisee (the business owner) the right to sell a given product/service or to use certain trademarks or trade names, usually within a designated area.
     
  • Franchise Fees: Cash paid to a franchiser for the use of a franchise.
     
  • Free Cash Flow:  The cash generated by a business on a pre-tax, pre-interest basis after making positive adjustments for non-cash expenses such as depreciation and amortization as well as owner-related benefits and negative adjustments for capital expenditures. Formally defined as Operating Cash Flow (Net Income plus depreciation and amortization plus taxes plus interest) minus capital expenditures and dividends.
     
  • Going Concern:  An ongoing operating business enterprise.
     
  • Going Concern Value:  The value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place.
     
  • Goodwill: The amount by which the price paid for a company exceeds the company’s estimated net worth at market value of the underlying tangible assets and liabilities (Goodwill is a result of name, reputation, customer loyalty, location, products, etc.)
     
  • Growth Capital:  An investment made in an operating company by an outside investor to support existing or anticipated expansion of the business. May or may not include a change of equity control but frequently involves the exchange of equity ownership.
     
  • Guarantee:  A pledge by a third party to repay a loan in the event that the borrower defaults.
     
  • Guarantor: A person or organization that guarantees repayment of a loan if the borrower defaults or is unable to pay.
     
  • Hard Assets: (Also referred to as “Tangible Assets”) Those assets which are material or physical (e.g. inventory, equipment, tools, vehicles, real estate, leasehold improvements).
     
  • Indemnification:  Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.
     
  • Intangible Asset:  Non-physical assets (such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts as distinguished from physical assets) that grant rights, privileges, and have economic benefits for the owner.
     
  • Invested Capital: The sum of equity and debt in a business enterprise. Debt is typically long term liabilities or the sum of short term interest bearing debt and long term liabilities. When the term is used, it should be supplemented by a definition of exactly what it means in the given valuation context.
     
  • Invested Capital Net Cash Flows:  Those cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments.
     
  • Investment Banker: An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank’s division that is involved with these activities. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers. Investment bankers require specific skills – number-crunching ability, excellent verbal and written communication skills, and the capacity to work very long and grueling
    hours. Related uses or terms: Business Broker, Business Intermediary.
     
  • Investment Risk: The degree of uncertainty as to the realization of expected returns.
     
  • Investment Value:  The value to a particular investor based on individual investment requirements and expectations. {NOTE: In Canada, the term used is “Value to the Owner.”}

This Glossary of Terms was compiled using multiple sources, to include: representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Valuers, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, Private Equity Firms, Barron’s, Investopedia, Divestopedia, PitchBook, IBBA, M&A Source and merger & acquisition advisors.

Rapidly Growing CBD National Operation #519

This company is a major player in the CBD oil business. It has become an industry leader with its own complete product line that is sold nationally on a wholesale basis, online, and through its own retail stores. The company’s growth has been exponential: 2018 revenues of $2.7 million increased by 363% over 2017. Year-to-date 2019 revenues are anticipated to exceed $4 million, with EBITDA to exceed $1 million. Internal value drivers also include high profit margins,