Monthly Update – August 2019

eNewsletter
August 2019

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

– Commercial Vehicle Maintenance and Repair #1718
– Outdoor Adventure Sports Outfitter #1518
– Healthy Restaurant/Franchise Concept #1219

As summer winds down and the kids head off to school, at my office we are preparing for the post Labor Day increase in new buyer inquiries. If you are thinking about selling a business, now is a good time to be on the market before things slow down in November, when we approach the holiday pause.
This month, we are continuing our Glossary of Terms used by the business acquisition industry. Special thanks to our FBB team member, Scott Densmore, for putting the article together.

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
Fifth 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.

  • Platform Company:  A platform company is a company that a Private equity group (PEG) views-when investing through acquisition in a new industry or market space-as a starting point for follow-on acquisitions in the same area.
  • Portfolio Discount:  An amount or percentage that may be deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that may not fit well together.
  • Portfolio Company: A company acquired and owned by a private equity fund.
     
  • Post-Closing Working Capital Adjustment: In a merger and acquisition transaction, a working capital adjustment typically represents a pre-determined amount of working capital the selling company must have on the books as of the closing date. If the actual amount is more than the pre-determined target amount, the purchase price is increased by the excess. If it is less, the purchase price is decreased.
     
  • Premise of Value:  An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; e.g. going concern, liquidation.
     
  • Principle of Substitution:  A buyer will pay no more than that which he/she would have to pay to purchase an equally desirable substitute.
     
  • Private Equity:  An investment in non-public securities of, typically, private companies. Also an investment asset class typically reserved for large institutional investors such as pension funds and endowments as well as high net worth individuals. Includes investments in privately-held companies ranging from start-up companies to well-established and profitable companies to bankrupt or near bankrupt companies. Examples of private equity include venture capital, leveraged buyout, growth capital and distressed investments.
     
  • Private Equity Fund:  An investment vehicle, typically a Limited Partnership, formed to make investments in private companies via a pool of available equity capital.
     
  • Private Equity Group (PEG):  See Private Equity and Private Equity Fund.
     
  • Profit and Loss Statement (P&L): A financial report listing sales, expenses, and net income that gives operating results for a specific period.
     
  • Promissory note: A signed, written instrument which acknowledges a debt, with the promise to pay the debt on specified terms (i.e. payment amount, payment date(s), interest rate).
     
  • Proration: The division of money obligations according to some formula.  In a business closing, a seller may have paid for certain benefits into the future which are assumed by the buyer.  The cost of these benefits are “prorated” between the seller and the buyer as part of the closing statement (e.g. prepaid rent, prepaid advertising, security deposits).
     
  • Purchase Agreement: The agreement setting out the terms for the purchase of a business.  A purchase agreement is the “road map” followed by the buyer and the seller in a business transaction.  It would include items such as a description of what is being purchased, the down payment and repayment terms, buyer and seller representations, warranties, and indemnification’s, and so on.
     
  • Purchase Price: The total consideration paid to the target company and/or its shareholders by the buyer upon consummation of the transaction. The purchase price amount includes cash, debt assumed, seller notes and escrow amounts, and excludes non-compete payments, earn-out payments, royalty payments, revenue sharing payments and other specified adjustments.
     
  • Purchase Price Allocation:  The manner in which the purchase price of a business is divided between seller and buyer for taxation purposes.
     
  • Quality of Earnings:  The quality of earnings refers to the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies.
     
  • Rate of Return:  An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment.
     
  • Ratio Analysisratio analysis is a quantitative analysis of information contained in a company’s financial statements, used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.
     
  • Recapitalization:  A financing transaction that allow owners to harvest some of the value they have created in their companies while retaining a large ownership stake in the business going forward.
     
  • Recasting:  As applied to financial statements, a method of restating financial results in order to determine seller’s discretionary earnings (SDE) (Financial recasting eliminates from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decision of the current owner and may not represent financing preferences of a new owner. Recasting provides an economic view of the company, and allows meaningful comparisons with other investment opportunities.)
     
  • Report Date:  The date conclusions are transmitted to the client.
     
  • Replacement Cost New:  The current cost of a similar new property having the nearest equivalent utility to the property being valued.
     
  • Representation:  A statement or condition made that something is true or accurate.
     
  • Representations and Warranties: Specific assurances in a purchase and sale agreement stating that certain statements are true. The purchase and sale agreement also includes specific remedies should assurances made turn out to be false or inaccurate.
     
  • Reproduction Cost New:  The current cost of an identical new property.
     
  • Residual Value:  The prospective value as of the end of the discrete projection period in a discounted benefit streams model.
     
  • Return on Investment (ROI):  The rate of return at which the sum of the discounted future cash flows plus the discounted future residual value equals the initial cash outlay.
     
  • Risk Free Rate:  The rate of return available in the market on an investment free of default risk.
     
  • Risk Premium:  A rate of return in addition to a risk-free rate to compensate the investor for accepting risk.
     
  • Rollover:  The amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar value of equity retained.
     
  • Roll up:  A Rollup (also “Roll-up” or “Roll up”) is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged. The principal aim of a rollup is to reduce costs through economies of scale.
     
  • Rule of Thumb:  A mathematical relationship between or among variables based on experience, observation, hearsay, or a combination of these, usually applicable to a specific industry.

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.

Commercial Vehicle Maintenance and Repair #1718

This well-established vehicle repair business specializes in class 6, 7, and 8 truck products and repairs for commercial accounts, as well as the general public. With several large bays, the company is able to accommodate very large vehicles, such as trash and cement trucks. The company is well known for providing the best full-service truck parts and repairs to Southern Colorado. The customer base is well diversified with the top commercial account responsible for just over 10% in gross sales. We believe this would make an excellent acquisition candidate for an industry acquirer looking to expand their operation into Southern Colorado, or an individual acquirer with mechanical experience.

  • Purchase Price (Business)…$1,295,000
  • Down Payment (Business)…$200,000
  • Purchase Price (Real Estate)…$598,000
  • Down Payment (Real Estate)…$60,000
  • Gross Sales…$2,125,338
  • SDE…$445,781 


For more information contact Rob Amerine, rob@fbb.com.