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Monthly Update – June 2019

eNewsletter
June 2019

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

– Plumbing & HVAC Business #719
– Sports Pub with Real Estate #1318
– Top-Rated Fitness Franchise in Great Location #619

Our featured article this month is a continuation of our glossary of M&A terms. Most of our Buyers that contact us either are experienced acquirers or have done their homework in researching the M&A process, and we believe that Sellers should also be familiar with the terminology.

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
Fourth 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.

  • Key Person Discount: An amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.
  • Leasehold: The interest which a lessee has in realty.
  • Letter of Intent (LOI): A description of the key points in a potential sale/ acquisition of a business. It is drafted to see if the parties are in general agreement on key issues before proceeding further in negotiations, and is generally designed not to be legally binding on either party. Sometimes buyers or sellers will use a more informal Indication of Interest to identify the key points of a potential business purchase.   Key points that buyers and sellers want to come to a general agreement on often include: stock or asset purchase, purchase price, down payment, seller financing terms, liabilities assumed, covenant-not-to-compete terms, consulting/employment agreement terms and real estate lease terms.
     
  • Leveraged Buyout (LBO): The acquisition of a business utilizing equity or investment capital and third-party debt financing. Typically includes a change of control or change of ownership.
  • Levered Beta: The beta reflecting a capital structure that includes debt.
  • Lien: A claim or charge upon real or personal property for the satisfaction of some debt or duty which can arise either by agreement or by operation of law.
  • Lien Search: A search of public records to determine if a business has any outstanding liens for payment of some debt.
  • Listing: A written engagement (contract) between a principal and an agent authorizing the agent to perform services for the principal involving the principal’s property (business) (Generally the services provided by the agent involve the proposed sale of the principal’s property or business. Also, the property or business listed by the agent is called a Listing.)
  • Liquidity: The ability to quickly convert property to cash or pay a liability.
  • Liquidation Value: The net amount that can be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced”.
  • Lower Middle Market (“LMM“): Lower middle market is the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with annual revenues in the range of $5 million to $50 million are grouped under the lower middle market category. 

  • M&AMI: Merger & Acquisition Master Intermediary (M&AMI) certification is a designation that distinguishes its holders as seasoned intermediary professionals who have a solid educational background, proven accomplishments in completing deals and a strong passion for the M&A Source and M&A work. The M&AMI designation requires both educational credits and successful completion of multiple middle-market transactions.

  • Majority Control: The degree of control provided by a majority position.
     
  • Majority Interest: An ownership interest greater than fifty percent (50%) of the voting interest in a business enterprise.

  • Management Buy-in: Financing an outside manager or management team to acquire a target company. In a management buy-in (MBI), an external management team partners with a company with a management void. This could be a private company, a stand-alone company, or an orphaned division of a larger company. Again, managers retain operational control while holding significant equity.
     
  • Management Buy-out: A process whereby management of a company acquires all or some of the ownership of the company they manage either independently or in partnership with a private equity fund/group (PEG). Management buy-outs (MBOs) are generally pursued by management teams that have little or no ownership in a business and want to obtain more ownership, but lack the financial resources to buy the company from the current owners. In these circumstances, a PEG can provide the financing necessary to facilitate the purchase of the business. The PEG also gives the management team a large equity stake to cement their commitment to continue running the business and pursue growth opportunities. Related uses or terms – MBO (Management Buy Out).
  • Marketability: The ability to quickly convert property to cash at minimal cost.
  • Marketing Plan: A written explanation of how you plan on reaching customers, making sales, and reaching your financial goals.
  • Mediation: A form of alternative dispute resolution (ADR), a way of resolving disputes between two or more parties with concrete effects. Typically, a third party, the mediator assists the parties to negotiate a settlement.
  • Merger: Any combination that forms one company from two or more previously existing companies.
  • Mergers and Acquisitions (M&A): A term that is commonly used for the mergers, acquisitions and the selling of companies. M&A is a commonly used abbreviation for this term.
     
  • Mergers & Acquisition Advisor vs. Main Street Business Broker: M&A Advisors service owners of Lower Middle-Market companies – deals that involve complex business transactions with sophisticated buyers, often including intricate deal structuring, and challenging valuation and finance arrangements. M&A Advisors, often work on national transactions, which may involve intricate business merging, or sale, spanning multiple locations and typically confidentially present the acquisition opportunity to a small select group of targeted buyers.  Main Street Business Brokers are often defined as Brokers that typically sell businesses for less than $1,000,000. These companies [i.e. dry cleaners, hair salons, restaurants, gas stations, convenience stores, franchises, or small service businesses] are usually purchased by individuals who want the independence of running their own company and want to replace their salary with the income of the business.
     
  • Minority Interest: An ownership interest less than fifty percent (50%) of the voting interest in a business enterprise.
     
  • Mission Statement: A series of brief sentences or paragraphs that describe the purpose of your business, its products or services, customers, markets, and philosophy.
     
  • Most Probable Selling Price: The price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to seller and probable buyer.
     
  • Net Cash Flow: Cash available for distribution after taxes and after the effects of financing – calculated as net income plus depreciation less expenditures required for working capital and capital items.
     
  • Net Tangible Asset Value: The value of the business enterprise’s tangible assets (excluding excess assets and non-operating assets) minus the value of its liabilities. {NOTE: In Canada, tangible assets also include identifiable intangible assets.}
     
  • Non-operating Assets: Assets not necessary to ongoing operations of the business enterprise. {NOTE: In Canada, the term used is “Redundant Assets.”}
     
  • Nondisclosure Agreement: A legally enforceable agreement preventing one party from using or disclosing commercially sensitive information belonging to the disclosing party to a third party.
     
  • Operating Expenses: Selling, general, and administrative expenses that are necessary to run the business (Examples include salaries, insurance, advertising, and rent. Any expenses other than cost of sales.)
     
  • Operating Income: The amount of profit earned during the normal course of operation.
     
  • Operating Plan: A written explanation of how one plans on running the business (An operating plan should include a description of the business facility, required operating equipment, supplier and vendor relationships, and needed personnel.)
     
  • Orderly Liquidation Value: Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.
     
  • Organizational Chart: A diagram of the relationships and responsibilities of individuals or functional departments within your business.

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.

Plumbing & HVAC Business #719

Established in 2000, this Colorado Springs based business provides new installation services for Plumbing, Gas Piping, HVAC, and related specialty products. This business is well k