How to Whitewash Your BIMBO, A Business Sale Glossary – 1 AIM to Goodwill
As with any type of work, how to value a business and how to manage a business sale have their own professional jargon. This pair of articles are designed to give brief plain English and practical explanations for some of the common terms used, starting with AIM to Goodwill.
AIM The Alternative Investment Market – a public UK stock market which has lower criteria for obtaining a listing than a full stock market listing.
Asset Based Finance – lending that is based on specific classes of asset, eg commercial mortgages based on property, factoring or invoice discounting based on debtor book (and sometimes stock), leasing, hire purchase, or chattel mortgages based on plant and machinery. Often an important element in the financing of buy-outs, advice and financing can be obtained through independent financial asset brokerages.
BIMBO – see Buy-out
Book Value – the value of assets as shown in the accounts of the company. As book values are generally based on the historic cost of the asset less depreciation since it was purchased, they often bear little or no relation to the asset’s current market value.
Business Angel – an individual who invests directly into a business, often a retired businessman who has already sold one business who is interested in investing funds personally in smaller or start up companies. Will often be looking for an active role in management of the company.
Buy-in – see Buy-out
Buy-out – the sale of your business to continue as a standalone entity (ie not a sale to a trade purchaser). Buy-outs come in a number of flavours. A management buy-out (MBO) is where the existing management team purchase the business from the shareholders; a management buy-in (MBI) is where a team of external managers buy out the shareholders to take over the running of the business; and a buy-in/management buy-out (BIMBO) is where a mixed team of existing internal managers and external managers buy the business. Many buy-outs are backed by venture capital firms and are therefore ‘financial sales’.
Contingent Liability – a potential liability of the business which may arise as a result of some specific event happening.
Data Room – a facility made available to a purchaser and their advisors where company information can be inspected.
Disclosure Letter – a letter usually attached or referred to in the sales contract that specifies certain items of information, such as exceptions to any general warranties given.
Discounted Cash flow – the value of money to be received in future periods, discounted back to its equivalent today (as money to be received at some future date is by definition less certain and therefore less valuable than cash in the hand now).
Due Diligence – the purchaser’s process of detailed investigation and review prior to completing a purchase.
EBIT Earnings Before Interest and Tax – the underlying profit from trading, before it is affected by the business’s tax status or financing. (‘Earnings’ is an American term and the UK equivalent is PBIT – profit before interest and tax.)
EBITDA Earnings Before Interest, Tax, Depreciation, and Amortisation – used as a measure of the ‘cash’ generated by trading activities (Aka Earnings Before I Trick the Dumb Accountant).
Equity Gap – the perceived difficulty of raising funds for businesses where there is insufficient security available to obtain bank lending, but where the share capital required is below the level at which venture capital firms will generally be interested.
ERRP Estimated Restricted Realisation Price – the estimated value of property or an asset given the restricted time within which to sell it (generally six months for a property, three months for plant and equipment). Replaces the older term ‘forced sale value’.
ERP Estimated Realisation Price – the estimated value of a property or asset given a reasonable time within which to achieve a sale.
Escrow – placing on trust and usually used in respect of an ‘escrow account’ where part of the sales proceeds will be held by a third party (usually a solicitor) for a specified period, so that in the event that the purchaser has a claim against the seller, he knows there are funds available against which to claim.
Exclusivity Clause – a contractual clause usually seen in heads of agreement that gives the purchaser exclusive rights to negotiate a deal with the seller.
Forced Sale Value – see ERRP.
GAAP Generally Accepted Accounting Practice – that accounts have been prepared in accordance with normal accounting conventions. Note that American and UK GAAP have some significant differences and you will need professional advice if this is an issue.
Gearing – level of borrowings. A company is said to be highly geared (in US: leveraged) if it is largely funded by way of loans rather than share capital.
Goodwill – the difference between the fair market value of assets acquired and the purchase price.
The next article covers terms from Grooming to Yield.