Section four

Glossary

Forty-six terms that appear in mandates, memoranda and purchase agreements, defined as they are used in transactions involving online businesses.

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Add-back: An adjustment that removes a cost from the accounts because it will not continue under new ownership, such as a private vehicle or an owner's above-market salary.
Asset transaction: A sale in which selected assets change hands and the legal entity stays with the seller.

Bank guarantee: An undertaking by a bank to pay a defined amount if a party fails to meet an obligation, sometimes used to secure a deferred payment.

Carve-out: The separation of one brand, shop or division from a larger group so that it can be sold on its own.
Closing: The moment at which the transaction is completed and ownership transfers, as opposed to signing, which may happen earlier.
Comparable transaction: A completed sale of a similar business, used as a reference point for valuation.
Concentration: The extent to which revenue, supply or traffic depends on a small number of customers, suppliers or channels.
Confidentiality agreement: A contract under which a candidate accepts limits on the use and disclosure of information received. Also called a non-disclosure agreement.

Data room: The organised, access-controlled collection of documents made available to a buyer during an investigation.
Deferred consideration: A part of the agreed amount that is paid after closing, on fixed dates or subject to conditions.
Discounted cash flow: A valuation method that projects future free cash flow and discounts it to a present value.
Due diligence: The buyer's investigation into the financial, legal, commercial and technical state of the business.

Earn-out: A part of the consideration that depends on results achieved after the transfer, measured against agreed definitions.
EBITDA: Earnings before interest, taxes, depreciation and amortisation; a profit measure used as a base for multiples.
Enterprise value: The value of the operating business, before adjusting for cash, debt and working capital.
Equity bridge: The calculation that moves from enterprise value to the amount actually paid for the shares.
Escrow: An arrangement in which a third party holds funds until agreed conditions are met.
Exclusivity: A period during which the seller agrees not to negotiate with other candidates.

Goodwill: The part of the value that is not represented by identifiable assets; in practice, the earning capacity of the business.

Heads of terms: An outline of the agreed commercial points, mostly non-binding. Also called a term sheet or letter of intent.

Indication of interest: A non-binding statement of a candidate's willingness to proceed, usually with a range rather than a figure.
Information memorandum: The document describing the business in detail, provided to candidates who have signed a confidentiality agreement.
Intrinsic value: The value of the assets less the liabilities, without regard to earning capacity.

Locked box: A mechanism in which the price is fixed on the basis of a historic balance sheet, with no adjustment at completion.
Long list: The initial set of parties considered as possible candidates, before screening.

Management buy-in: An acquisition by a manager or management team from outside the company.
Management buy-out: An acquisition by the existing management of the company.
Mandate: The agreement under which an adviser is engaged to represent a seller or a buyer.
Multiple: A factor applied to a profit measure to arrive at a value.

Net working capital: Current assets less current liabilities; the amount tied up in running the business day to day.
Non-compete: An undertaking by the seller not to start or join a competing activity for a defined period and area.
Normalisation: Adjusting reported results so that they reflect ordinary operation under new ownership.

Participation exemption: A tax rule under which gains on a qualifying shareholding are exempt at the level of the holding company.

Reinvestment reserve: A tax facility allowing a gain to be carried forward against a future investment, subject to conditions.
Representations and warranties: Statements by the seller about the state of the business, with liability attached if they prove incorrect.
Retention: An amount withheld at closing and released later, subject to conditions.

Seller's discretionary earnings: Operating profit with one owner's remuneration and personal costs added back; a base used for owner-operated businesses.
Share transaction: A sale in which the shares in the company change hands, so that the entity transfers with its history.
Signing: The moment the contracts are executed, which may precede completion if conditions remain outstanding.

Tail clause: A provision under which the adviser remains entitled to remuneration if an introduced party completes after the mandate ends.
Teaser: A short anonymous description of a business, used to attract enquiries before disclosure.
Term sheet: See heads of terms.
Transfer document: The record of what was handed over at completion, from logins to stock counts.

Vendor loan: A loan provided by the seller to the buyer as part of the funding for the transaction.

Warranty period: The time during which the buyer can bring a claim under the warranties given by the seller.
Working capital adjustment: A correction to the amount paid, based on the level of working capital at completion compared with an agreed reference.