An A-Z of useful buy-out and private equity terms

An A-Z of useful buy-out and private equity terms

The finance industry borders on criminal intent with it’s ability to create fancy words and complicated acronyms to make what it does look like rocket science.  As a subset of finance the private equity industry is  as guilty as the rest but the most ridiculous terms without question come from the bankers. If you’re doing a PE buy-out or are working for someone who has done one, then the following terminology guide might be helpful.

Accordion facility – An overdraft

CDD or Commercial Due Diligence – A report that a buyer (or seller – see VDD) buys from a consultancy firm that attempt to research, quantify, analyze and document a company’s clients and market opportunity. An essential document that you can’t do a deal without and normally an astonishing waste of money.

Covenant : See this article

Cliff – as in “your shares will vest over three years with a one year cliff” – the cliff is something you fall off and in this example, it means that your shares will vest on the anniversary of their allocation over 4 years at 0, 1/3rd, 1/3rd, 1/3rd. The cliff means that first year which is 0.

Family office – A (normally small) group of people who work for a very wealthy family investing their money directly in companies or other funds. Surprisingly there are loads of these.

FDD or Financial Due Diligence – A report that a buyer (or seller – see VDD) buys from an accountancy firm that analyses the company’s finances and budgets. An essential document that you can’t do a deal without and if you get a good firm, less annoying and less of a waste of money than the CDD document.

Funds Flow – An astonishingly complicated spreadsheet that an assistant to your investment banker will work on almost full time. Does what it says – documents where the money goes on your deal including how much comes to you. You’ll never understand it but try and make sure you know which cell is yours.

IM or Information Memorandum – A big brochure you produce that sells your business. Occasionally called a CIM – Confidential Information Memorandum when bankers fancy confusing you with a new word. Whatever name you call it it takes ages to write, you’re never happy with it and you worry that people don’t really read it. Nonetheless essential.

Investment Banker – An estate agent for businesses. Basically an accountant with high social skills. You’ll spend a vast amount of your life with one of these for 9 months so for heavens sake get one that you like. Some are incredible and some are incredibly bad! Take your time to choose, it’s terribly important as they are representing you. I’ve used two and they’ve become lifelong friends.

Investment Committee – All PE firms have an investment committee which will comprise the managing or senior partners and the people who hold the votes on whether a deal gets done. They normally meet each week to discuss “deal flow” and eventually to approve or reject a deal. Your Deal Lead or Deal Director will be your advocate at the investment committee.

Investment Director : The person at the PE fund who is championing your deal – the person that wants the fund to invest in your business. In most funds that person then becomes the investor on your board so they can look after the investment. You need to really like and get on with this person as you’ll be seeing them regularly for 5 years. Good advice I had from my ex chairman was “try and imagine having a good row with them about something then thinking – would we be friends afterwards?”.

LP’s – or “Limited Partner” – the investors who invest in your PE firm’s fund. They are often working for pension funds or “family offices.” You start out thinking your investor (the PE firm) was king of the world and then you realize that they are running around after their own investors – the LP’s. Who are also running around after…. and so the merry go round continues. After you’ve got a deal done and you become a PE asset you’ll be paraded at the next LP’s annual meeting as the new toy and have to have dinner and make small talk. You can normally get out of subsequent ones by making an excuse – normally something to do with missing a target.

Loan Note – An unnecessary word meaning a loan.

Management – Thats you and me. The generic term for CEO’s and their team is “management“. Used as in “we’re backing management“, or occasionally when it’ll all gone w bit wrong “we’re replacing management“.

Mezzanine Finance – A lender who takes a bit higher risk for a higher interest rate. Occasionally they take a little bit of equity as a sweetener to give them a bit more upside if everything goes well. Basically its an expensive loan.

Multiple – the multiplier that you apply to either profit or revenue to come up with an enterprise value. As in “It sold for a 10x multiple of current years’s profits”. VC’s and fast growing (tech) startups often talk in multiples of revenue when they haven’t made profit et, but the majority of the growth PE industry talks in multiples of profits (much more sensibly in my view)

Multiple Arbitrage – an necessarily fancy term to mean the increase in EV you get when you buy something at a lower multiple than you are worth or you will sell at. For example, if you’re a fast growing tech company with scale, number 1 or 2 position in your market you might be heading for a sale at 12x or 13x profits. If you buy a smaller company that is smaller and not growing much you might buy it for 6x. That means even if you had no other cost synergies, you’d double your money because you’r buying profit at 6x and selling it for 12x.

Permanent Capital (also known as “equity cheque”) – the amount of the firms fund that will be used to make the investment. Quite a lot less than your Enterprise Valuation due to management rollover and bank debt (leverage).

Pro-forma – I suspect this might be latin for “made up.” It’s a term used to glue some number together that haven’t really happened yet but you hope might happen in the future. Often used with acquisitions – imagine that Company A has profit of £10m and it buys Company B that has profit of £6m. The management team hope that there are cost synergies of £3m therefore once they have been executed the profit of the combined companies might be £19m. But until you’ve done the cost synergies you don’t know so if you can get away with it you say things like “post synergies pro-forma EBITDA of £19m” – which means “I have done it yet but I’ve made this up and I’m hoping you are desperate enough to overlook it.”

Project – All deals have to have a secret project name which is pointless as private equity is full of gossips globally and no one could keep a secret if they were paid to (actually they are and they still can’t, so point proven). You will end up with a ridiculous name just try to make it as least embarrassing as possible. Our deals were called Project Ant in 2010 (no idea how we got that) and Project Solar in 2016. We’ve bought businesses under the names Project Stratford and Project Swift. Investment bankers quite like coming up with the project name as they think its creative, and you have to remember they are accountants.

Portfolio – the group of companies that your investor owns at any one time. Used as in “portfolio” and “other portfolio CEOs.”

Portfolio Away Day – An attempt by the PE firm to add-value to their investments by inviting all of their portfolio CEO’s out for the day to learn something. Occasionally useful and a nice day out of the office but you don’t have to go if you don’t want to.

Rollover – Founders and shareholders who are continuing in the business will need to “roll over” some of their money (normally 50%) into the investment. This gives the PE firm confidence that they’re not buying a turkey and essentially is your golden handcuffs to stay and make a good fist of it all for them. Remember – investors don’t and can’t run businesses they back founders and management teams so its critical to them that you’re personally invested in the business.

Senior Debt – The debt that you have to pay back first. Usually the lowest interest rate and therefore lowest risk to the lender and thats why it has to be paid back before other debt – so it’s “senior” to other debt.

Teaser – A one or two page document that comes out long before the IM to signal to potential buyers that your sale process is going to start.

Unitranche – a word made up by bankers to complicate lending. I’ve done two PE MBO’s totaling over $250million of deal size and I owe the bank nearly $100m and I still don’t know what Unitranche is. I suspect you don’t need to just ignore it.

VC or Venture Capitalist – basically like Private Equity but without any sensible metrics on valuation, more like gambling or playing the lottery. Has different money flows so read this article.

 

I’ll keep expanding this A-Z as I get time, there is such a lot of jargon that a good A-Z will help many an entrepreneur doing their first deal. There is a very funny alternative PE A-Z over on the Better Capital website where you should have a look, it’ll make you smile.

Written by 

Glenn is an employee engagement and tech entrepreneur. He founded Reward Gateway, the HR technology company in 2006 and continues to lead it as CEO today.

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