Glossary of Terms
The Alternative Investment Market. Launched by the London Stock Exchange in 1995 in can provide an alternative route for smaller companies seeking a listing.
A wealthy individual who invests in entrepreneurial firms or more typically a successful entrepreneur, who has built up a business, sold it and now brings not just money but experience to a young developing business. There are a number of Angel groups and lists of angels are kept by some investment institutions.
Bear market describes a continuous downward slide in stock prices. The opposite upward trend in the stock market is described as a Bull Market.
A way of providing companies with a choice of providers of financial and professional services. It normally involves a short-list of potential suppliers being drawn up and invited to pitch for business usually by presentation and interview.
Top 4 accountancy firms: Deloitte & Touche, Ernst & Young, KPMG and PriceWaterhouseCoopers.
A combination of management buy-out and buy-in where the team buying the business includes both existing management and new managers.
Buy-in growth-opportunity. An attractive investment opportunity where in an MBI or MBO or BIMBO a significant proportion of the funding raised goes toward growing the business. This should not be confused with the DINGO. See below.
The generic name for a tradeable loan security issued by governments or companies as a means of raising capital. Government bonds are known as gilts or Treasury Stock.
The concept of the bought deal arose in the venture capital world as a way of venture capital firms taking a more proactive role in seeking investments and greater involvement in MBO negotiations. It is not the same as an IBO, see below. In a traditional MBO the incumbent team of managers normally negotiates direct with the vendor of the business – their former employer – at the same time as reaching agreement with an investment institution to back them. In a Bought Deal, the investor is the principal and negotiates directly with the vendor, then works out arrangements with the management team.
The level of sales where a company’s gross margins just cover its costs.
The rate at which cash is used up in a venture, usually expressed on a monthly or weekly basis. . Cash and financing divided by burn rate equals how long the business can continue to be financed by its existing resources.
Detailed description of the plans of a new business, or of the expansion plans of an existing business, together with financial projections.
Buy and build
An investment made in a business with the intention of acquiring further businesses in order to build the value of the original investment.
British Venture Capital Association
Caps, floors and collars
Limits on interest rates. Interest rates can either be fixed or variable. Where they are variable, it may be agreed (at a cost) that the rate is capped so it will not rise above a certain figure, or that there will be a floor below which it will not fall. A collar involves both a cap and a floor.
The ratio of cash generated in a business before senior debt payments to senior debt cash and interest payments due.
A business which has a strong positive cash flow and or large cash reserves.
The moment when legal documents are signed and a corporate finance transaction is concluded. Normally, also the moment at which funds are advanced by investors or paid by an acquirer.
Regulation of the UK’s financial services industry has developed almost out of recognition. “Compliance” is the process in thousands of offices in the City and around the country to ensure that these regulations are complied with. Many of the rules are designed to protect the public from misleading claims about returns they could receive from investments, others outlaw insider trading.
Before a deal is completed, an investor in a business venture may insist on certain conditions being satisfied.
The part of a business which is considered to be the main profitable activity of an organisation. Corporate finance activities often involve divesting of non core activities a process sometimes known as back to basics.
Ratio of current assets to current liabilities.
The rate at which investment propositions come to venture capitalists or other investors.
A legal document which formalises the lender’s charge over the assets of the company.
Debt is money borrowed from a bank or other institution, where interest has to be paid at a specified rate and the total borrowed must be repaid either on a specified date or (as in bank overdrafts) on demand.
An element of a transaction to be paid in the future, sometimes depending on performance targets being achieved.
Also known as growth capital and often provided by venture capital solutions. It is the long-term equity capital raised to allow a company to grow without relying wholly on short-term bank debt.
When a company issues more shares, the value of each share is “diluted” – unless the total assets of the business are increased by obtaining cash or other assets.
Apart from salary, directors may receive valuable benefits in the form of pension rights, expenses, etc. Investors in a company stipulate that total emoluments must not exceed a specified level – otherwise they might find the directors paying themselves so much there is nothing left to reward shareholders.
Discounted cash flow
A method of assessing the value of an investment based on predicted cash flows that are “discounted” to take account of the value of money over time.
A ratio that measures the number of times a dividend could have been paid out of the year’s earnings. The higher the dividend cover the “safer” the dividend.
Evaluation of the effect of the worst case scenario. Evaluation of the downside is sometimes referred to as downside risk.
When investors agree to provide fund, all the funding may not be needed at once. Some is used as “drawn down” later.
The detailed analysis and appraisal of a business, which takes place after an investment, loan or sale, has been agreed in principle. The aim is to ensure that there is nothing which contradicts the financier’s or buyers understanding of the current state and potential of the business. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountants report (trading record, net asset and taxation position) and legal due diligence (implications of litigation, title to assets and intellectual property issues).
Earnings per share
Profit after tax divided by the number of ordinary shares in issue.
A provision sometimes written into the terms of a transaction that states the vendors will receive further payments if the business they have sold achieves specified performance levels.
The European Association of Securities Dealers Automated Quotation. This was set up in order to establish and operate a pan-European regulated stock market, targeted specifically towards young and fast-growing companies with international aspirations.
Earnings before interest and tax
Earnings before interest, tax, depreciation and amortisation. EBITDA is measure of cash flow. By excluding interest, taxes, depreciation and amortisation the amount of money a company is bringing in can be clearly seen.
A new or young business with the potential to grow into a substantial business.
A word to describe an enterprising businessman or woman. Normally an owner of an independent business.
The ratio between the price paid by management and that paid by the investing institution for their share of the equity in an MBO or MBI.
Equity investors share ownership of an enterprise. Consequently, they share both the rewards, if the business prospers, and the risk of losing their investment if things go wrong.
The opportunity for investors to sell their investment. Normally, the exit from investment in a private company occurs either through a trade sale of the company or through its flotation on the stock market. When raising finance, the opportunity to exit will be a key part of the investors’ assessment.
Fees in Corporate Finance transactions can be paid to advisers, lawyers, funders, underwriters and can sometimes seem to come from all angles. They may also form part of an ongoing Investment companies earning in connection with putting together a deal and for monitoring progress of the investment.
Fixed and floating charges
Security for a loan to a business is normally provided by a charge on its assets. Fixed charges apply to specific assets such as plants or buildings, floating charges apply to all the company’s assets.
A much favoured feature of modern management techniques. It means a concentration on the business activities in which a company can do well, rather than spreading resources of skill and capital across a range of activities.
The ratio of debt to equity capital. If a balance sheet shows £10 million of total assets and a debt of £6 million, the gearing is 60%. The higher the gearing, the greater the exposure to changes in circumstances although in secure times high gearing can fuel growth.
Ambitious businesses sometimes aspire to going public – becoming a quoted company. However, there are directors of quoted companies who feel that the advantages of listing are outweighed by the disadvantages and turn themselves back into a private company.
The value of a business over and above its tangible assets. It includes the business’s reputation, contacts and intellectual property.
Growth capital or development capital
The long-term equity capital raised to allow a company to grow ambitiously without relying wholly on short-term bank debt.
Adjective applied to investors to indicate their investment approach. A pro-active, hands-on investor might typically put a director on the board and seek to influence the timing of an exit. A hands-off investor leaves the management to get on with running their business.
Operating at a threshold of new technological development. The two most active high-tech sectors are life sciences and information technology.
High Yield (Junk) Bonds
Bonds which offer high rates of interest but with correspondingly higher risk attached to the capital.
The shape of a typical graph of a successful business and an optimistic business plan. The graph dips to begin with, indicating that the company’s expenditure is higher than its income, but soon heads upwards as the company establishes a profitable, growing trade.
Independent or non-executive directors. They are part-timers but still share all the legal responsibilities of their executive directors on the board of a company.
IBO (Institutional buy-out)
Where a financial institution acquires a business and installs its own management. Slightly different from a bought deal, where an institution negotiates the acquisition of a business with a view to handing it over to an MBO or MBI team.
Sometimes used to describe a particular type of loan or share capital.
Patents, copyrights, trademarks, trade secrets and similar rights in ideas, concepts, etc.
Profit before interest and tax divided by interest payable.
Anyone in a position to bring together the principals in a deal or prospective deal. They are usually accountants, other corporate advisers and merchant bankers.
Long-term equity capital provided by institutions to facilitate growth in private companies. To some extent the term is interchangeable with venture capital.
Providers of capital for the long-term, as distinct from lenders of short-term capital. Investors have rights which lenders don’t enjoy – and accept risks which lenders aren’t exposed to.
Initial public offering. Once called a flotation this is the initial offering of the company’s shares on a public market.
Internal Rate of Return. A measurement of the return on an investment based on discounted cash flow, expressed as an annual percentage rate.
Debt which ranks alongside Senior Debt but is repaid later. Can be very similar to Mezzanine Finance.
Key man insurance
A life and/or critical illness insurance policy taken out by a company to provide a cash sum if a key executive dies or becomes ill, thus covering some or all of the resulting financial loss to the business.
LBO (leveraged buy-out)
This is an MBO in which the equity capital is supported by a very large amount of debt i.e. highly geared.
In a substantial investment, no single investor will wish to carry the whole risk. It is therefore shared among members of a syndicate. Normally, one investor takes the lead in negotiating the terms of the investment and has responsibility for finding other syndicate members.
The London Interbank Offered Rate – the rate at which banks lend to each other in London. It matters because it is the most common reference point used by banks for quoting their rates. e.g. 2% over
LIBOR. (The equivalent rate for the Euro is EURIBOR)
This is a measure of the ease with which the assets of a business can be transformed into cash. Also, where companies are publicly quoted, on the stock market or on AIM, their shares are said to be liquid if they are readily bought and sold. Smaller, or less fashionable, quoted companies may find their shares lack liquidity.
When a company trades its shares on the stock market – either the London Stock Exchange or one of the other markets, such as AIM.
Large management buy-out (usually defined as involving a transaction over £10million). Whereas in a smaller MBO management teams will often hold the majority of equity shares in an LMBO the managers may have only a minority of the equity. A syndicate of investors will share the greater part of the equity. Such investors may nominate directors to sit on the board alongside managers.
The form of debt which has to be repaid at a specific time in the future, as distinct from a bank overdraft which the bank may call in at short notice.
A form of vendor finance or deferred payment, in which the purchaser acts as a borrower, agreeing to make payments to the holder of the transferable loan note at a specified future date.
Mergers and acquisitions – a phrase that covers the process of buying, selling and merging businesses.
MBI (management buy-in)
MBIs developed as a variation of the MBO as a means of acquiring a business. An incoming management team acquires the business with backing from institutional investors (as opposed to incumbent managers who acquire it in the case of an MBO). See also BIMBO.
MBO (management buy-out)
An MBO involves the management team of a business, usually with the backing of external financing, taking over ownership of the business where they are employed. MBOs are a common way of changing ownership. Often, a large company hives off one of its subsidiaries by selling to its management team. Another source of MBOs is family businesses where the owner wishes to retire.
MEBO (management and employee buy-out)
An MBO where a substantial number of employees as well as managers hold shares in the company.
Types of high risk debt which have some attributes of debt and some of equity. It ranks and is repaid after Senior/Junior Debt but before institutional loan stock. Generally carries an option/warrant or redemption fee which tends to distinguish it from Junior Debt.
The National Association of Security Dealers Automated Quotation is the largest US stock market in terms of companies listed and number of shared traded. Launched in 1971, NASDAQ is home to more than 82% of all the technology listings in the US. It is operated by the NASDAQ Stock Markets Inc, a wholly owned subsidiary of the National Association of Security Dealers. See EASDAQ
The name used to describe a new company to be used in a transaction.
See independent director
Ambitious small companies in France can float on the Nouveau Marche, launched by the Paris Stock Exchange in 1996, after a vetting which is less rigorous than for a full listing (and generally less expensive). It is similar to AIM.
OBO (owner buy-out)
Form of private placing where an institutional investor buys shares from a shareholder in a private company who wishes to realise his investment.
The OFEX market is a prescribed market under Section 118 of the Financial Services and Markets Act 2000. It provides a secondary market for the trading of unlisted and unquoted securities in the UK off exchange. It can provide a stepping stone for young companies to Aim or Full Listing.
Ordinary shares – the equity of the company. Decisions on matters like whether the company should be sold are normally taken by the shareholders of a majority of the ordinary shares. See also preference shares.
A self-explanatory term – but whereas in the past, it usually applied to the owner of something like a corner shop, today there are thousands of owner-managers of substantial businesses, many of whom became owners as a result of a management buy-out or buy-in. Others built up the business themselves.
P/E (price/earnings) ratio
The market price per share of a business divided by the earnings per share (See earnings per share). The P/E multiple is sometimes applied to a business’s profits to calculate the value of the business.
PFI (Private Finance Initiative)
A UK Government initiative in the late 1980s to introduce the benefits of private sector management and finance into public sector projects, such as road building and the building and running of hospitals. The PFI differs from privatisation in that responsibility – e.g. clinical responsibility in hospitals – remains in the public sector.
Part of the capital of a company. Unlike ordinary shares, preference shares are usually paid back over time out of retained profits. Holding preference shares involves less risk than ordinary shares but does not give access to the capital gains that can accrue when a successful company is sold. A variant is “A” ordinary shares in a private company, which carry a guaranteed right to share in the profits but may not have the same benefits as ordinary shares if the business is sold or floated.
Equity Capital and other risk money which doesn’t come via the public market. The term is used to describe venture capital investments in general but is mainly used to describe to finance for MBOs and MBIs.
The sale of a block of shares in a private company to an investment institution. Private Placings normally do not involve any change in control of the business. They can occur when shareholders wish to retire or, for some other reason, wish to realise all or part of their holdings.
A provision sometimes written into the financing of a transaction. It states that if the managers achieve certain performance targets, their share of the equity will increase.
The state of affairs when a receiver is appointed to recover debts of a company which has failed. In the case of a large company, with subsidiaries, the receiver may seek a buyer for a subsidiary. This often leads to a MBO, an MBI or a trade sale.
Bringing about fairly major changes in the organisation of a company by changing the management and/or the share ownership structure.
When a business in trouble is turned round and made viable by outside intervention.
When a small company takes over a large one, or when the company being taken over is likely to be the major element in the combined business.
The annual layout on an investment, expressed as a percentage of the current value not the original value.
Second round financings
Finance made available to young companies that have already launched products on to the market but need more cash to realise their full potential.
Second time entrepreneurs
Many successful entrepreneurs build up a business then sell it, either because of an offer they can’t refuse or, occasionally, because they have itchy feet and want to look for another challenge. Institutional investors often like to back second (or third, or fourth) time entrepreneurs, because they have a track record.
Also known as a “buy-out of a buy-out”. Where the original MBO managers will sell the company to the next generation of managers.
Another name for private placing.
Early funding which enables a project or idea to develop into a business.
Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up.
Share buy-in or Purchase of Own Shares
The mechanism whereby a company buys-in part of its issued share capital – a straightforward process for dealing with some shareholder issues or, in the case of large plcs, often a way of using up spare cash in the business!
The sale of shares to a number of investors but not to the general public.
A management and investment philosophy which puts the interests of the shareholder first – in terms of earnings and asset growth.
The stock markets are often accused of short-termism with the result, allegedly, that directors of quoted companies cannot plan intelligently because stock market investors insist on performance in the short-term. Some look for an early exit. Others believe it can be in everybody’s financial interest to take a longer view.
An investor who is not involved in the running or strategic direction of a company of which he or she is a shareholder.
When a division of a company becomes independent, either because it has been taken over or through an MBO. The term is usually applied to a high-tech division that the parent company does not regard as fitting into its core business.
A new business. It can be on any scale, but in fact most start-ups are small. Their critical phase often comes later when they may need significant amounts of capital to enter their chosen market. See emerging business.
Step growth (or exponential growth)
Ideally, what investors want to see in the businesses they back is not just moderate growth but a rate of growth that takes the business into a different dimension. See quantum leap.
A relatively large corporation that agrees to invest in a young company in order to have access to a proprietary technology, product or service. By having this access, the corporation can potentially achieve its strategic goals.
Loans which rank after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender’s point of view. Mezzanine finance is an example of a subordinated loan.
Ownership of shares in a company resulting from work rather than investment of capital.
Where an investment is too large, complex or risky, the lead investor may seek other financiers to share the investment. This process is known as syndication.
A word, often overused, to describe how two businesses would fit well together – the aim of mergers and acquisitions.
A company suitable for takeover is described as a target.
Investors like to invest in management and companies with a track record of producing profits. This presents problems in the case of a new venture, but the same principle applies because the individuals running the new venture each have their own track record.
Sale of a company to another company. As a form of exit, a trade sale is a more common alternative to a flotation.
When a failing business is made profitable. This can be achieved by existing management or through a rescue involving new management.
When a company raises capital, either on the stock market or directly from institutional investors, there is always the possibility that not all the money will be forthcoming. This risk is often underwritten by an institution which, for a fee, agrees to make up any shortfall.
Valuation of shares
The shares of publicly quoted companies are valued daily, according to the whims of demand and supply on the stock market. Valuation of private companies is more difficult because there is no market in their shares – unless the whole company is being sold. In other cases, valuation of private company shares is often done by reference to P/E ratios in similar quoted companies, or by discounting the projected future cashflow of the business. See discounted cash flow. However, valuation tends to be an art not a science and becomes a matter of negotiation between a willing buyer and a willing seller.
VCTs (venture capital trusts)
A recent appearance on the financial markets. VCTs are specialist investment trusts, which offer tax advantages to investors willing to provide money for investment in unquoted companies.
The seller of a business.
Can either be in the form of deferred loans from, or shares subscribed by, the vendor. The vendor may well take shares alongside the management in the new entity. This category of finance is generally used where the vendor’s expectation of the value of the business is higher than that of management and the institutions backing them.
Risk capital in the form of equity and/or loan capital that is provided by an investment institution to back a business venture which is expected to grow in value.
A security which gives the holder the right to purchase shares in a company at a pre-determined price. A warrant is a long term option, usually valid for several years or indefinitely. Typically, warrants are issued concurrently with preferred stocks or bonds in order to increase the appeal of the stocks or bonds to potential investors.
Warranties and indemnities
The legal undertakings often required by the purchaser of a business or asset from the previous owners to confirm there will be no nasty surprises.
An investor who rescues a company in distress. This is a bidder who is considered to be friendly to the interests of the management and who is invited to bid for a company when the takeover target is facing a hostile bid.
Window of opportunity
The best investments often take place because of circumstances that will never happen again. A “window of opportunity” is the period of time when these circumstances are favourable.
Worst case scenario
Investors backing a business like to contemplate what will happen if all its hopes come to pass – but if they are sensible they also consider the consequences if none of them come true.
Capital which is required to finance the ordinary trading activities of a company, i.e. to purchase raw materials, to pay labour to convert raw materials to goods, and to finance debtors.
Calculated by dividing the gross dividend by the share price and expressed as percentage. It shows the annual return on an investment from interest and dividends, excluding any capital gain element.