The Ultimate Dictionary of Business Exit Terms You Should Know
You probably know most business terms by now, but do you know all those little nitty-gritty terms that come with selling a business?
Perhaps you do – but it can really throw you off your game in a conversation when the person across the table asks: "Are grooming for a BIMBO?"
It's at times like these I find myself discreetly scribbling down the term or, if I have a phone, looking it up online without anyone noticing.
So, I thought it was time to create a blog post that could serve as a holistic business exit dictionary – something I'll continue to expand over time, and that not only defines each term but also offers some helpful resources in case you want to learn about them in more depth.
Have fun diving into this glossary of terms – and if I've missed any, leave your definitions in the comments below!
Asset-based finance is a specialized method of providing companies with working capital and finance using specific classes of assets, such as accounts receivable (invoice factoring), inventory, machinery, equipment, or real estate as collateral. It is essentially any loan to a company that is secured by one of the company's assets.
The sale of your business to continue as a standalone entity. 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 mixture of existing internal managers and external managers buy the business. Many buy-outs are backed by venture capital or private equity firms and are therefore 'financial sales'.
Baskets and Caps
Baskets and caps are typically included with the reps and warranties made by a seller in a purchase and sale agreement. When a seller makes a representation, there is typically an indemnification for the buyer (usually under your watch, my watch clause) to protect it from such representation being inaccurate.
The baskets and caps clause limits the seller's exposure to this indemnification. The caps concept usually limits, or "caps," the total amount payable under the indemnity. The most common cap used is 50% of the enterprise value, but this cap can be negotiated by both parties. The basket concept establishes a threshold for the indemnification, which means that claims would not be payable unless the threshold, or "basket," is exceeded.
A potential liability of the business which may arise as a result of some specific event happening.
A data room, also known as a deal room or virtual data room (VDR), is a secure facility or online repository for document storage and distribution (Dropbox is a good example). It is typically made available to a purchaser and their advisors during the due diligence process preceding a merger or acquisition to review, share, and disclose your company information.
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).
The purchaser's process of detailed investigation and review prior to completing a purchase.
Earnout or earn-out refers to a pricing structure in mergers and acquisitions where the sellers must "earn" part of the purchase price based on the performance of the business following the acquisition.
Earnings before interest and tax. The underlying profit from trading, before it is affected by the business's tax status or financing ('Earnings' is common in the United States and the UK equivalent is PBIT — profit before interest and tax.)
Earnings before interest, tax, depreciation, and amortisations, used as a measure of 'cash' generated by trading activities.
Employee Ownership Trust (EOT)
An EOT or employee share ownership trust (ESOT) is a stock program that facilitates the acquisition and distribution of a company's shares to its employees. ESOTs are trust accounts through which a company can sell its shares to employees.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan (ESOP) is an employee benefit plan that gives employees an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at no up-front cost to the employees. ESOP shares, however, are part of employees’ remuneration for work performed. ESOP shares are allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. ESOPs give the sponsoring company, the selling shareholder, and participants receive various tax benefits, making them qualified plans. Companies often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders.
ESOP vs ESOT
An Employee Stock Ownership Plan (ESOP) is an individual stock bonus plan designed specifically to invest in the stock of the employer corporation. An ESOP may be either non-leveraged or leveraged. An Employee Stock Ownership Trust (ESOT) is the entity responsible for administering the ESOP.
Gearing refers to the relationship, or ratio, of a company's debt-to-equity (D/E). A company is said to be highly geared (or leveraged, in the US) if it is largely funded by way of loans rather than share capital.
Heads of agreement
The document that sets out the price that has been agreed for the sale and the key terms, subject to due diligence and contract.
Letter of Intent (LOI)
Similar to heads of agreement, term sheet, or memorandum of understanding, the LOI is a document outlining the understanding between two or more parties which understanding they intend to formalize in a legally binding agreement.
A business valuation is a general process of determining the economic value of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business.
Estimating the fair value of a business is an art and a science; there are several formal models that can be used, but choosing the right one and then the appropriate inputs can be somewhat subjective.
When a business is being sold, the purchaser will generally insist that a number of warranties are included in the sale of business agreement. A 'warranty' is a statement of fact that is incorporated into a sale of the business agreement to induce a purchaser to enter into the agreement.
These are just a few of the most used terms at the moment. And like any area of interest, new terms and acronyms creep in over time... I still find myself scribbling them down, or looking them up on my mobile device.
So, if you've got an exit term or acronym to add to the list... comment below with the term and its definition.
And if you're currently planning your exit strategy, be sure to check out:
- Why increasing revenue doesn’t always make your business more valuable (and what you should focus on instead)
- The 9 changes that increased the value of my business the most
- What is my business worth?
- How to switch to a recurring revenue model (and why you need to)
- How to remove yourself from the day-to-day running of your business (and why you need to)
And subscribe to The Freedom Experience podcast for weekly insights into growing a valuable business you can sell at a premium.
Don't miss a beat!
Get the only emails anybody wants on creating a business that thrives without you, delivered to your inbox.
We hate SPAM. We will never sell your information, for any reason.