ook Value/Net Worth

Brinkmanship

Bull

Bull Market

Business Angel or Informal Investor

Business Plan

Buy and Build

Called -up Share Capital

Capital

Cat

City Code on Take-overs & Mergers

Collateral

Comfort letter

Company Voluntary Arrangement

Compulsory Liquidation

Concession

Confidential Undertaking

Contingent Liabilities

Creditors Voluntary Liquidation

Data-Room

Deadlock

Deal

Debentures

Deferred Consideration Payment

Dilapidations

Disclosure Letter & Disclosure Bundle

Discounted Cash Flow

Dividend

Dividend Cover

Dividend Yield

The dividend yield is one of the key measurements for shareholders. This is the amount of dividend received per share expressed as a percentage of the market price of the share. The dividend may be paid in two installments: the interim and final dividends. Most dividends are paid after deduction of tax: yields are generally expressed ‘gross’. The tax deducted is added back as part of the calculation. We need to be aware of this before we compare our own yield with the figure quoted on the stock market prices in the newspapers. A gross yield of 4 per cent is equivalent to a net yield of 2.4 per cent to a 40 per cent taxpayer. We can leave the calculations to the newspapers.
How should we interpret the yield?
Very high yields may indicate that a company was expected to reduce its dividend pay out. The share price has fallen on the stock market because reduced profits are expected. We must be aware that the calculation used for last year's dividend and this year's (reduced) share price. Last year's dividend is expected to have been higher than this year's.
Low yields may indicate expectations both of a growth in profits and of increased dividends and a share price which has already risen.
Shares in different companies may be compared through dividend yields.

Due Diligence

Financial: Checking diligently the financial status of a business and value of the assets and liabilities. Assessing any contingent liabilities.
Legal: Checking diligently how a business is run and administered. Confirming a business' legal obligations, contracts and liabilities when dealing with its customers and suppliers and establishing what terms and conditions exist. Checking the relationship of key customers, particularly the discounts continuation. Checking the legal position between the company, its employees and bankers.

The replies to due diligence enquiries will form the basic information required to draft appropriate forms and warranties and indemnities for all aspects of the business to give any purchaser the necessary guarantees when buying the business.

The key to success in acquiring a business is to understand the nature and the extent of the business and to plan ahead to meet the requirements of the customers of the business and changing market circumstances. It is most important, therefore, that firm foundations are built when a business is acquired and information gathered by due diligence should be closely scrutinised prior to completion of the acquisition.

EBITA

Earnings before interest, tax, depreciation and amortization.

EBITD

Earnings before interest, tax, depreciation

Earn Out

An agreement between the vendor and the purchaser whereby the purchaser pays a lump sum up front for a company at the point of acquisition with the promise to pay more in the future once certain criteria have been met.

Elevator Deal

A transaction with a significant shareholding purchased but probably less than 50% by a company willing / wishing to invest in a venture to grow it. The remaining element is retained by the existing shareholders who stay with the business and use the funds (and probably infrastructure / ideas) of the investor to grow. The investor has the definite right to buy of the remaining element at a higher price pre-agreed, or by a ratchet if they wish, as the business grows.

Economy of Scale

Where the linking of two operations provides a direct cost saving enabling enhanced operating profits. Typically this is where in two businesses two functions may duplicate each other. The closure or 'scaling down' of one creates better 'economies' ie. reduces costs creating more profit.

Equity

The amount by which the value of an asset exceeds any liabilities attached to it.

Escrow

A deed that has been signed and sealed but will not become operative until a pre-determined event takes place. Money held in escrow is controlled by a third party (often a Solicitor) and is only released to the beneficiaries when a certain event takes place.

Exclusion of Trade (non- Competition Clause)

Restrictions: To avoid competition and to protect the goodwill of the business a purchaser should consider at an early stage the restrictions he requires on a vendor's activities once the sale has taken place. The UK and EU both have guiding laws on prohibiting competition.

Factoring

The buying of trade debts of a company assuming the task of debt collection and accepting the credit risk, thus, providing the company with working capital. A firm that engages in factoring is called a factor.

Financial Reporting for Smaller Entities

The reporting standards for businesses have been revised and up-dated in several areas. Accountants are required to prepare them according to published financial reporting standards. These set out the permitted methods of accounting for certain transactions and situations. These standards have to cover all sorts of issues that are sometimes only relevant to larger companies. As a result, there is now a separate, less complex, standard for smaller companies and other organisations, known as the Financial Reporting Standard for Smaller Entities, or FRSSE (pronounced ‘fruzzy’!) As new standards are issued, the FRSSE is amended to reflect those aspects that apply to smaller companies.

Financial Statement

The annual statement summarising a company’s activities over the last year. This includes the profit and loss account, balance sheet and, if required, a cash-flow statement.

Fiscal Year

It is the recognised financial year used by Accountants for calculating tax. The year starts from April 6th to April 5th of the following year.

Fixed Asset and Goodwill Sale

Often referred to incorrectly as an asset and goodwill sale. It means where the fixed assets of a business, its goodwill, customers, staff and know-how are sold on in a way that enables continuance of a business.

Franchising

Franchise - an agreement whereby the franchisor (a primary company) provides a market tested business package to another business / the franchisee. The latter then operates under the franchisor's trade name, marketing goods according to an agreed contract.

FT-SE

Financial Times Share Index. The Financial Times publishes the FT-SE 100 Share Index which reflects the combined performance of the 100 largest companies quoted on the stock market. The index shows the current level, the highs and lows, and levels at other specified dates. The FT-SE 250 shows the combined performance of the next 250 largest companies below the top 100. The FT Actuaries All Share Index shows the daily performance of the top 800 companies.

GAAP

An accounting practice where by your accounts have been prepared in agreement with normal accounting conventions. Please note that there are some differences between UK and American processes.

Gearing

The level of borrowing (debt) to equity.

Golden Handcuffs (Loyalty Bonus)

Financial incentives offered to key staff to persuade them to remain with a business after the sale. Also known as loyalty bonus. Usually paid on business sales after a completion of the deal and satisfactory hand-over by the vendor. Six months often considered appropriate.

Goodwill

Goodwill: a kindly feeling, a well being, benevolence.
What is Business Goodwill? The advantage or favour a business has in its custom and trade.
What is Financial Goodwill? The excess of the purchase price (not its valuation but what is achieved) over and above the value assigned to its net assets exclusive of goodwill.
In other words goodwill is an abstract concept. It also means different things to different people. Therefore, it stands to reason that goodwill is a matter of opinion. Some even argue that it does not exist. Goodwill could also be the measure of 'trust' the market has on a business.

Grooming

The process of preparing a business for sale in order to make it more attractive to a potential purchaser.

Hand-over

In the case of specialised businesses, buyers may be concerned about their ability to run the business. A hand-over period should be offered. In a normal sale we recommend one week should be included free and up to six months reasonable availability by phone. Thereafter, it is considered work. A hand-over can be for up to two years plus. It is common to agree daily rates for hand-over.

Heads of Agreement

Notification of sale or Heads of Agreement: Once the broad outline of the sale has been agreed a brief will be drafted which will then be used to finalise the terms of the contracts. If conditions are included to benefit a particular party, then that party should be permitted to withdraw from the deal if the conditions have not been satisfied within a certain pre-agreed time scale. A Heads of Agreement will be signed by both the parties.

House Keeping

This is an accounting term pre-supposing a meaningful dialogue regarding financial objectives by the owners of a business. Good house keeping is often carried out before a sale. Firstly, to get the records straight. Secondly, and more often, decisions to invest or spend are off-set and expenses are reduced to boost profit for the annual accounts. These exercises are usually started two years before a sale.

Insolvency

A company with liabilities in excess of assets without hope of trading out of losses therefore ceasing business.

IPO

Initial Public Offering - an American term for floatation

IRP

Intellectual Property Rights

IRR

Internal Rate of Return

Know-how

The procedures, ideas, products, vision and personal knowledge of a business in its people. Unless this is transferred on a sale. Goodwill will rapidly dissipate. An experienced buyer will work out a deal that retains know-how.

Large business

Large companies - firms with over 250 employees.

Leverage

See Gearing

Liability

An obligation to transfer economic benefit as a result of past transactions. When the premise a contingent liability covers becomes an actual problem.

Limited Company

A limited company is a separate entity from its owners. Its Directors are not normally liable for its debts, although, they may be asked to give personal guarantees on certain loans and liabilities. The company must be registered and submit properly prepared statutory financial statements. There are specific rules and regulations governing the way a limited company is set up and run which must be followed.

Listing

The floatation of a company on the stock exchange

Loan Note

Issued by a company who pay an agreed amount, usually with interest and appoint a period of time in the future for payback. They are also used for tax planning purposes as part of the overall deal / agreement.

Market Capitalisation

This is the value put on the company by the stock market. It represents the cost of buying all the shares in the company at the share price quoted.

MBI (Management Buy In)

The acquisition of a company by a manager or management team from outside of the company which buys it and then become the new managers.

MBO (Management Buy Out)

The acquisition of a company by its existing managers.

Medium Business

A business that can claim two or more of the following:
Balance sheet not exceeding £5.6m
Turnover not exceeding £11.2m
Average number of employees not exceeding 250.

Members Voluntary Liquidation

In this instance the company must be solvent. The Directors are obliged to make a statutory declaration that they have formed the opinion that the company will be able to pay its debts (including the cost of liquidation) in full, together with interest at the official rate, within 12 months. The burden of proof is on the Directors.

Memorandum of Association

An official document setting out a company’s existence. It includes the registered office of the company. A statement of the company's objectives (called the objects clause) the amount of authorised share capital and its division.

Merger

A combination of two or more businesses on an equal footing that results in the creation of a new reporting entity. The shareholders of the combining entities mutually share the risks and rewards of the new entity. (Approval of the Monopolies and Mergers Commission may be required). Mergers must be conducted on lines sanctioned by the City code on take-overs and mergers.

Micro-firms

Firms with fewer than 9 employees.

Minority Shareholders

A shareholder who holds less than 50% of the company's shares is classed as a minority shareholder. They can receive their share of the profits in the form of dividends however they cannot control or determine company policies.

Negotiation

The process of successfully bringing together two or more parties in order that a “win/win” deal is achieved. To make each side understand, manage their expectations and remain in control. Generally the aim of negotiation is to obtain a mutually beneficial solution which involves dove tailing interests - which gives both sides a degree of satisfaction to the agreement.
Win/Win: Where both sides feel they have obtained a good deal.
Win/Lose: Where one side is feeling they have a good deal and the other feels hard done by. The deal might still happen but there will be bad feeling that might result in criticism, or lack of support in a hand-over.
Lose/Lose: Where ultimately neither side succeeds in their objectives. This might occur when a Win/Lose deal is agreed and one party backs out leaving both with large professional bills.

Net Asset Value

The value of the assets of the company plus what it is owed minus what it owes.

Net Present Value

A discounted cash flow, less the money you have paid for it.

Net Profit

The amount of income earned by an organisation after deducting all expenses.

Net return

This is the true economic view of a company. It is calculated by recasting the financial statements of a business to eliminate direct and indirect owner-related expenses as well as extraordinary or non recurring items. This type of recast is known as an add-back. There might also be the converse, an add-on where the expenses are not realistic with beneficial rents or lower salaries being paid.

Non Embarrassment Clause

The rights given to a vendor should a successful purchaser re-sell the business within a certain period of time and who benefits from a higher sale value. This usually takes the form of financial compensation.

Notification of Sale

Notification of Sale or Heads of Terms: Once the broad outline of the sale has been agreed a brief will be drafted which will then be used to finalise the terms of the contracts. If conditions are included to benefit a particular party, then that party should be permitted to withdraw from the deal if the conditions have not been satisfied within a certain pre-agreed time scale. A Heads of Terms will be signed by both parties.

OFEX

A privately traded listing where the shares are dealt on an individual trade. Used more in SMEs.

Open Market Value

Also known as a fair market value ie. how much an asset will fetch if sold on the open market.

Partnership

A 'partnership' involves two or more people jointly running a business. Although, you do not have to formally register a partnership, it is recommended that a Partnership Agreement is drawn up. Included in the agreement should be who has put what into the business, which does what role, how your profits are shared and what would happen if you decided to wind up the Partnership. Each Partner is personally liable for all debts incurred by the business. Trust in this type of business relationship is therefore crucial.

Payback Period

How long it will take to gain the amount invested at current levels of earning.

Perception Value

Perception value is denominated by the market view of a business. This can be measured by ‘market comparison’. Literally what others are selling for but also ‘instinct’. The most common measure of this perception value is the selection of a profit earnings ratio. A P/E multiple (In its inverse state this is called ROCE, return on capital employed).

Performance Related Consideration Payment

An agreement in which payment of the consideration is delayed until a certain date against the performance of the business. This is usually linked to turnover or gross profit. Often expressed as a % or £ in the £. Occasionally paid when a specified event has occurred. Security and or personal guarantees should be asked for against performance related payments.

A good performance related payment structure will usually be based in turnover and only start after a business has been judged to make sufficient profits as the money comes often from a business (be wary of the Financial Assistance Clauses in the Companies Act). Eg. a payment of 50 pence in the £1 will be made on all turnover achieved over £400,000 for one year from completion. Often referred to as profit related- payment. See deferred payments.

PEST

A management or valuation technique where an analysis of the environmental forces that affect a business is created:
A review of national and global trends:
   Political
   Economic
   Social or sociological
   Technical

Phoenix

A buy-out from a liquidator.

Preparation

This is where all parties research, consider, brainstorm and assess prior to transactions. A good negotiator can never do too much preparation.

Price

The monetary value for which a business is marketed at sale.

Price Earnings Ratio (P/E)

For some investors the P/E ratio is the most useful measure for comparing share prices and performance. The calculation of this ratio is based on the assumption that when we buy shares we are buying a right to benefit in corresponding shares on the company's annual stream of earnings. The P/E ratio tells us how much we are paying to participate in that stream of earnings.

To calculate a P/E ratio:
Divide the total after tax earnings of the company by the number of shares issued - this tell us the earning of each share.
Divide the current market price for the earnings per share.

A high P/E ratio, relative to other companies in the same sector, means that investors expect quick growth in earnings.

A low P/E ratio suggests that the company is less than dynamic and that its profits may even fall.

The P/E ratio is widely quoted as a basis for comparison. There are those who regard P/E ratios as having their uses, even if they are a limited tool.

Profit Related Consideration Payment

An agreement in which payment of the consideration is delayed until a certain date against the profits of a business. Often expressed as a % or £ in the £. Occasionally paid when a specified event has occurred. Security and or personal guarantees will often/should be asked for against performance related payments.

Profit related payments are not helpful to the deal as the profits of a company are too difficult to define and too restrictive for both buying and selling parties. A buyer would be restricted against heavy investment on purchase, as a seller would want to ensure profit remains similar. See also deferred payments and performance related payments.

Put Option

The right to buy or sell a defined number of shares at a pre-agreed price on a particular date. This is sometimes used if a purchaser buys a proportion of a business and has a put option to buy more of it at a later date.

R&D (Research & Development)

This is the intellectual concept borne out of shared knowledge. Historically associated with a quantifiable product but more often referred to as know-how, the shared knowledge of a team or company. In the early 1990s when IBM acquired Lotus Notes for $3.2 billion, $1.84 billion was attributed to R&D, the knowledge base of the company. The rest was goodwill, liquid, tangible and net assets.

Red Herring Tactic

A point, proposal or issue whether by accident or design that is clouding the real issue.

Redundancy

Where an organisation no longer has a commercial use for some of its functions, the staff that perform those functions may be made redundant and receive a redundancy payment. There are very strict rules governing redundancy. 
By reference to the period during which the employee was continuously employed.
By reference to the age of the employee during the above period.
The actual calculation is based on the following table, assuming that no other exclusion applies:

Aged 41 or over but under 65
One and a half weeks pay*
Aged 22 or over but under 41
One week*
Aged 18 or over but under 22
Half a week*
*For each year in age group.

A calculation of age and length of service gives a certain number of 'weeks pay' which is to be multiplied by the employee's usual weekly pay. However there is maximum of 20 years service and a (current) maximum payment of £220 per week giving an overall maximum redundancy payment of £6,600 with effect from 1 April 1998, i.e. 20 x 1 1/2 x £220.

Warning: See Staff Consultation

Return on Capital Employed (R.O.C.E.)

An accounting ratio expressing the profit of an organisation as a percentage of the capital employed (the rate of return required on money invested). This should certainly be more than the rate of interest you could get from leaving your money in a Building Society account.

Roll-over Tax Relief

A relief from Capital Gains Tax on eligible disposals. The financial gain from the disposal of an asset as defined below may be used to purchase another asset in the list without attracting Capital Gains Tax:
 land or buildings
 fixed plant & machinery
 ships, aircraft &hovercraft
 goodwill
 satellites, space stations and  spacecraft
 milk & potato quotas
 premium quotas for ewes and suckler cows

Schedule of Staff

A comprehensive list of all staff, their job description, their addresses, the length of their employment, their salaries and any outstanding holidays.

Section 320

Provisions in the Companies Act that prevents a Director purchasing more than 10% of the company's net assets without obtaining permissions from the shareholders.

Securites and Futures Authority (SFA)

The self regulating authority responsible for regulating the conduct of Brokers and Dealers in securities, options and futures.

Security

An asset or loan to which a lender can have recourse if a borrower defaults on his loan payments. Sometimes referred to as collateral or a charge.

Share price

The share price: This is usually the previous day’s closing mid-market price in pence (i.e. halfway between the offer and bid price at the previous day’s close of business) or the price change from the previous trading day
Highest and lowest prices: These are the share’s maximum and minimum prices over the prior 52-week period.

Shares

Shares are equal parts into which the capital stock of a company is divided. They fall into two basic categories:
Ordinary shares
Preference shares
When we buy shares, we are investing in the future performance of the company, which originally issued them. We are looking for:
Income (received via dividend payments), or
Capital gain (received if we sell shares at a higher price than we paid for them), or
Both

Shares - ordinary

Companies sometimes subdivide their ordinary shares into different classes – e.g. to reflect different dates of issue. Ordinary shares are securities issued by companies in return for the investment of risk capital. The risk is high because the claims of owners of ordinary shares rank behind those of all others in the event of the company being wound up and its income and assets distributed.
Limited liability: here, the shareholders’ risk is limited to the value of the ordinary shares. If the business fails their liability for losses incurred by creditors and lenders is limited to the funds they have invested in the business – hence the term ‘limited liability company’
Potential for gain to compensate for their high risk status, ordinary shares offer unlimited potential for gain because other forms of capital – e.g. preference shares – have strictly limited claims on the income and assets of the business
Shareholders’ rights: ordinary shareholders also have voting rights on a whole range of issues. The exercise of these rights by an individual shareholder may be of limited significance – this is particularly so where institutional investors – e.g. insurance companies – own very large blocks of share.

Shares - preference

Preference shares provide part of the equity capital of a company. They carry very limited rights of ownership, restricted often to the right to vote if preference dividends remain unpaid. In reality, preference shares are a form of specialised debt. They carry rights to:
A fixed dividend each year – which may accrue if funds are not available to meet it
Repayment of the par value of the share in the event of winding up.
Preference shareholders rank behind unsecured debtors and ahead of ordinary shareholders.

Share transfer

A change in the ownership of a share or stock.

Skeletons in the cupboard

Hidden liabilities (see contingent liabilities) normally referred to as ones that have been left dusty, ignored or hidden. The skeleton is the deliberate hiding of the body.

Small businesses