An explanation of Corporate Finance terminology

The world of Corporate Finance uses a lot of professional jargon and abbreviations; but what do they all mean? We take a look at some of the most commonly used words and phrases, and try to explain them in easy to understand terminology.

Although some of these phrases may be straightforward, we thought it may be helpful (especially for those who are not involved in Corporate Finance on a daily basis) to produce a short guide to some of the more commonly used expressions and abbreviations.

ABL – Asset Based Lending – is a generic term used to describe lending facilities that are secured on assets. Examples of this are loans on plant and machinery, CID line and stock finance.

Acquisition – The act of buying a business (sole trader or partnership) or a controlling shareholding in a company.

APA – Asset Purchase Agreement – is a business sale agreement where the buyer purchases some or all of a company’s assets and current trade agreements. This is typically used for the purchase of unincorporated businesses.

BIMBO – Buy In / Buy Out - similar to an MBO/MBI whereby the management team consist of a mixture of existing and incoming management.

CID Line – Confidential Invoice Discounting – is a facility that is secured on the trade debtors of the business and the funding available increases or decreases monthly in proportion to the value of trade debtors.

Consideration – this relates to the money offered or received when buying or selling a business. In some cases, consideration can take forms other than cash such as shares in another company or an asset such as a property or car.

Corporate Finance – the term corporate finance relates to providing advice to clients around, fundraising, acquisitions, disposals, management buy outs or due diligence. The team at Shorts have a vast range of experience covering these areas and are happy to have an informal discussion with you to discuss how we can help you achieve your business or personal goals.

DD – Due Diligence – is undertaken on a transaction to give comfort over an area of risk. For example, a funder may ask for financial DD to be carried out on the forecasts of a business to ensure that these appear realistic, or a buyer may seek legal DD to ensure that all contracts are up to date.

Deferred payment – when completing a transaction, a deferred payment can be offered. This is where a fixed amount of consideration is not paid on completion but is paid at a specific point in the future. This could be 6 months, a year, 2 years or even longer after the transaction has completed.

Disposal – the opposite of an acquisition whereby you sell your stake in a business or company.

Earnout – this relates to consideration that is payable in the future, but unlike a deferred payment is dependent on the future performance of the business. For example, a seller could receive an additional 25p for every £1 of turnover in excess of £1 million over the next 2 years.

EBITDA – Earnings Before Interest, Tax, Depreciation and Amortisation – is a measure of profit and is often used when calculating a company’s value.

Grooming for Sale – if an owner knows they are looking to retire then grooming for sale can be undertaken in advance to put their business in the best shape to achieve a successful sale. This spans a wide range of actions and can be undertaken 2-3 years in advance in some cases.

LTV – Loan To Value – is a term used principally on property debt such as mortgages. It is the % by which the amount borrowed is covered by the value of the property. i.e. if you borrowed £800k against a property worth £1m the LTV would be 80%.

M&A – Mergers and Acquisitions – is often used as a term to describe a team or service completing merger or acquisition transactions, “The M&A team” or “M&A activity”.

MBO - Management Buy Out – a transaction whereby ownership of the business passes to the existing management of the business.

MBI - Management Buy In – a transaction whereby ownership of the business passes to new incoming management.

PE & VC – Private Equity and Venture Capital – both of these provide funding to businesses in exchange for an equity stake (i.e. partial ownership in the business.) The funding usually consists of an element of share capital and an element of loan capital.

SPA – Share Purchase Agreement – this is a legal document prepared by lawyers and acts as the main contract between the buyer and seller to purchase share capital with in a company.

Working Capital Facility – this is a generic term for a lending facility that is designed to meet the day to day cash requirements of the business. Examples of a working capital facility could be overdrafts, a CID line or stock finance (where a loan is based on, and secured by the amount of stock held).

For more details on any of the above, or if you would like help with your upcoming transaction, why not drop us a line today to see how we can help make your ambitions a reality.