By-Lined Article
The Owner's Manual: Glossary
By Duane Morris Private Equity
Winter 2013
Duane Morris Private Equity: The Owner's Manual
Bake-off – A competition (sometimes called a "beauty contest") among investment banks to be selected as the advisor to a company for an offering, financing, sale or similar transaction.
Closing – Closing is the date on which a transaction, whether debt or equity, is completed.
Confidential Information Memorandum (CIM) – A confidential information memorandum, or CIM, is a detailed disclosure document delivered to potential investors in a private equity transaction that provides information on the company. It is similar to a private placement memorandum used in a securities offering.
Control Investment – The purchase or acquisition of a majority interest in a business for the purpose of gaining economic and voting control of a company.
Due Diligence – The act of performing an investigation (legal and business) of a business entity, person or party in preparation for an acquisition or loan transaction or to verify the accuracy and completeness of an offering document.
Earn-out – An earn-out is contingent additional purchase price paid to a selling owner, the amount of which is based on the business' achieving certain financial goals over a period of time following closing.
EBITDA – Earnings before the deduction of interest, taxes, depreciation and amortization. EBITDA is a non-GAAP calculation based on data from a company's income statement used to measure a company's available cash flow. It is useful for measuring a company's operating cash flow and for comparing the profitability of various companies with different capital structures and in different tax brackets.
Employee Stock Ownership Plan (ESOP) – A defined contribution plan that is designed to invest primarily in employer stock. An ESOP is generally used as a financing vehicle to purchase the founder's stock.
Financial Buyer – A private equity firm that utilizes the capital in its various private equity funds to purchase an equity interest in a company, or the entire business, as distinguished from a strategic buyer.
Letter of Intent (LOI) – A non-binding document that sets out certain terms of a transaction agreed to in principle between parties that is negotiated and signed at the beginning of a transaction. Although not legally binding, an LOI may contain certain non-economic terms that are legally binding.
Mezzanine Debt – A debt obligation that ranks in priority behind senior debt but ahead of equity; often unsecured, high-yield, subordinated debt and commonly convertible into equity of the borrower.
Non-Control Investment – The purchase or acquisition of an interest in a business without gaining economic and voting control of the company, although the investor generally has the ability to exercise control over certain major corporate decisions.
Portfolio Company – A portfolio company is a company in which a private equity firm has invested.
Preferred Security – A class of equity security in an entity that typically entitles the holders to certain preferences and rights over the common holders, such as the right to receive dividends and the right to receive priority distributions upon the entity's dissolution or liquidation.
Private Equity Firm – A private equity firm is an investment manager that makes investments in privately owned operating companies. These investments are typically made through a "fund," which is most often a limited partnership that has been established by the private equity firm. Each fund raises money through capital commitments from various investors, such as public pension funds, corporations, endowments and high net worth individuals, all of whom become limited partners in the fund. The private equity firm will manage one or more funds, each of which will have particular criteria for the portfolio companies included in that fund.
Process – The activities in which a company engages in connection with a capital transaction, such as a "sale process."
Quality of Earnings – An assessment of the true earnings of an entity by examining recurring and non-recurring items, non-business related expenses and similar items.
Strategic Buyer – An operating company making an acquisition for strategic rather than investment reasons. Generally, a strategic buyer operates in the same industry as the company it is looking to buy.
