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News - 21 October 2013

The Jargon Buster

As part of the continuing process of bringing plain English to an industry littered with jargon and acronyms, we at ABDS bring you our latest edition of the Jargon Buster with our two resident interpreters, Tonmoy Kumar and Stuart Coleman.

In this edition, TK and Stuart have summarised some of the most common terms associated with management buy-outs/buy-ins.

Articles (of Association): The legal constitution of Newco (see below).

BIMBO: A combination of management buy-in and buy-out where the team buying the business includes both existing management and new managers.

Bought deal: Where an institutional investor buys the target company as principal, later allowing either the existing management or a new management team to subscribe for equity.

Class transaction: An acquisition, disposal or finance raising by a quoted company that meets certain size criteria and is subject to Stock Exchange rules laying down the information given to shareholders. (In certain cases shareholders’ approval may be required.)

Debentures: A legal document which formalises the lenders’ charge over the assets of the company.

Deferred consideration:  An element of the purchase price that is to be paid at some time in the future. Payment may be contingent upon the outcome of defined future events.

Enterprise value: The debt-free value of a business equivalent to the business valuation plus the level of debt to be absorbed by the purchaser.

Envy ratio: A measure of the valuation implied by the amount invested by management for their equity percentage compared to that of the institutions.

Equity kicker: A mechanism whereby holders of debt or mezzanine finance are given the option of subscribing for shares, usually at exit.

Exit: The point at which the institutional investors realise their investment. Venture capitalists may, depending on the business and their own situation, look to achieve an exit in anything from a few months to over 10 years.

Fixed or floating charge: A legal mechanism whereby security over the assets of the business is granted.

Goodwill: The difference between the price which is paid for a business and the fair value of its assets.

IBO: An institutional buy-out. This is when the private equity house acquires a business directly from a vendor and incentivises management withequity – some time post completion.

Institutional Strip: A proportion of the total finance provided by institutional investors, which may include some or all of ordinary shares, preference shares and loan stock.

IRR: Internal rate of return. The average annual compound rate of return received by an investor over the life of their investment. This is a key indicator used by institutions in appraising investments.

Loan stock: Subordinated debt which carries fixed interest and is repaid in a defined period, typically on exit.

Newco: A new company formed to effect the buy-out by acquiring the operating subsidiaries.

Participating dividend: A dividend on ordinary shares which is calculated by reference to the level of profits.

PE ratio: Price Earnings ratio. This represents the multiple of profits implicit in a valuation of the business. Thus, if a group making post-tax profit of £2m has a market capitalisation of £24m, it would be trading on a PE of 24/2 = 12.

Pre-tax multiple: Similar to a PE ratio, except the ratio is calculated as market capitalisation divided by pre-tax profit, rather than post-tax profits.

Ratchet: A mechanism whereby management’s equity stake may be increased (or decreased) on the occurrence of various future events, typically when the institutional investors’ returns exceed a particular target rate.

Senior debt: Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up.

Sensitivity analysis: Illustration of how the financial projections in the business plan change if the key assumptions are altered.

Subordinated loan: 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.

Subscription or: A legal agreement binding the various shareholders of the business. The primary purpose of the agreement

investment agreement: is to safeguard the rights of the passive shareholders – the institutional investors.

Sweet equity: A term used to describe ordinary shares.

Syndicated investment: 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.

Upside: A positive outcome over and above the expected result. Managers will typically invest in the sweet equity.

Warranties and indemnities: Legal confirmation given by the seller, regarding matters such as tax or contingent liabilities, to assure the buyer that any undisclosed liabilities that subsequently come to light will be settled by the seller.

For those who are looking for a more personal approach on a range of issues, including Business strategy, business recovery, sale or acquisition, VAT and all other tax strategies, contact us at ABDS.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail:

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