Glossary
Every term in the course, in plain English. Each one links to the lesson that teaches it.
- Accretive
- A deal that raises the buyer’s earnings per share. Accretion dilution analysis
- Add-backs
- Costs a seller adds back to EBITDA because they won’t recur. Fair for one-offs; not for costs that come back every year. Quality of earnings in due diligence
- Bank confirmation
- A request the auditor sends directly to a bank, which replies directly to the auditor with the balances. The company never handles it. Cash fraud and bank confirmations
- Bill-and-hold
- Billing a customer for goods the seller keeps in its own warehouse. Legitimate only when the customer asked for it, for its own reasons. Revenue recognition fraud
- Capitalized cost
- A cost booked as an asset and depreciated over years instead of expensed now. Right for things that last; a trick for routine repairs. Capitalized expenses fraud
- Cash-free, debt-free
- The usual basis for a private sale: the buyer pays enterprise value, the debt is repaid from it and the seller keeps the cash. Enterprise value vs equity value
- Channel stuffing
- Pushing distributors to take more stock than they can sell, often with discounts or return rights, to pull sales into this period. Revenue recognition fraud
- Data room
- The shared folder where a seller puts its ledgers, contracts and statements for the buyer to examine. Quality of earnings in due diligence
- Debt paydown
- Using the company’s cash to repay buyout debt. Each dollar repaid is a dollar more for the equity at the sale. LBO returns: IRR and MOIC
- Debt-like items
- Obligations a buyer adds to net debt even though they aren’t called debt: earn-outs owed, guarantees, unpaid bonuses and taxes, recourse factoring. Off-balance-sheet liabilities
- Dilutive
- A deal that lowers the buyer’s earnings per share, usually because it issues many new shares or borrows expensively. Accretion dilution analysis
- Due diligence
- The buyer’s check of a company before closing: the books, contracts, debts and cash behind the seller’s numbers. Quality of earnings in due diligence
- Equity value
- Enterprise value minus net debt. What the shareholders get when the company is sold. Enterprise value vs equity value
- Escrow
- Part of the price held by a neutral agent after closing, released to the seller later unless claims come out of it. Due diligence: repricing a buyout
- Exit
- The sale that ends a buyout: to another fund, a company, or the stock market. LBO returns: IRR and MOIC
- Factoring with recourse
- Selling invoices to a factor that can hand back the unpaid ones. The risk stays with the seller, so it is really a loan. Off-balance-sheet liabilities
- Forensic accounting
- Accounting as investigation: tracing numbers back to invoices, contracts and bank records to test whether they are what they claim. Capitalized expenses fraud
- Goodwill
- The price paid for a company above the fair value of its assets less liabilities. Sits on the buyer’s balance sheet. M&A synergies and goodwill
- Goodwill impairment
- A write-down of goodwill when the business is worth less than its book value. A non-cash charge against earnings. M&A synergies and goodwill
- Indemnity
- The seller’s promise to repay the buyer for a specific loss, such as a tax bill from before the sale. Due diligence: repricing a buyout
- IRR
- Internal rate of return: the yearly rate that turns the money in into the money out. With one in and one out, MOIC^(1/years) − 1. LBO returns: IRR and MOIC
- Letter of intent
- A signed offer that sets the price and terms, subject to due diligence. Usually gives the buyer a few weeks of exclusivity. Quality of earnings in due diligence
- Leverage multiple
- Debt ÷ EBITDA. How many years of EBITDA the company owes. Sources and uses of funds
- Leveraged buyout (LBO)
- Buying a company mostly with borrowed money that the company itself must repay. The equity is small, so it gains and loses fast. Leveraged buyout: a worked case
- MOIC
- Multiple on invested capital: money out ÷ money in. Says nothing about how long it took. LBO returns: IRR and MOIC
- Multiple expansion
- Selling at a higher EV/EBITDA multiple than you bought at. The engine nobody controls. LBO returns: IRR and MOIC
- Off-balance-sheet debt
- An obligation to pay that doesn’t appear as debt on the balance sheet, through structures like special-purpose entities or recourse factoring. Off-balance-sheet liabilities
- Price chip
- A cut to the agreed price after due diligence, usually the same multiple applied to the corrected numbers. Due diligence: repricing a buyout
- Private equity
- Funds that buy whole companies, usually with a lot of debt, and sell them a few years later. Sources and uses of funds
- Pro forma EPS
- Earnings per share worked out as if the deal had already happened: combined earnings over the new share count. Accretion dilution analysis
- QoE report
- Quality-of-earnings report: accountants rebuild EBITDA from the ledger and test every adjustment the seller made. Quality of earnings in due diligence
- Revenue recognition
- The rules for when a sale counts as revenue: when the customer gets control of the goods or service, not when the invoice goes out. Revenue recognition fraud
- Run-rate
- A recent period annualized, e.g. last month × 12. A forecast dressed as a result. Quality of earnings in due diligence
- Senior notes
- Bonds sold to investors. Senior to junior debt and equity; here unsecured, so behind the term loan for the assets. Sources and uses of funds
- Sources and uses
- The deal’s two-column table: where the money comes from and where it goes. The totals must match. Sources and uses of funds
- Sponsor equity
- The buyout fund’s own money in the deal. Paid last, keeps the upside. Sources and uses of funds
- Strategic vs. financial buyer
- A strategic buyer is a company in the business, buying to keep. A financial buyer is a fund, buying to sell later. Accretion dilution analysis
- Synergies
- Extra profit two companies expect to make together: cost synergies (spend less) and revenue synergies (sell more). M&A synergies and goodwill
- Term loan
- A bank loan repaid on a set schedule, usually secured on the company’s assets. Sources and uses of funds
- Transaction fees
- Bankers’, lawyers’ and accountants’ bills for doing the deal. A use of cash on day one. Sources and uses of funds
- Trapped cash
- Cash that exists but can’t be used to repay debt: pledged as collateral, blocked abroad, or owed back to customers. Cash fraud and bank confirmations