A record used to account for the total number of sales made by a business on credit
Accrual Basis.
An accounting method used for record keeping purposes in
which all income and expenses are charged to the period in which they
registered, whether or not there was any actual exchange of funds during
the period
Acid Test ratio.
A method used to provide a quick measure of liquidity of
a business by dividing total liquid assets by current liabilities
Add-Back.
Adjustments made in the taxation computations by adding
back non-allowable expenditure included in the accounting profit so it
suffers tax
Ambitious small companies can float on the Alternative Investment Market, after a vetting which is less rigorous than for a full listing (and generally less expensive). AIM, which was launched by the London Stock Exchange in 1995, can provide an exit for the original backers of the business.
Arm’s Length.
Refers to business transactions in which neither the buyer
nor the seller is influenced by the other. E.g. in a non-arm’s length
transaction you might sell a family member some assets of the business
at an artificially low price in order to move assets out of the business
Assets.
Items of property and equipment owned by a business together
with money owed to the business by the customers, money with bankers and
cash in hand
Balance sheet.
A statement of the worth (assets, liabilities and equity)
of the business at the accounting date expressed in terms of historical
cost
The accepted way of providing companies with a choice of providers of financial and professional services. It normally involves a short-list of potential suppliers being drawn up and invited to pitch for business.
Top 4 Accountancy Firms; Deloitter & Touche, Ernst & Young, KPMG and Price Waterhouse Coopers.
Buy-in-management-buy-out. A combination of an MBI and an MBO. In a BIMBO, an entrepreneurial manager buys into a company and teams up with members of the incumbent management team to run it as an independent business.
Buy-in growth-opportunity. An MBI where a significant proportion of the funding raised goes toward growing the business.
Board.
Meaning board of directors of a business. These individuals
control the corporation for the benefit of the shareholders.
Boilerplate.
Boilerplate paragraphs are the standard paragraphs in most
venture capital and investment documents.
In a traditional MBO the incumbent team of managers normally negotiates direct with the vendor of the business - their former employer - at the same time as reaching agreement with an investment institution to back them. Recently, however, many MBOs have been financed by a "bought" deal. This is where the investor acts as the purchaser and negotiates directly with the vendor, then works out arrangements with the management team.
Break-even analysis.
A method used to determine the number of jobs or products
that a business has to sell to cover expenses
Bridge Financing.
Medium-term investment designed to finance a company until
it can raise equity capital
Burn Rate.
The monthly rate at which a company is pending cash
Business Angel.
A private individual who makes and equity investment into
a business
Business Angel Network.
Organizations that facilitate the bringing together of
businesses and business angels
Business Plan.
A plan used to chart a new or ongoing business’s strategies,
sales projections and key personnel to provide a strategic foundation
for growth and often to obtain necessary finance
Buy Out.
The term refers to the sale of a business i.e. the buyer
‘buys out’ the seller.
An agreement in which, under certain circumstances, the first party in a partnership must agree to buy out the second party or vice-versa. Buy-sell arrangements are usually negotiated between two partners such as an entrepreneur and a venture capitalist
BVCA.
British Venture Capital Association - association of suppliers of venture
capital and investment capital.
Capitalization.
Every company has capital, in the form of money, common
stock, long-term debt or a combination of all three.
Capital Gains Tax.
Tax due on the profit from the sale of a capital asset
Limits on interest rates. Interest rates can either be fixed or variable. Where they are variable, it may be agreed (at a cost) that the rate is capped so it will not rise above a certain figure, or that there will be a floor below which it will not fall. A collar involves both a cap and a floor.
Abbreviation for "carried interest scheme" - an investment vehicle used by many venture capital companies to allow their employees to co-invest in companies on favourable terms.
Refers to a business which has a strong positive cash flow.
Cash Flow Statement.
A schedule designed to show the net cash inflow or outflow
from a business through an accounting period
Cash In.
When a shareholder sells part or all his/her stock for
cash.
Closing.
The event of signing legal documents binding on your company.
Collateral.
Assets used as security for a loan. If the loan is not
repaid these assets may be sold.
The moment when legal documents are signed. Normally, also the moment at which funds are advanced by investors.
Regulation of the UK's financial services industry has developed almost out of recognition. "Compliance" is the process in thousands of offices in the City and around the country to ensure that these regulations are complied with. Many of the rules are designed to protect the public from misleading claims about returns they could receive from investments, others outlaw insider trading.
Compounding.
The effect of adding the interest on an investment to the
principal amount so that interest is earnt on the interest
Before a deal is completed, an investor in a business venture may insist on certain conditions being satisfied.
Convertible.
Usually refers to debt or preference stock, each of which
is convertible into ordinary stock of the company.
Copyright.
A legal form of protection used to safeguard original literary
works, visual arts, etc.
Corporation tax.
Tax paid by companies on their trading profits
Covenant.
Statements in legal documents detailing what you are and
are not able to do on closing of the agreement
Current ratio.
Ratio of total current assets to current liabilities
Current return.
Income that is received during the period of the investment
(e.g. dividends) as opposed to the capital gain portion received on an
investment at the end of the investment period.
The rate at which investment propositions come to venture capitalists.
Debenture.
Another word for a debt, note or loan
In the financing of a business, there is a vital distinction between debt and equity. Debt is money borrowed from a bank or other institution, where interest has to be paid at a specified rate and the total borrowed must be repaid either on a specified date or (as in bank overdrafts) on demand. By contrast, equity is permanent capital, and the return paid to the provider of the equity is related to the profits of the business.
Debt Service.
The amount of funds required to be paid periodically on a debt to prevent
it going into default.
Default.
If the terms of an investment agreement/loan are broken, then it is in
default.
An element of a transaction to be paid in the future, sometimes depending on performance targets being achieved.
Example of polite management-speak to describe what happened in much of industry in the recession years of the late 80s early 90s. Layers of middle management, once thought essential, were stripped out of the corporate hierarchy. Many companies found it was more profitable to trade with fewer staff, lower their turnover and outsource some of their activities.
Depreciation.
The lessening in value of an asset over the lifetime of the asset. Based
on either the declining balance or straight-line method
When a company issues more shares, the value of each share is "diluted" - unless the total assets of the business are increased.
Apart from salary, directors may receive valuable benefits in the form of pension rights, expenses, etc. Investors in a company stipulate that total emoluments must not exceed a specified level - otherwise they might find the directors paying themselves so much there is nothing left to reward shareholders.
Discount Rate.
The rate used in present value calculations to convert
future cash flows into current monetary values. i.e. £1 in 10 years time
will not have the same purchasing power as £1 today, the discount rate
coverts the £1 in 10 years time into today’s values.
Dividends.
A distribution of the profits by a limited company to the
shareholders
A ratio that measures the number of times a dividend could have been paid out of the year's earnings. The higher the dividend cover, the "safer" the dividend.
Downside.
The amunt of risk an investor takes on any venture is called the downside.
If the investor stands to lose half his/her invested funds if the business
goes under, the downside risk is said to be 50% o
“Drag-along rights” are provisions (most commonly found in shareholders' agreements) that require all shareholders to agree in advance to participate in a future acquisition of the company if a specified percentage of the shareholders or preferred shareholders support the acquisition. Drag-along rights typically terminate upon a public offering.
When investors commit themselves to back a venture, all the funding may not be needed at once. Some is used as "drawn down" later.
Drawings.
Money (or other assets) withdrawn from a business by the proprietor
Due Diligence.
The process of investigating a business venture to determine its feasibility
Profit after tax divided by the number of ordinary shares in issue.
The European Association of Securities Dealers Automated Quotation. This was set up in order to establish and operate a pan-European regulated stock market, targeted specifically towards young and fast-growing companies with international aspirations. See NASDAQ.
Enterprise Investment Scheme. A successor to the Business Expansion Scheme, designed to offer individuals a tax-efficient way of investing in unquoted companies. The scheme enables unquoted businesses to raise new equity finance of up to £1m per tax year.
Equity.
Normally it describes the preference and ordinary shares of a business.
In addition, it is frequently used to describe the amount of ownership
of one person or group in a business
European Venture Capital Association - association of providers of venture capital and investment capital across Europe.
Exit.
The sales of equity or ownership in a business, usually for cash.
Financial Purchase.
Where a financial institution buys a business and then decides the form
of management to run it. This is different from a bought deal, where the
existing management team plays a larger role in the transaction.
Security for a loan to a business is normally provided by a charge on its assets. Fixed charges apply to specific assets such as plants or buildings, floating charges apply to all the company's assets.
Fixed expenses/overheads.
Expenses/overheads of the business that do not fluctuate with sales volume
Fixed Assets.
Property and equipment owned by the business that will have a long-lasting
benefit to the business
Very short investment, where the exit is often identified pre-completion.
Fully diluted ownership.
Ownership assuming the exercise of all ordinary share options, warrants
and the conversion of any convertible securities
The ratio of debt to equity capital. If a balance sheet shows £10 million of total assets and a debt of £8 million, the gearing is 80%. A very highly geared business is living dangerously. Like driving an automobile, use of high gears can produce fast and spectacular results, but may lead to difficulties in climbing up a steep hill.
Share with unusual rights, often allowing exiting/minority shareholders disproportionate control or rights to future capital proceeds.
The value of a business over and above its tangible assets. It includes the business' reputation and contacts.
Grace Period.
The period of time available to correct a default
The profit earned by a business from trading, prior to the deduction of overhead expenses. That is to say, sales less direct cost of sales equals gross profit
Growth Capital (Development
Capital).
This has been described as small companies' equivalent of big companies'
rights issues on the stock market. It is the long-term equity capital
raised to allow a company to grow ambitiously without relying wholly on
short-term bank debt.
An adjective used to describe an investor's investment approach. A pro-active, hands-on investor might typically put a director on the board and seek to influence the timing of an exit. A hands-off investor leaves the management to get on with running their business.
Historical Cost.
The original cost, particularly applicable to fixed assets, without any
adjustment for inflation that will have changed the purchasing power of
money
Hurdle.
The Return on Investment necessary to compensate the investor for the
risks in involved with a particular investment.
Input Tax.
VAT incurred on purchases which is reclaimable by a VAT registered trader
(or at least set against output tax due to reduce payments made to Customs
& Excise)
A company's intangible assets, for instance patents, software, brand names etc. Intellectual property has become increasingly important compared with the old days when the assets of a prosperous business consisted entirely of bricks and mortar and metal - property, plant and machinery. Companies can protect their ownership rights over intellectual property, but cannot assert ownership of all that goes on in the heads of staff. This can lead to disputes when key employees leave to start their own enterprise.
The discount rate that equates the present value of cash outflows with the present value of cash inflows.
Initial Public Offering (IPO).
The initial offer and sale of a company’s shares to the public
Providers of capital for the long-term, as distinct from lenders of short-term capital. Investors have rights which lenders don't enjoy - and accept risks which lenders aren't exposed to.
IRR.
Internal Rate of Return. A measurement of the return on an investment
based on discounted cash flow, expressed as an annual percentage rate.
This is an MBO in which the equity capital is supported by a very large amount of debt. See gearing. LBOs were common in the US in the 1980s and for a time were popular in the UK.
Lead Investor.
The investor who leads a group of investors into an investment.
Leverage.
Another term for debt. Debt is usually referred to as leverage because
in using debt, one dies not have to give up equity. Therefore, for a very
small amount of equity and a large amount of debt, one can leverage a
business based on its assets.
Leveraged buy-out (LBO).
An acquisition of a business using mostly debt and a small amount of equity.
The assets of the business secure the debt
Liabilities.
Amounts owed by a business to third parties
The London Inter-Bank Offered Rate - a benchmark rate of interest for wholesale funds. When financial packages are provided for businesses, the interest rate payable is often defined as LIBOR plus so many points.
Limited Company.
A business where the owners (the shareholders) have a limited liability
to contribute money to the business. The company is a separate legal entity
Liquidity.
This is a measure of the ease with which the assets of a business can
be transformed into cash. Also, where companies are publicly quoted, on
the stock market or on AIM, their shares are said to be liquid if they
are readily bought and sold. Smaller, or less fashionable, quoted companies
may find their shares lack liquidity.
Listing.
When a company trades its shares on the stock market - either the London
Stock Exchange or one of the other markets, such as AIM.
Loan Capital.
The form of debt which has to be repaid at a specific time in the future,
as distinct from a bank overdraft which the bank may call in at short
notice.
Mergers & Acquisitions
(M&A).
A phrase that covers the process of buying, selling and merging businesses.
MBI (Management Buy-In).
Following the success of the MBO movement in the 1980s, MBIs developed
as another means of changing the ownership of a business whose owners
wish to sell. The incoming management team acquires the business with
backing from institutional investors (as opposed to incumbent managers
who acquire it in the case of an MBO). See also BIMBO.
MBO (Management Buy-Out).
Basically, an MBO means that the management team of a business, usually
with the backing of institutional investors, takes over ownership of the
business where they are employed. MBOs emerged during the "enterprise"
years of the 1980s as a major factor in restructuring British industry.
Often, a large company hives off one of its subsidiaries by selling to
its management team. Another source of MBOs is family businesses where
the owner wishes to retire. (See also LMBOs, bought deals and back to
basics). The acronym MBO has passed into other languages - you can see
references to le MBO in the financial press in Paris.
MEBO (Management and Employee
Buy-Out).
An MBO where a substantial number of employees as well as managers hold
shares in the company.
Multiple.
Sometimes called the PE ratio (price earnings). The multiple of earnings,
EBIT, or cash flow used to estimate the future value of a company
The National Association of Security Dealers Automated Quotation is the largest US stock market in terms of companies listed and number of shared traded. Launched in 1971, NASDAQ is home to more than 82% of all the technology listings in the US. It is operated by the NASDAQ Stock Markets Inc, a wholly owned subsidiary of the National Association of Security Dealers. See EASDAQ
Net Present Value.
The discounted present value of an investment minus the required initial
investment. Generally required to be a positive figure in order for an
investment to go ahead
Net Profit.
The profit of a business after taking account of all the expenses
Net Profit on Sales.
A profitability measure in which you divide the net profit before taxes
by gross sales
Non-executive or independent directors, although they are part-timers, still share all the legal responsibilities of their executive colleagues on the board of a company. In the distant past, non-execs used to include people who were not highly regarded externally - titled golfing friends of the chairman and suchlike. Today, non-execs include some of the best operators in the business world. Their status means they can take a strategic, long-term view of a business (whether a listed or unlisted company), whereas the executive team may be too close to the action. The modern view is that independent directors also have a vital role in protecting the interests of shareholders.
Options.
The right to given to someone to buy stock in your company after a certain
period of time
The equity of the company. Decisions on matters like whether the company should be sold are normally taken by shareholders of a majority of the ordinary shares.
Output Tax.
VAT charged on sales by a registered business
Overheads.
Non-labour expenses incurred in the operation of a business that are not
directly related to the purchase of the goods or services being sold by
the business
Partnership.
A business that is owned and run by 2 or more individuals where, unlike
a limited company, it is not a separate legal entity from those that own
it. These individual partners are each responsible for the debts of the
business.
Patent.
A form of protect that provides a person or legal entity with exclusive
rights to make, use or sell a concept or invention for the duration of
the patent
Payback Period.
A measurement of the number of years required to recover an initial cash
investment
Post-money valuation.
The post-investment valuation of a company. Equal to the amount of the
investment divided by the percentage ownership that such investment purchases
Part of the capital of a company. Unlike ordinary shares, preference shares are usually paid back over time out of retained profits. Holding preference shares involves less risk than ordinary shares but does not give access to the capital gains that can accrue when a successful company is sold. A variant is "A" ordinary shares in a private company, which carry a guaranteed right to share in the profits but may not have the same benefits as ordinary shares if the business is sold or floated.
Present Value (PV).
The discounted value of a series of future cash flows to account for the
time value of money. Alternatively, the value of a future series of cash
flows in current monetary terms
Pre-money valuation.
The pre-investment valuation of a company.
Price-Earnings (P/E) Ratio
.
The current price of a stock divided by the current earnings. Can also
be used to determine the fair value of a stock, e.g. if a stock is earning
50p a share and a price earnings ratio of 12 is used, then the stock is
worth £6 per share (50px12)
A statement summarizing the income and expenditure of a business for a given period and showing the surplus income (profit) or deficit (loss).
Profit and Loss Account.
A statement summarizing the income and expenditure of a business for a
given period and showing the surplus income (profit) or deficit (loss).
Quorum
The number of shareholders or directors at board meetings who must be
present at a meeting to allow proceedings to be validly and effectively
conducted. The quorum can be varied to suit particular needs and the requirements
are contained in the Articles of Association. Any resolutions passed at
a meeting without the required quorum are invalid, but may be notified
at a subsequent quorate meeting.
Ratchet.
A provision sometimes written into the financing of a transaction. It
states that if the managers achieve certain performance targets, their
share of the equity will increase.
Receivership.
The state of affairs when a receiver is appointed to recover debts of
a company which has failed. In the case of a large company, with subsidiaries,
the receiver may seek a buyer for a subsidiary. This often leads to a
MBO, an MBI or a trade sale.
Restructure.
Bringing about fairly major changes in the organisation of a company by
changing the management and/or the share ownership structure.
Rescue.
When a business in trouble is turned round and made viable by outside
intervention.
Return on Investment (ROI).
A profitability measure that evaluates the performance of a business by
dividing net profit by total assets
When a small company takes over a large one, or when the company being taken over is likely to be the major element in the combined business.
Second and Third Round Funding.
The later rounds of funding that follow the start-up round of financing
Early funding which enables a project or idea to develop into a business.
Sensitivity Analysis.
Used to determine how sensitive the return on investment is to variances
from expected values of the key variables
A shadow director is defined in section 741(2) of the Companies Act 1985 as an individual whose directions or instructions the directors of the company are accustomed to act (although a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).
The mechanism whereby a company buys-in part of its issued share capital - a straightforward process for dealing with some shareholder issues or, in the case of large publicly listed companies, often a way of using up spare cash in the business!
The sale of shares to a number of investors but not to the general public.
Shareholder Covenants.
This is the legal term for the terms of a contractual agreement
or contract that restrict the actions of one party. Restrictive covenants
are typically written into financing agreements, such as loan or bond
documents.
A management and investment philosophy which puts the interests of the shareholder first - in terms of earnings and asset growth.
The stock markets are often accused of short-termism with the result, allegedly, that directors of quoted companies cannot plan intelligently because stock market investors insist on performance in the short-term. Some look for an early exit. Others believe it can be in everybody's financial interest to take a longer view.
An investor who is not involved in the running or strategic direction of a company of which he or she is a shareholder.
Sole Trader.
A person running a business on his/her own without any business partner.
He/she is responsible for the debts of the business.
A new business that may be on any scale. In fact most start-ups are small. Their critical phase often comes later when they may need significant amounts of capital to enter their chosen market.
Structure.
Refers to the type of financing that would be used to finance a business.
E.g. £500,000 of ordinary shares with £200,000 of debt at 12% for 10 years.
Syndication.
The process whereby a group of investors will each put in a portion of
the money required to finance a business
A company suitable for takeover is described as a target.
Taxation Computation.
A schedule showing the adjustments to the accounting profit in order to
arrive at the taxable profit of the business. In particular, some items
of expense that have been recorded in the accounts will need to be ‘added
back’
A contractual obligation used to protect a minority shareholder . Basically, if a majority shareholder sells their stake, then the minority shareholder has the right to join the transaction and sell their minority stake in the company.
Term Sheet.
In simple terms, a term sheet is a funding offer from a capital provider.
It lays out the amount of an investment and the conditions under which
the investors expect you to work using their money. The key is to remember
that it's just an offer, and the entrepreneur can counter that offer and
negotiate all the terms before finally accepting the funds.
Investors like to invest in management and companies with a track record of producing profits. This presents problems in the case of a new venture, but the same
Sale of a company to another company. As a form of exit, a trade sale is a more common alternative to a flotation.
A list of balances on the accounts in the nominal ledger extracted primarily to ensure that the total debits equal the total credits and the accounting records are therefore correct and in balance
Turnaround.
When a failing business is made profitable. This can be achieved by existing
management or through a rescue involving new management.
When a company raises capital, either on the stock market or directly from institutional investors, there is always the possibility that not all the money will be forthcoming. This risk is often underwritten by an institution which, for a fee, agrees to make up any shortfall.
Upside.
The amount of money that one can make by investing an a certain deal is
the upside potential
The shares of publicly quoted companies are valued daily, according to the whims of demand and supply on the stock market. Valuation of private companies is more difficult because there is no market in their shares - unless the whole company is being sold. In other cases, valuation of private company shares is often done by reference to P/E ratios in similar quoted companies, or by discounting the projected future cashflow of the business. See discounted cash flow. However, valuation tends to be an art not a science and becomes a matter of negotiation between a willing buyer and a willing seller.
Value Added Tax.
A tax levied on the sales/supplies made by a registered trader
Variable Expenses.
Business costs that fluctuate according to sales volume (e.g. material
costs)
Startup or expansion capital that a business obtains from private investors in return for a stake in the business
Venture Capital Trusts (VCTs).
A recent appearance on the financial markets, VCTs are specialist investment
trusts, which offer tax advantages to investors willing to provide money
for investment in unquoted companies.
The legal undertakings often required by the purchaser of a business or asset from the previous owners to confirm there will be no nasty surprises.
Working Capital.
Net current assets (current assets less current liabilities) available
to a company to carry on with its business
Worst Case Scenario.
Investors backing a business like to contemplate what will happen if all
its hopes come to pass - but if they are sensible they also consider the
consequences if none of them come true.