| A |
|
Accounts
Receivable.
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
|
AIM.
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
|
| B |
|
|
Balance sheet.
A statement of the worth (assets, liabilities
and equity) of the business at the accounting date
expressed in terms of historical cost
|
Beauty Parades.
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. |
Big 5.
Top 5 Accountancy Firms; Arthur Andersen, Deloitte&
Touche, Ernst & Young, KPMG and Price Waterhouse
Coopers. |
BIMBO.
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.
|
BINGO.
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.
|
Bought Deals.
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.
|
Buy-Sell.
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.
|
| C |
|
|
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
|
Caps, Floors
and Collars.
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. |
Carry.
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. |
Cash Rich.
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.
|
Completion.
The moment when legal documents are signed. Normally,
also the moment at which funds are advanced by investors.
|
Compliance.
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 earned on the interest
|
Conditions
Precedent.
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.
|
| D |
|
Deal Flow.
The rate at which investment propositions come to venture
capitalists. |
|
Debenture.
Another word for a debt, note or loan
|
Debt.
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.
|
Deferred
Consideration.
An element of a transaction to be paid in the future,
sometimes depending on performance targets being achieved.
|
De-layering
and Downsizing.
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
|
Dilution.
When a company issues more shares, the value of each
share is "diluted" - unless the total assets
of the business are increased. |
Directors'
Emoluments.
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
|
Dividend
Cover.
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 amount 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
|
Drawdown.
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
|
| E |
|
Earnings
Per Share.
Profit after tax divided by the number of ordinary shares
in issue. |
EASDAQ.
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. |
EIS.
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
|
EVCA.
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.
|
| F |
|
|
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.
|
Fixed and
Floating Charges.
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
|
Flip.
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
|
| G |
|
Gearing.
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. |
Golden Share.
Share with unusual rights, often allowing exiting/minority
shareholders disproportionate control or rights to future
capital proceeds. |
Goodwill.
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
|
Gross Profit.
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.
|
| H |
|
Hands-On/Hands-Off.
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.
|
| I |
|
|
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)
|
Intellectual
Property.
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. |
Internal
Rate of Return (IRR).
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
|
| Investment Capital.
Long-term equity capital provided by institutions to
facilitate growth in private companies. To some extent
the term is interchangeable with venture capital. However,
it emphasises that such capital is available for growth
projects being carried out by a range of young or established
businesses, whereas venture capital is mainly provided
for MBOs or MBIs that change the ownership of the business. |
Investors.
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.
|
| L |
|
LBO (Leveraged
Buy-Out).
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
|
LIBOR.
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.
|
| M |
|
|
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
|
| N |
|
NASDAQ.
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
Director.
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. |
| O |
|
|
Options.
The right to given to someone to buy stock in your
company after a certain period of time
|
Ordinary
Shares.
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
|
| P |
|
|
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
|
Preference
Shares.
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)
|
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). |
|
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).
|
| R |
|
|
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
|
Reverse Takeover.
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. |
| S |
|
|
Second and Third Round Funding.
The later rounds of funding that follow the start-up
round of financing
|
Seed Capital.
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
|
Share Buy-In.
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! |
Share Placing.
The sale of shares to a number of investors but not
to the general public. |
Shareholder
Value.
A management and investment philosophy which puts the
interests of the shareholder first - in terms of earnings
and asset growth. |
Short-Termism,
Long-Termism.
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.
|
Silent Partner.
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.
|
Start-Up.
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
|
| T |
|
Target.
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’
|
Track Record.
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
|
Trade Sale.
Sale of a company to another company. As a form of exit,
a trade sale is a more common alternative to a flotation.
|
Trial Balance.
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.
|
| U |
|
Underwrite.
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
|
| V |
|
Valuation
of Shares.
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)
|
Venture Capital.
Start-up 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.
|
| W |
|
Warranties
and Indemnities.
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.
|
