Private equity glossary

40 private equity and M&A terms in plain English, for owners thinking about a sale or a partner.

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Add-Backs: Add-backs are one-time or owner-specific costs added back to profit, so the earnings show what a new owner would actually earn.
Add-On Acquisition: An add-on acquisition is a smaller company bought by an existing platform company and combined into it, which adds customers, services or locations.
Adjusted EBITDA: Adjusted EBITDA is EBITDA after add-backs and other changes that remove unusual, one-time or owner-specific items to show normal earnings.

Buy and Build: Buy and build is a strategy where an investor buys a platform company and then adds smaller companies to it, creating one larger and stronger business.

Confidential Information Memorandum: A confidential information memorandum is a detailed document that describes a company to potential buyers who have signed a non-disclosure agreement.

Data Room: A data room is a secure online folder where a seller shares documents with buyers and their advisers during due diligence.
Dividend Recapitalization: A dividend recapitalization is when a company borrows money and pays it out to its owners as a dividend, without selling the business.
Due Diligence: Due diligence is the buyer's detailed check of a company's finances, operations, legal matters and customers before the deal closes.

Earnout: An earnout is extra purchase price paid to the seller after closing, but only if the company reaches agreed targets such as revenue or profit.
EBITDA: EBITDA is a company's earnings before interest, taxes, depreciation and amortization. Buyers use it as a quick measure of operating cash earnings and as the base for setting a price.
EBITDA Multiple: An EBITDA multiple is the purchase price divided by EBITDA. Buyers use it to compare what they pay for different companies.
Enterprise Value: Enterprise value is the total value of a business, including its debt, minus its cash. It shows what it costs to buy the whole operation.
Escrow: Escrow is money held by a neutral third party after closing to cover possible claims against the seller, then released if no claims arise.
Exclusivity Period: An exclusivity period is a set time after a letter of intent when the seller agrees not to negotiate with, or share information with, other buyers.
Exit Strategy: An exit strategy is an owner's plan for how and when to leave a business, such as through a sale, a recapitalization or a handoff to the next generation.

Financial Buyer: A financial buyer is an investor, such as a private equity firm, that buys a company mainly to grow its value and sell it later.
Fragmented Industry: A fragmented industry is one with many small companies and no dominant leader, which makes it a natural fit for buy-and-build strategies.

Growth Equity: Growth equity is investment in an already growing company, often for a minority stake, to fund expansion rather than to buy control or pay off the owner.

Holding Period: The holding period is the length of time an investor owns a company before selling it. For a private equity fund, it runs from the purchase to the exit.

Incentive Equity: Incentive equity is ownership offered to managers so they share in the company's growth, usually as options or a share pool.
Investment Thesis: An investment thesis is an investor's researched view of why a certain sector or type of business is a good place to put money.

Letter of Intent: A letter of intent is a document that sets out the main terms of a proposed deal, such as price and structure, before the final contracts are signed.
Leveraged Buyout: A leveraged buyout is the purchase of a company using a large share of borrowed money, which is repaid from the company's own cash flow.
Lower Middle Market: The lower middle market is the group of smaller private companies, often defined by earnings of a few million to about fifteen million dollars of EBITDA.

Majority Recapitalization: A majority recapitalization is a deal where an investor buys more than half of a company, and the owner keeps a smaller stake and often stays on to help lead.
Management Buyout: A management buyout is a sale of a company to its own senior managers, usually funded with outside capital such as debt or an investor.
Minority Recapitalization: A minority recapitalization is a deal where an investor buys less than half of a company, so the owner keeps control and takes some cash out.

Non-Disclosure Agreement: A non-disclosure agreement is a contract that requires the other party to keep shared company information private and use it only to evaluate a deal.

Platform Company: A platform company is the first business a private equity firm buys in a sector. It is chosen to be the base for later add-on acquisitions.
Private Equity: Private equity is money from investment funds used to buy or invest in private companies. The fund works with management to grow the business, then sells its stake later.

Quality of Earnings: A quality of earnings report is an accountant's review that tests whether a company's reported profits are accurate, complete and likely to repeat.

Recapitalization: A recapitalization changes a company's mix of owners and debt. It lets owners take cash out of the business while keeping part of the equity.
Representations and Warranties: Representations and warranties are the seller's written statements of fact about the company, which the buyer relies on in the purchase contract.
Rollover Equity: Rollover equity is the part of a seller's proceeds that the seller reinvests in the company after the sale, instead of taking that value in cash.

Second Bite of the Apple: The second bite of the apple is the later payout a seller can get on rolled-over equity when the investor sells the company again.
Seller Financing: Seller financing is when the seller lends the buyer part of the purchase price, and the buyer pays it back over time with interest.
Strategic Buyer: A strategic buyer is a company that buys another company to gain customers, products, locations or other benefits that fit its own business.
Succession Planning: Succession planning is the process of preparing for a change in who owns or runs a business, whether the next leader is family, staff or a new owner.

Value Creation: Value creation is the work an owner or investor does to make a company more valuable, such as growing sales, improving margins and building a stronger team.

Working Capital Adjustment: A working capital adjustment changes the final price if the company's short-term assets and liabilities at closing differ from an agreed target level.

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