Glossary: key terms in the process of buying and selling a company
Selling a business is a complex process that involves a series of specific terminologies.
This glossary provides an overview of the key terminologies used in the business sales world to help readers better understand the process.
- Confidentiality Agreement (or in English” NDA”, which stands for Non-Disclosure Agreement): An NDA is a legal contract between two or more parties stating that certain information shared between them must remain confidential. The agreement requires the parties not to disclose or use confidential information for purposes other than those set out in the agreement itself. NDAs are commonly used to protect sensitive information, such as business secrets, business plans, financial data, technological innovations, and other strategic information that could be harmful if made public or used by competitors.
- Pre-emption Agreement: An agreement between a seller and a buyer that gives the seller the right to have the first opportunity to buy the business if the buyer decides to sell it in the future.
- Asset Sale: A transaction where the buyer purchases only the company's specific assets, such as equipment, inventory, and customers, instead of acquiring the entire legal entity.
- Articles of Incorporation and Articles of Association: The legal documents that establish the legal structure and operating rules of the company.
- Act of Preemption: An agreement between a seller and a buyer that gives the seller the right to have the first opportunity to buy the business if the buyer decides to sell it in the future.
- Deed of Sale: The legal document that sets out the terms and conditions of the sale of a business, including the financial details and responsibilities of the parties involved.
- Draft Contract: The preliminary version of the sales contract that can be negotiated before reaching a final agreement.
- Business Sales Broker: A specialized intermediary that helps in the sale of a business. It usually identifies potential buyers and manages the negotiation process.
- Working Capital: The difference between current assets (such as cash, inventory, and receivables) and current liabilities (such as business debts and anticipated expenses).
- Sale of a Company: The act of transferring control and ownership of a business from a seller to a buyer.
- Clientele: The set of customers and business relationships of a company, which can represent significant value for the buyer.
- Closing: The term Closing refers to the final phase of the acquisition process, in which all the terms of the agreement are met, the legal documents are signed, and the transaction is officially completed.
- Completion of the Transaction: The moment when all legal documents are signed, and the sale is officially concluded.
- Covenant Not to Compete: An agreement in which the seller agrees not to enter into competition with the sold company for a certain period of time or in a specific geographical area.
- Virtual Data Room (or VDR in English, or Virtual Data Room): It is a secure online platform used to store and share confidential documents between parties involved in a transaction, such as mergers and acquisitions (M&A), capital raising, or other types of diligence.
- Distribution of profits: The transfer of profits or dividends from the company to the seller before the sale.
- Due Diligence: An in-depth analysis process conducted by a buyer to evaluate the company being purchased, reviewing its financial accounts, transactions and contracts in detail.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A financial indicator that represents a company's gross profit before interest, taxes, and amortization.
- Earn-Out: An agreement in which part of the purchase price is based on the company's future performance, often linked to financial objectives.
- Scrow: A bank account managed by a trusted third party where funds are held during the sales process until all conditions are met.
- Cash Flow: The net amount of money generated or used by a business in its daily operations.
- Free Cash Flow: The money available after covering all operating expenses and working capital investments.
- Goodwill: The intangible value associated with the company, such as its reputation, brand, and loyal clientele.
- Contingent Legal: A lawyer who is compensated only if the sale of the company is successfully concluded.
- Letter of Intent: A Letter of Intent, or LOI in English, is a preliminary document that expresses the intention of two or more parties to enter into a negotiation or collaboration on specific terms and conditions. While not generally binding, the LOI establishes the basis for future negotiations and serves to clarify the expectations of the parties involved.
- I READ: see “Letter of Intent”.
- M&A: The acronym M&A stands for Mergers and Acquisitions, which in Italian translates to Mergers and Acquisitions. This term refers to all financial transactions through which two or more companies merge (merger) or one company acquires another (acquisition).
- EBITDA multiple: A multiplicative factor used to determine the value of a company based on its EBITDA. This multiple may vary depending on the industry and market conditions.
- NOTHING: see 'Confidentiality Agreement'
- Promising Note: A written commitment by the buyer to pay the seller a specific amount at a future date.
- Non-Binding Offer (or in English NBO, or Non-Binding Offer): is a preliminary proposal made by a potential buyer to buy a business or business. Unlike a binding offer, the NBO does not legally compel the buyer to complete the transaction. However, it does serve as a serious indication of interest and intent.
- Liabilities: The company's financial obligations and commitments, which may include loans, business debts, and other financial liabilities.
- Long-Term Liabilities: A company's long-term financial obligations, such as medium and long-term loans and bonds.
- Return on Investment (ROI): An indicator that measures the return on investment for the buyer following the purchase of the company.
- Expiry of Options: The date on which the buyer must exercise any options provided for in the sales agreement.
- Market Evaluation: An estimate of the company's market value based on similar transactions in comparable sectors.
- Evaluation Based on Sales Multiple: A valuation method that uses a multiple of the company's revenue or profits to determine its value.
- Asset Valuation: The valuation of the company based on the value of its assets and liabilities.
Note: This glossary is constantly being updated.
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