Glossary of Terms
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The 3Cs Process is designed to enhance the investor-readiness of a business proposition.
Ambitious small companies can float on the Alternative Investment Market, after a vetting which is less rigorous than it would be for a full listing and is also generally less expensive. AIM, which was launched by the London Stock Exchange in 1995, can provide an exit for the orginal backers of the business.Fundraisings tend to be in the 2m - 20m range, averaging around 5m. See listing .
Typically a successful entrepreneur who has built up a business, sold it and now brings not just money but experience and street-wisdom to give credibility to a young management team starting up a new venture. Far-sighted investment institutions keeps lists of potential angels whom they can introduce to young businessses that otherwise might not otherwise get off the ground. See angels in Route to Funding.
back to basics
Selling non core activities. This occurs when a company concentrates on its core activities and sells parts of the business which are not central, hence, back to basics.
BAMBI - Bloody Awful MBI
When a Management buy in goes wrong.
The accepted way of providing companies with a choice of providers of financial and professional services. Typically, a short list of potential suppliers is drawn up and invited to pitch for business.
Top four accountancy firms: Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers.
BIMBO (buy in management buyout)
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 towards growing the business.
In a traditional MBO the incumbent team of managers normally negotiate direct with the vendor of the business their former employer and meanwhile reach agreement with an investment institution to back them. Recently, however, many MBOs have been financed by a 'bought deal' where the institution is in the position of a purchaser negotiating with the vendor, and then works out arrangements with the management team.
break even point
The level of sales where a company's gross margins just cover its costs.
The rate at which a company requires additional cash to keep going.
Detailed description of the plans of a new business, or of the expansion plans of an existing business, together with financial projections.
BVCA (British Venture Capital Association)
Association of suppliers of venture capital and investment capital.
caps, floors and collars
Limits on interest rates. Interest rates can be either fixed or variable. Where they are variable, it may be agreed (at a cost) that the rate is capped, ie 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.
Just what it says, referring to a business which has a strong positive cash flow.
Investing Chairman in an MBO or MBI.
Colossally over priced MBO.
Investing in a growing enterprise is always going to be risky, but you can obtain 'comfort' by checking up on various aspects of the businessthe state of its relationships with its customers, for instance, or whether its products are highly rated by reputable authorities. Comfort factors can often be provided by due diligence.
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 the 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.
Before a deal is completed, an investor in a business venture may insist on certain conditions being satisfied. See also comfort factor.
See back to basics .
The rate at which investment propositions come to venture capitalists.
Individuals know what being in debt means. 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. 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 equity is related to the profits of the business. See also gearing .
An element of a transaction to be paid in the future, sometimes depending on performance targets being achieved.
de layering and downsizing
Examples of polite management speak to describe what happened in much of industry in the recessionary years of the late 80s early 90s and more reecently. Layers of middle management, once thought essential, were stripped out of the corporate hierarchy. And many companies found it was more profitable to trade with fewer staff and sometimes lower turnover and to outsource some of their activities.
See growth capital.
When more shares are issued, the value of each share is diluted, unless the total assets of the business are increased. See options .
Don't invest - no growth opportunity.
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 that there would be nothing left to reward shareholders.
discounted cash flow
A method of assessing the value of an investment based on predicted cash flows 'discounted' to take account of the value of money over time.
This is a ratio which measures the number of times that a dividend could have been paid out of the year's earnings. The higher the dividend cover the 'safer' the dividend.
A bad investment.
See worst case scenario.
When investors commit themselves to back a venture, all the funding may not be needed at once. Some is 'drawn down' later.
The detailed analysis and appraisal of a business which takes place after a deal has been agreed in principle. During due diligence nasty things may creep out of the woodwork - flaws appear in a property lease, references on individuals don't say what they were expected to say, assumptions on which profit forecasts were based don't make sense.
earnings per share
Profit after tax divided by the number of ordinary shares in issue.
Early Growth Funds
Business angel matched funding schemes were launched as part of the UK Government's early growth funding initiative. These operate on the basis of a fund provided by the Government that is invested alongside business angel funding.
A provision sometimes written into the terms of a transaction that the vendors will receive further payments if the business sold achieves specified performance levels.
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.
A new or young business with the potential to grow into a substantial business.
A word to describe an enterprising businessman or woman. Normally an owner of an independent business.
Equity investors share ownership of an enterprise and share both the rewards if the business prospers and the risk of losing their investment if things go wrong.
EVCA (European Venture Capital Association)
Association of providers of venture capital and investment capital across Europe.
The Opportunity for investors to realise (i.e. sell) their investment. Normally, the exit from investment in a private company occurs either through a trade sale of the company or through its flotation on the stock market. A good exit benefits both the individuals who launched the business and outside investors who back them. (Some of these outside investors look for a quick exit, some take a longer view). See short termism .
Investment companies earn their rewards in the form of dividends or interest payments, but they may also be entitled to fees in connection with putting together the deal and for monitoring progress of the investment.
Where a financial institution buys a business, and then decides the form of management it wishes to run it. Different from a bought deal, where the existing management team play 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 plant or buildings, floating charges apply to all the company's assets.
Cynics say it is a sure sign of the start of the slippery slope for a hitherto successful business when the chairman decides the company is important enough to have a flagpole in the car park. (Sometimes known as the crested carpet syndrome or the fountain in the foyer syndrome.)
Very short investment, where the exit is often identified pre completion.
In a public market context, the percentage of the company's shares that is in the hands of outside investors, as opposed to being held by corporate insiders.
A much favoured feature of modem management techniques concentration on business activities which the company can do well, rather than spreading resources of skill and capital across a range of activities.
The ratio of debt to equity capital. If a balance sheet shows 5 million of total assets and debt of 4 million, the gearing is 80%. A very highly geared business is living dangerously. As in a car, high gearing can produce dashing performance - but leads to problems when you have to climb a steep hill.
Ambitious businesses sometimes aspire to going public becoming a quoted company. Against this there are directors of quoted companies who feel frustrated by the perceived short termism of stock market investors and turn themselves back into a private company.
Share with unusual rights, often allowing exiting/ minority shareholders disproportionate control or rights to future capital proceeds.
The element in the value of a business over and above its tangible assets. It includes the business's reputation and contacts. See also intellectual property.
growth capital or development capital
This has been described as small companies' equivalent of big companies' rights issues on the stock market - equity capital raised to provide for the company to grow ambitiously with the support of long term capital rather than relying wholly on bank debt.
The situation in a sub critical mass business with no potential to reach critical mass, so the managing director just ends up running around getting nowhere but frustrated.
hands on hands off
Adjectives applied to investors to indicate their 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.
Operating at a threshold of new technological development. The two most active high tech sectors are life sciences and information technology.
The shape of a typical graph of a successful business and an optimistic business plan. The graph dips to begin with, indicating that the company's expenditure is higher than its income, but soon heads 'northwards' as the company establishes a profitable, growing trade.
A company or facility designed to foster entrepreneurship and help Startup companies, usually technology-related, to grow through the use of shared resources, management expertise, and intellectual capital.
Independent, or non executive, directors, although part-timers, 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 (titled golfing friends of the chairman and suchlike) who were not highly regarded externally. 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 an unlisted company), whereas the executive team may be too close to the action. The modem view is that independent directors also have a vital role in protecting the interests of shareholders.
institutional buy out (IBO)
Where a financial institution acquires a business and installs its chosen management. Slightly different from a bought deal, where an institution negotiates the acquisition of a business with a view to handing it over to an MBO or MBI team. See also financial purchase.
A fancy word for a particular type of loan or share capital.
A company's intangible assets like 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.
Anyone in a position to bring together the principals in a deal or prospective deal. Everyone operating in the financial market tries to keep on good terms with intermediaries, such as accountants and merchant bankers, because it can lead to profitable business. See also beauty parades.
A person who while remaining within a larger organization uses entrepreneurial skills to develop a new product or line of business as a subsidiary of the organization
Long term equity capital provided by institutions to facilitate growth in private companies. To some extent the term is interchangeable with venture capital, but it emphasises that such capital is available for growth projects being carried out by a range of young or established businesses, whereas many providers of venture capital concentrate mainly on MB0s and MBIs which change the ownership of a business.
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.
Initial Public Offering see listing.
Internal Rate of Return. A measurement of the return on an investment based on discounted cash flow, expressed as an annual percentage rate.
LBO (leveraged buy out)
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.
In a substantial investment, no one investor will wish to carry the whole risk. It is therefore shared among members of a syndicate. Normally, one investor takes the lead in negotiating the terms of the investment and has responsibility for finding other syndicate members. Lead investor can also be described as sole investor.
Examples of words used in the financial world to sum up the success or failure of a business lemons ripen fast on the tree, and investments which leave a bitter taste ripen faster than good ones. See also dog and pearl.
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.
This measures whether it is easy to transform the assets of a business 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.
When a company trades its shares on the stock market. In the UK this can be either on the London Stock Exchange or one of the other markets, such as AIM or OFEX.
Large management buy out (usually defined as involving a transaction over 10 million). Whereas in a smaller MBO the majority of equity shares will often be held by the management teams, in an LMBO the managers may have only a minority of the equity. A syndicate of investors will share the greater part of the equity. Such investors may nominate directors to sit on the board alongside the managers.
A phrase heard in some quarters in the 1980s but (like the word yuppy) unfashionable in the 1990s. It was a shorthand way of stating the obvious that many business enterprises succeed because of the single-minded determination of an entrepreneur to make a fortune. By the 1990s there was greater emphasis on other criteria for business success.
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 and acquisitions - a phrase that covers the process of buying, selling and merging businesses.
management start up (MSU)
A phrase used to describe a new business which has a clear management team and a structure.
management walk out
When managers running a company, or a subsidiary, decide to find a role for themselves elsewhere as a team, possibly by starting their own business or carrying out an MBI. They have to be careful not to use any intellectual property belonging to their ex employers without permission.
A public place where buyers and sellers make transaction, directly or via intermediaries. Also sometimes means the stock market.
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 it to its management team. Another source of MBOs is family businesses whose owners 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 the managers hold shares in the company.
As the name implies, a half way position between equity capital and debt. The UK form of mezzanine finance fills a useful role in transactions such as large buy outs. Those leading the transaction raise as much equity capital as they can and as much senior debt as possible but there may still be a gap. Mezzanine finance can bridge the gap by offering a higher rate of interest than that offered on the senior debt in return for taking on more risk and there is often the added attraction of vouchers to subscribe for equity if the company floats or is sold.
The collective name given to middle sized companies in the German economy. Mittelstand manufacturers have achieved a formidable reputation for their world beating high quality products. Such companies family owned or management owned have provided a role model for some of the most ambitious British middle sized businesses.
The National Association of Security Dealers Automated Quotation is the largest US stock market in terms of companies listed and number of shares 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 Market Inc, a wholly owned subsidiary of the National Association of Security Dealers. See EASDAQ .
Provisional new legal entities, with names like Snooks & Bloggs Newco, are often established during restructuring operations including MBOs. The newco will acquire certain assets of Snooks & Bloggs. The new owner may revert to the original company name or may decide to use a completely new name.
non executive director
See independent director .
Ambitious small companies in France can float on the Nouveau March launched by the Paris Stock Exchange in 1996, after a vetting which is less rigorous than it would be for a full listing (and is generally less expensive). It is similar to AIM.
OBO (owner buy out )
A form of private placing where an institutional investor buys shares from a shareholder in a private company who wishes to realise his investment.
OFEX, an independent market, is cost effective for companies of the size of anything up to 20m. Fundraisings tend to be in the range of 300,000 to 4m, averaging around 1.5m
Share options can be issued to managers or sometimes institutions. They confer the right to acquire shares at a specified price at or after a future date, and they can be performance related. The release of share options will normally dilute the value of other shares in issue.
Ordinary shares the equity of the company. Decisions on matters like whether the company should be sold are normally taken by the holders of a majority of the ordinary shares. See also preference shares .
A self explanatory term but whereas in the past, it usually applied to the owner of something like a corner shop, today there are thousands of owner managers of substantial businesses, many of whom became owners as a result of a management buy out or buy in. Others built up the business themselves.
P/E (price/earnings) ratio
The market price per share of a business divided by the earnings per share (See earnings per share). The P/E multiple is sometimes applied to a business's profits to calculate the value of the business.
Pay it Forward
The act of voluntarily helping another without expectation of payback
pearl / gem
A good investment.
PFI (Private Finance Initiative)
A UK Government initiative in the late 1980s to introduce the benefits of private sector management and finance into public sector projects, such as road building and the building and running of hospitals. The PFI differs from privatisation in that responsibility for 'public service' aspects of the project e.g. clinical responsibility in hospitals remains in the public sector.
The set of activities intended to persuade someone to buy a product or take a specific course of action.
Part of the capital of a company but, by contrast with ords', preference shares are usually paid back over time, out of retained profits. Preference shares involve less risk than ordinary shares but do not give access to the capital gains that can accrue to holders of ordinary shares 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 have the same benefits as ordinary shares if the business is sold or floated.
A company whose shares are not traded on the open market - opposite of public company.
The business of making equity investments in unquoted companies.
The sale of a block of shares in a private company to an investment institution. Private placings normally do not involve any change in control of the business. They can occur when shareholders wish to retire, or for some other reason wish to realise all or part of their holdings.
A phrase to describe outstanding growth of a business.
RAMBO (Rescue After an MBO)
Sometimes MBOs go wrong. Perhaps too high a price was paid, or perhaps the management team isn't up to the job. In such circumstances a RAMBO may be required.
A provision sometimes written into the financing of a transaction that if the managers achieve certain performance targets their share of the equity will be increased.
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, and this can often lead to an MBO, an MBI or a trade sale.
Regional Development Agencies
Regional Development Agencies (RDAs) were established by UK Government to promote sustainable economic development in England. Their main tasks are to help the English regions improve their relative economic performance and reduce social and economic disparities within and between regions. There is an RDA in each of the nine regions of England. In many cases the RDA's website provides information on sources of funding (including grants administered by the RDA) and locally-based advisers (including Business Link).
Regional Venture Capital Funds
The Regional Venture Capital Funds (RVCFs) were established to focus on investing in the equity gap. Each of the nine regions of England has its own RVCF. All RVCFs have similar rules: they must invest in SMEs in their region, they must be the first institutional investor, their initial investments are limited to 250,000 and they can follow on after 6 months or more with a further 250,000. Each fund can also invest in a company at subsequent rounds to prevent dilution.
Bringing about fairly major changes in the organisation of a company, by changing the management and/or the share ownership structure.
When a business in trouble is turned round into a viable business through outside intervention.
When a small company takes over a larger one, or when the company being taken over is likely to be the major element in the combined business.
Usually an intermediary who is co ordinating the fund raising process.
The annual layout on an investment expressed as a percentage not of the original value but of the current value.
second round financings
Finance made available to young companies which have already launched products on to the market but need more cash to realise their full potential.
second time entrepreneurs
Many successful entrepreneurs build up a business, then sell it, either because they have an offer they can't refuse, or occasionally because they have itchy feet and want to look for another challenge. Institutional investors tend to like to back second (or third, or fourth) time entrepreneurs, because they have a track record.
secondary buy out
Also known as a 'buy out of a buy out'. Where the original MBO managers will sell the company to the next generation of managers.
another name for private placing.
Money used for the initial investment in a project or start up company, for proof-of-concept, market research, or initial product development.
This is the element of a financial package which consists of bank lending. It is senior because, if things go wrong, the lender has higher priority than those who provided equity or mezzanine finance.
See second time entrepreneur .
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 plcs often a way of using up spare cash in the business!
See options .
The sale of shares to a number of investors but not to the general public.
A management and investment philosophy which puts the interests of shareholders first in terms of earnings and asset growth.
short termism, long termism
The stock markets are often accused of having a short-term philosophy with the result, allegedly, that directors of quoted companies cannot plan intelligently because stock market investors insist on performance in the short-term. Investors in unquoted companies vary in their timescale philosophy. 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 is a shareholder.
Small Firms Loan Guarantee scheme
Loans provided by commercial banks where the lack of security is replaced by a guarantee from the government covering 75% of the loan, for which the government charges a fee.
See lead investor .
When a division of a company becomes independent, either by being taken over or through an MBO. Usually applied to a high tech division which has evolved specialist techniques which the parent company does not regard as fitting into its core business.
A well known character in modern business, who loves analysing performance figures for the sake of it, but his spreadsheets don't really add much to the sum of human knowledge.
A very successful investment.
A new business. It can be on any scale, but 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. See emerging business .
step growth (or exponential growth)
Ideally, what investors want to see in businesses they back is not just moderate growth but a rate of growth that takes the business into a different dimension. See quantum leap .
A term to describe a mixture of all the institutional elements of a transaction, equity, preference shares, mezzanine and debt.
A group of investors. See lead investor .
A word, often overused, to describe how two businesses would fit well together - the aim of mergers and acquisitions.
A company suitable for takeover is described as a target.
A document summarising the details of a potential investment which serves as the basis for a final business agreement.
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 principle applies because the individuals running the new venture each have their own track record.
Sale of a company to another company. As a form of exit, a trade sale is an alternative to flotation and more common.
An agreement between a buyer and a seller to exchange an asset for payment.
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 all the money will not be forthcoming. This risk is often underwritten by an institution which, for a fee, agrees to make up any shortfall.
valuation of shares
The shares of publicly quoted companies are valued daily, according to the ebb and flow 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 at the end of the day is always a matter of negotiation between a willing buyer and a willing seller.
VCTs (venture capital trust)
VCTs are specialist investment trusts which offer tax advantages to investors willing to provide money for investment in unquoted companies.
The seller of a business.
Risk capital in the form of equity and/or loan capital which is provided by an investment institution to back a business venture which is expected to grow in value.
A crude term sometimes applied to suppliers of venture capital who are perceived to be greedy or ruthless.
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!
window of opportunity
The best investments often take place because of circumstances which will never happen again.
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.