Important Terms To Know When Selling A Company

If you're a founder and you haven't been through the process of the sale previously, whether You’re having a first conversation with an investment banker M&A lawyer or adjacent deal professional, you're going to hear some confusing terms of art. Here's a quick primer on what really matters…

VALUATION

This is what the market price is for your company usually expressed as a multiple of revenue earnings, or typically EBITDA. (More on that in a minute). This is an indication where the market is for your business. Right now, this will often be frustratingly free of your expectations, and sometimes seem far too focused on your financial metrics and not your uniqueness.

Take heart. There's a place in this process for brand & MOAT and other differentiators, but none of that stuff will matter much, If the financial piece doesn't pencil out,

EBITDA (earnings before interest, taxes, depreciation, and amortization).

Think of it as the cash earnings of your business. Often adjusted by buyers and bankers to reflect some degree of normalization for salaries, leases, and other expenses that might be different without you, the founder involved get to know this term. It's likely that everyone involved in your deal will use it. Some will pronounce it, EBITDA or EBITDA or some variation. But in all likelihood, your business will sell at some multiple of this number.

Structure

This will come up when your investment banker or buyer is proposing any non-cash element of your deal. In other words, X amount in cash, Y amount Instructure, where in this case structure means something like a seller note roll or retained equity.

Bank or mezzanine financing even preferred or structured equity. This gets murky pretty quickly. But for you just think of it as the deal being comprised of the cash you received at closing and the structure of the comprise future payments, some of which are contingent others more certain.

Due Diligence

This is the process that starts after you've agreed in principle to deal terms with your buyer. It follows their letter of intent or LOI. It's an effort on the buyer's part to make sure that they've assessed all the risks validated all of their assumptions and your assurances, including your representations about financial and other conditions.

So they know exactly what they're paying for and how they'll operate the business after you've closed the deal. Especially if you're walking away afterwards, this process will feel invasive and at times even accusatory lean on your advisors and don't take it personally it's necessary, but it eventually ends and you'll be richer literally for the experience.