Glossary

CXO

CXO is a short way to refer to a C-level (top executive) business leader. The "X" is a variable replaced by the function (i.e. CEO, CFO, COO, CIO, CMO, etc.). In privately held companies, it is understood that a CXO will be effective in multiple roles.

Lower Middle-Market

Companies with 3 million to 50 million in annual revenues

EBITDA

Earnings before interest, taxes, depreciation and amortization. Some multiple of EBITDA is often used in valuing companies. For example, if a company has EBITDA of $700,000, and is selling for “4 times EBITDA” the sale price is $2.8 Million Dollars. Actually, the valuation of businesses is a bit more complicated. If you want to know the value of your company, getting an appraisal from somebody with experience in small business valuation is always the way to go.  CPAs, investment banks, business brokers, and professional appraisers are resources that can provide this guidance.

Goodwill

A business may have assets such as cash, accounts receivable, inventory, real estate, machinery, vehicles, etc. All of these items have a cash value. Goodwill is something that is more difficult to value, nonetheless, it exists within a going concern.  Goodwill may describe such things as brand acceptance, customer relationships and specialized know-how. The value of a business may include the cash value of its physical assets plus the value of its goodwill.

Investment Bank

A company that markets and sells businesses. Goldman & Sachs is a large, well-known Investment Bank.  Only the smallest investment banks will be interested in selling businesses with a minimum EBITDA $750,000 dollars. Unlike most business brokers, Investment Banks are fully licensed to sell securities.

Business Broker

A company that sells main street (very small) businesses. Some Realtors are also Business Brokers. Business Brokers often work with businesses with less than $500,000 in EBITDA.

Business Intermediary

A generic term which can mean any type of company or individual involved in the sale or merger of businesses. Many states require such a person or entity to have a license to sell businesses. Often, very little is required to become licensed as a business intermediary.

Private Equity Firm

A firm that has accumulated funds from various sources that are used to invest in private companies. Some private equity firms are interested in holding onto and growing these companies. Others are interested in buying and “flipping” them within 5 years or less.  There is often a requirement of the business owner to stay on and work while the business is being transitioned, but not always. The terms of “deals” vary widely. Private equity firms are seeking at least a 20% return on their investment capital to be interested in a deal.  The smallest private equity firms will usually be interested in businesses with a minimum of 1 million dollars in EBITDA.

Venture Capital Firm

A firm that has accumulated funds from various sources that are used to invest in startup companies.  Venture capital firms usually require majority ownership and seek a minimum 35% return on invested capital, because of the risks inherent in startup businesses.

Angel Investors

Private, high-net worth individuals seeking to invest small sums ($10,000-$50,000) in startup businesses.  These investors expect returns similar to those of  Venture Capital Firms (35% annual returns). They are usually issued shares of the company, but do not have control in the leadership of the company or voting rights.

Leveraged Buyout

A deal whereby the owner of a business is paid a lump sum, while the business being sold inherits that lump sum as debt. It is assumed that the debt is repaid out of the future profitable operations of the business.

Merger

Putting two or more companies together to form one. The idea is that “synergies” may be created. For example, if two businesses have two management teams, one team can assume the leadership of the combined firm, creating an immediate cost savings to “Newco” (the newly combined company).

ESOP

An employee stock ownership program providing Company Stock for employees as part as a defined contribution retirement program. Similar to a publicly traded company’s ability to offer equities in their 401k/profit sharing program it can be scaled to smaller companies. The company should be about 25 million in sales, around 100 employees, and have a valuation of over 5 million. It can be done for smaller companies but costs become prohibitive. It is a complicated transaction, but can provide great benefits to both owners and employees.