PRIVATE EQUITY TERMS

Acquisition: 
When a company, often a private equity firm, takes ownership of a new company. This ownership can be partial or full, but typically the firm looks to acquire a majority.

Action Items:
A list of tasks to be completed, typically by the junior person in the room, generated during an important all-hands-on-deck meeting— usually including white boards.

Add-backs:
Expenses paid by a company that a seller wants to add back, increasing earnings. Add-backs can include above market compensation, non-recurring items, or relatives on the payroll who don’t show up to work. Add Backs can also be negative— for example, below market compensation of an owner who needs to be replaced by an at market employee.

Add-on Acquisition:
When one company purchases another, so that the purchased company can be integrated into the purchasing company. Contextually, this typically looks like a portfolio company expanding.

Adjusted EBITDA:
EBITDA adjusted for Add-Backs.

AIV:
Alternative Investment Vehicle

All Hands on Deck:
A large group meeting that can include all employees. Used when there is a big announcement and the company wants everyone to buy in and row in the same direction.

Allocation:
The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.

Alternative Assets:
This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.

Amortization:
In accounting, a technique used to lower the value of a loan or an asset over time. In the case of intangible assets, the asset cost is spread out over time to relate it to the resulting revenue.

Asset:
In simple terms, something that holds value. For example, intellectual property rights, physical property, or even an employee’s abilities.

Asset-based Lending:
If a company does not have enough cash flow to obtain a loan, the business may use physical assets as collateral.

Back Burner:
When a project that was a top priority last week has been replaced by a new top priority project this week. The former top priority project gets moved to the back burner.

Bandwidth:
The capacity to pick up an additional top priority project on top of all other action items. Might result in some projects getting moved to the Back Burner.

Bear and Bear Market:
A negative sentiment, opposite of Bull. It often means the near future will be challenging. A stock market decline of more than 20% means a Bear Market.

Black:
Another word for profitability. For example, “The company is operating in the black.”

Black Swan:
An extremely rare Tail Event.

Book Value:
In accounting, the book value of a company is typically considered to be the sum of its assets after depreciation and amortization minus its liabilities. It is usually different from the company’s market value.

Bottom Up/ Bottom Up Investing
Bottom up investing focuses on individual stocks instead of larger economic cycles, believing the right companies can perform well despite what happens in the economy.

Broke:
Having completely run out of money.

Bull and Bull Market:
A positive sentiment, opposite of Bear. It means stock market values are increasing.

Business Broker:
A person or company that helps facilitate a business sale and purchase, usually in the case of small businesses. Their fee is typically a percentage of the transaction.

Buyin:
Showing support for a project or an idea.

Buyout:
When a private equity firm acquires the majority of a company, usually using some debt financing.

Capital:
Another word for money, finances, or funding.

Capital Call:
When a fund manager requests that limited partners fund a portion of their capital commitment.

Capital Commitment:
An investor’s obligation to a certain dollar amount of investment to a fund over a specified time period.

Capital Expenditures:
Abbreviated CapEx, funds used by a company to acquire, maintain, or improve physical assets. For example, upgrading a machine or buying property.

Chasing Nickels Around Dollars:
Losing sight of what’s important and focusing on small details, or prioritizing cutting costs versus investing in the business. See Penny Wise Pound Foolish.

Chinese Wall:
Prohibition on sharing any information whatsoever to maintain confidentiality— particularly in sensitive areas like mergers and acquisitions of publicly traded companies.

Cockroach Theory:
If you see one, you know there are a lot more.

Commitment Period:
The time period that a fund manager can call capital from its limited partners.

Committed Capital:
Investors’ Capital, raised by a fund manager and then used for investments.

Cookie Jar Accounting:
When a business manages or “smooths over” earnings by manipulating timing of revenue and expenses.

Crown Jewels:
A company’s prized assets that contribute to its earning power and its valuation. These assets can be anything from intellectual property to long-term contracts with key customers.

DCF:
Abbreviation for Discounted Cash Flow. See Discounted Cash Flow.

Debt Financing:
A company receives funds through issuing debt to various investors. This is the opposite of equity financing, wherein a company gains funds through selling stock shares.

Deep Dive:
When an employee or a group of employees exhaustively researches an idea. Typically after someone has Run it Up the Flagpole and the manager pushes it back down to the lower level, asking for more information.

Discounted Cash Flow (DCF):
A financial exercise to facilitate capital allocation decisions. Investment returns are projected into the future and then discounted back to the present time using an appropriate discount rate.  When a DCF is used in conjunction with investment amounts, the end result is Net Present Value.

Dove:
An economic policy advisor that advocates for low interest rates, sometimes at the expense of high inflation. Their goal is to spark job growth.

Due Diligence:
The process a buyer and seller undergo before the sale where the buyer investigates the company’s finances, legal matters, and operations. Learn more. 

Dumpster Fire:
Not a good thing, whether it is behind an Arby’s or it is your portfolio company.

Eat Own Cooking:
An operator or deal sponsor investing alongside investors.

EBITDA:
Stands for earnings before interest, taxes, depreciation, and amortization. A metric commonly used to measure a company’s cash generating capability and in business valuation. Learn more. 

EBIT:
The shortened version of EBITDA, standing for earnings before interest and taxes. It is used to understand a company’s net income before interest and taxes.

Efficient Frontier:
The maximum amount of investment return for a given level of risk in a portfolio.

Equity Value:
The money that would be returned to the company’s shareholders in an exit or liquidation and after all debts are paid off.

Exit:
When a business owner sells the business to investors or to another company. Sometimes used in the phrase “exit plan,” signifying a planned business departure.

General Partner:
A business partner who has the authority to manage the limited partnership.

Golden Handcuffs:
An employee who is unable to change jobs and maintain the same level of compensation has golden handcuffs keeping her at the current employer.

Golden Parachute:
A terminated employee with a particularly generous severance package

Gross Profit Margin:
A company’s total sales minus cost of goods sold (COGS). It is often communicated as a percentage of the company’s net sales.

Hawk:
Opposite of the dove. A policy maker who prefers to keep inflation under control, even if that means raising interest rates and harming economic growth.

Hockey Stick:
Projections / forecasts that ramp up significantly in the future years.

Holding Period:
The amount of time an investment is held by an investor, or the time between the purchase and sale of an asset. In private equity, this often means the holding period of a portfolio company.

In the Red:
Losing money. Negative earnings.

Investment Banker:
Professionals who help with complex transactions, often for financial institutions such as corporations or the government.

Investment Period:
See Holding Period.

John Hancock:
A signature.

Leveraged Buyout:
A Leveraged Buyout (“LBO”) is an acquisition of a business using debt— or leverage— as a source of funds to complete the acquisition.  The acquired or target company then needs to repay the debt going forward.

Liability:
A liability is a debt or obligation owed from one party to another. In a business, liabilities include accounts payable, leases, loans, etc. Most liabilities show up on a company’s balance sheet— or in the footnotes of the financial statements.

Limited Partner:
Sometimes called silent partners, their liability is limited to the amount they have invested in the company. They often have no daily involvement in the business. See General Partner.

Low Hanging Fruit:
Tasks that should be more easily accomplished that can have a quick return or payback. Often, the low hanging fruit is at the top of the action items list.

Make Hay While the Sun is Shining:
When conditions are good to harvest, do so. Or when conditions are good to make money, do that too.

Management Buyout:
A form of Leveraged Buyout, when the management or team purchases the business from its owners. Learn more.

Merger:
When two previously independent companies combine to form one company. Usually, both companies gain something from the transaction.

Mezzanine Financing:
Also called mezzanine debt, it has debt-like features and equity-like features and sits between senior debt and equity. Learn more.

Money:
Cash, green, cabbage, Benjamin’s (100’s) coin, cheddar, scratch, clams, bread, dough, and whatever is in the latest rap music video.

Net Present Value:
Net Present Value (“NPV”) compares the present value of future cash flows to the cost of the project or initial investment. If the NPV is positive, it indicates the investment generates a positive return. 

Non-recurring Add-backs:
Add-backs that a seller argues are one time events; the associated expenses will not happen again, and therefore should be added back to earnings. See also Recurring Non-Recurring Add-backs.

Penny Wise Pound Foolish:
Making decisions to save pennies and losing sight of the long term big picture. Often the penny-saving actions destroy long term value. 

Portfolio Company:
A company that is owned by a private equity fund.

Present Value:
A dollar today is worth more than a dollar tomorrow, and a dollar today is worth a lot more than a dollar ten years from now. Converting future dollars to a value today requires selecting a discount rate and applying it.

Private Equity Fund:
A fund of capital to invest in private businesses that are not publicly traded.

Puke Point:
When an investor/owner finally gives up on a money-losing investment and exits.

Razor/ Razor Blade Model:
A business that has high-margin recurring revenue selling replacement or consumable parts to its customers after making an initial capital equipment sale.

Recapitalization:
When a company borrows money to pay a dividend to the owners, or to purchase equity from the owners. Learn more.

Recurring Non-Recurring Add-backs:
Non-recurring add-backs that seem to keep recurring.  For example, “that inventory write-off in 2023 was a one time event and should be added back to earnings.” But then an inventory write off happened in 2022 and in 2021 as well.

Rowing in the Same Direction:
Making sure all employees are putting forth effort and working toward a common goal.

Run it Up the Flagpole:
Seeking feedback from a senior member of management. For example, “I don’t know if that is a good idea or not, let’s run it up the flagpole and see what the important manager thinks.”

Search Fund:
A search fund is a fundless sponsor who raises a small pool of capital to fund a search to buy and typically operate a company. Learn more.

Second Bite of the Apple:
A leveraged recapitalization where the seller receives proceeds (first bite of the apple) and maintains a portion of the ownership, continues to manage the company, and sells the business down the road for the second bite (additional proceeds). Learn more. 

See How the Sausage is Made:
Seeing or learning about an undesirable process that produces a positive outcome. Sausage tastes good— the end product is desirable. However, the actual process of making sausage— from slaughter on— is not fun to watch.

Seller Note:
Debt financing that is provided by the current business owner (seller) in a change of control transaction. The seller becomes a lender and expects to be paid both interest and principal going forward. A seller note is typically a small portion of the total consideration (ie 10%) and is frequently used to bridge the gap between buyer and seller valuations. Learn more. 

Senior Debt:
Highest priority of repayment, frequently secured by assets and/or a personal guarantee.  Typically has the lowest interest rate of all lending sources.

Sleeping Beauty:
A business that has a great future. With the right changes and leadership, the company could become very valuable. It is just waiting for that magic “kiss,” like in Sleeping Beauty.

Tail Event:
An unusual or very rare event that, if it happens, can have significant impact. A tail event typically has a likelihood of three or more standard deviations from the expected outcome, or less than 0.03%.

Tanking:
In business, a decline or failure. In sports, an intentional underperformance.

To the Moon:
When the value of something increases rapidly.

Tombstone:
Mementos from transactions, usually made from lucite and customized to reflect particulars of the deal or the companies involved. While some like to display them on office bookcases as badges of achievement, accomplished people typically deposit them into the circular filing cabinet.

Walking Dead:
A portfolio company that isn’t doing well, the future is not looking good, and yet it just won’t die.

Working Capital:
The difference between current assets and current liabilities. Working capital is the amount of investment needed to operate your business, and a growing business typically has increasing working capital needs.

Working Capital Adjustment:
Working capital fluctuates daily— which can make an acquisition valuation complicated, particularly in a seasonal business. To overcome this, it is common to set a working capital target for closing. The working capital adjustment is increasing or decreasing the purchase price based upon the difference between the actual working capital delivered at closing and the working capital target. For example, if the working capital target is $2.5 million, and the actual working capital delivered at closing is $2.6 million, there will be a $100,000 increase in purchase price.

Zombie:
See Walking Dead.