Key Terms Related to Business Valuation, Selling, Recapitalizing, or Investor Capital
Get familiar with the language of investors so you’ll be prepared to discuss financial opportunities for your medical practice. These are just some of the 100+ terms defined in our complete Glossary.
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization): is a measure computed for a company that looks at its "top line" earnings before deducting interest expense, taxes and depreciation charges. It is used to compare related companies and for purposes of valuation.
Depreciation: An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.
Divestiture: Disposition or sale of an asset by a company. A company will often divest an asset which is not performing well, which is not vital to the company's core business, or which is worth more to a potential buyer or as a separate entity than as part of the company.
Due Diligence: A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of cash flow calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, and amortization).
EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation, and amortization, we can clearly see the amount of money a company brings in.
This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.
Enterprise Value (EV): is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization.
Exit Strategy: A fund’s intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates, including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company, or a recapitalization.
Multiples. Valuation multiples derived from similar business sales are often used to estimate the likely selling price of a business. These multiples are calculated as ratios which relate some measure of business financial performance to its potential selling price.
Recapitalization: The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged-buyout sponsors. (See also: Exit Strategy)
Strategic Investors: Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.
Term Sheet: A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail.