BSBR Educational Resources
M&A Terminology
Capitalization of Earnings
Capitalization of Earnings
Dictionary Definition
This method is used to value a business based on the future estimated benefits, normally using some measure of earnings or cash flows to be generated by the company. These estimated future benefits are then capitalized using an appropriate capitalization rate. This method assumes all of the assets, both tangible and intangible, are indistinguishable parts of the business and does not attempt to separate their values. In other words, the critical…
What is Beta?
Beta
Dictionary Definition
Beta is a factor used to measure systematic risk. Systematic risk is the uncertainty of future returns owing to the sensitivity of the return on the subject investment to movements in the returns for a composite measure of marketable investments.
Plain English
Beta refers to the volatility or riskiness of a stock relative to all other stocks in the market.
Why it Matters to You
This is used in calculating the WACC. Generally, we are using public company beta…
What is the Equity Risk Premium?
Equity Risk Premium...AKA ERP
Dictionary Definition
Equity Risk Premium (ERP) is defined as the extra yield that can be earned over the risk-free rate by investing in the stock market.
Plain English
The equity risk premium is based on the idea of the risk-reward tradeoff. As a forward-looking quantity, the equity-risk premium is theoretical and cannot be known precisely, since no one knows how a particular stock, a basket of stocks or the stock market as a whole will perform in the future…
What is the Risk Free Rate?
Risk Free Rate
Dictionary Definition
The risk free rate is the return that can be earned by investing in a riskless security, e.g., U.S. Treasury bonds.
Plain English
The risk free interest rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time.
The 20 year treasury yield curve rate is the most widely used metric for the risk-free rate.
Why it Matters to You
This is used in calculating the WACC.
What is Weighted Average Cost of Capital?
Weight Average Cost of Capital...AKA WACC
Dictionary Definition
A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including common shares, preferred shares, and debt. The cost of each type of capital is weighted by its percentage of total capital and they are added together.
The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt, and preferred stock it has. …
What is a Bolt-On Company?
Bolt-On Company...AKA Tuck-In or Add-On
Dictionary Definition
A bolt-on acquisition refers to a company that is added by a private equity (PE) firm to one of its platform companies, usually in the same line of business, that presents a strategic value.
Plain English
This is a smaller investment for a PEG and could be of any revenue or EBITDA size, as long as it presents a synergistic value to the platform company.
Why it Matters to You
For a smaller company, we would target PEGs tha…
What is a Platform Company?
Platform Company
Dictionary Definition
A platform company is a company that a Private equity group (PEG) views—when investing through acquisition in a new industry or market space—as a starting point for follow-on acquisitions in the same area
Plain English
This is the first investment a PEG makes in certain industry or market. Depending on the PEG, the typical platform company has EBITDA of approximately $2M and must be scalable.
Why it Matters to You
This is relevant to business …
What is a Private Equity Group?
Private Equity Groups..AKA PEGs
Dictionary Definition
Private Equity Groups are an investment management companies that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital.
Plain English
A group of investors who use other people’s money to purchase businesses. They generally do not operate the business themselves…
What is S,G,&A?
Selling & General Administrative Operating Expenses...AKA S,G&A
Dictionary Definition
The major non-production cost presented in an income statement (statement of profit or loss).
Plain English
All of the expenses on the profit and loss statement that are not directly tied to the cost of creating the product or service.
Why it Matters to You
Business owners need to be aware that the SG&A is a potential topic of conversation for a buyer who wants to purchase your company and has dupl…
What is the Altman zScore?
Altman zScore
Dictionary Definition
The Altman Z-Score is the output of a credit-strength test that helps gauge the likelihood of bankruptcy for a publicly traded company. The Z-score is based on five key financial ratios that can be found and calculated from a company’s annual 10K report.
Plain English
This is a score that gauges the likelihood that a company is headed for bankruptcy.
Why it Matters to You
This is a good metric for any company to review. Should the company fall in…