FRONT PAGE | MORE KNOWLEDGE | FAQ
FAQ - Terms you should know when buying or selling a business
1. What does M&A stand for?
M&A stands for Mergers and Acquisitions. It covers both companies joining forces and full or partial acquisitions.
2. What is an information memorandum (IM)?
An information memorandum is a confidential presentation or prospectus of the company. It is typically prepared by the business broker. It gathers everything a buyer needs to know: Key figures, business model, products, employees, market and potential. All interested buyers receive the same professional presentation, which forms the basis for the first indicative offers.
3. What is the difference between an indicative bid and a Letter-of-Intent (LOI)?
An indicative bid is a non-binding indication of the value from an interested buyer. It is based on initial information and provides an indication of where we stand in terms of value. A Letter of Intent (LOI) is the next step: a declaration of intent in which the parties agree on the valuation and the framework. After signing an LOI, the process moves on to more specific negotiations and due diligence. The LOI typically includes an exclusivity period during which the seller is not allowed to talk to other buyers.
4. What does normalization of EBIT and EBITDA mean?
EBIT and EBITDA are key figures that tell you something about the company's earnings.
- EBIT = Earnings Before Interest and Taxes.
- EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization.
When we normalize EBIT and EBITDA, we adjust the figures to better reflect the actual ongoing operations as they would appear to a future buyer. For example, owner salaries, one-off expenses or unrealistically low rents may be adjusted. This gives the buyer a more accurate picture of the company's actual earnings.
5. How is Enterprise Value (EV) calculated?
Enterprise Value is the total value of the company on a debt-free basis. There are different methods to calculate EV, but typically it is based on EBITDA/EBIT multiplied by a multiple.
6. What does a multiple mean?
A multiple is used to calculate the value of a company. It is a ratio - usually a factor multiplied by EBITDA. Example: If EBITDA is 5 million. DKK and the multiple is 5, the company is worth DKK 25 million (Enterprise Value). The multiple depends on the industry, market position, growth opportunities, risk, etc. It's not a fixed value and this is where experience and industry knowledge make the difference. Read more about valuation.
7. What is the relationship between Enterprise Value and Equity Value?
Enterprise Value (EV) is the total value of the company. Equity Value is what the seller gets in hand when the debt is paid. Equity Value is calculated as EV minus interest-bearing debt and plus the free cash (for example, bank deposits at the time of closing).
8. What is included in a calculation of net interest-bearing debt?
All debt that costs interest is counted here. This includes bank loans, mortgages, finance leases, corporation tax owed, vacation pay owed and other financial obligations. At the same time, cash and cash equivalents are deducted.
9. What is the difference between an asset transfer and a share transfer?
In an asset transfer, you only buy selected parts of the business - for example, customer contracts, machinery and employees. The rest stays in the old company. In a share transfer, you buy the entire company with everything it owns and owes. The choice depends on tax, risk and the wishes of the parties. There are pros and cons to both models.
10. What are working capital items and how are they calculated?
Working capital shows how much capital is tied up in daily operations. For example, it can be in inventory, receivables and accounts payable. Buyers look closely at working capital as changes here can affect liquidity and the need for financing. A normalized working capital is typically included in negotiations.
11. What is a due diligence?
Due diligence the buyer's thorough examination of the company – financially, legally, technically, and commercially. The due diligence process is typically initiated after the LOI has been signed. The purpose is for the buyer to confirm that the company is as presented in the information memorandum and in verbal discussions. Due Diligence is typically managed digitally in a DD system, where the buyer's "Due Diligence list" is answered by the company, auditor, and business broker by uploading materials and agreements to the DD system. Read more about due diligence .
12. What is a warranty catalog?
A warranty catalog is part of the purchase agreement. Here, the seller promises, for example, that the accounts are correct, that there are no hidden liabilities and that all tax matters are in order. If a warranty turns out to be incorrect, the buyer can claim compensation. It's an important document that requires care and experience to draft.
13. Equity versus enterprise value
Equity is what's on the books and therefore the book value of the company. But the company's market value is determined by what a buyer will pay. It depends on earnings, potential and buyer motivation. Therefore, market value and accounting figures are rarely the same thing.
14. What does earn-out mean?
An earn-out an agreement that part of the purchase price will be paid later if the company achieves certain agreed targets. It is typically used if the buyer and seller disagree on how much the company is worth, or if the seller is to remain with the company for a period of time. We have written an entire article about earn-out, which you can read here.
15. What is a SPA/APA?
SPA stands for Share Purchase Agreement and is used for share transfers. APA stands for Asset Purchase Agreement and is used for asset transfers. It is the legal purchase agreement that sets out the terms, price, warranties and everything that needs to be in place before you can close.
16. What does closing mean?
Closing is the day the agreement takes effect. The money is transferred and ownership changes hands. Before closing, both parties have been busy completing due diligence, negotiating the purchase agreement, and obtaining any necessary regulatory approvals. Once everything is in order, closing takes place.
