- Early Stage
- The early stage in a company's development. In this stage the company has no or only modest sales, is making a loss, has negative cash flow and must be financed with external capital.
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An earnings measure which gives "earnings per share" -- abbreviated EPS. The measure is an indicator of a company's profitability and is based on earnings after taxes (usually adjusted for possible dividends) divided by the number of outstanding shares:
EPS = (Net income – Dividends)/Number of shares in the company.
Assume that a company has a net income after tax of €100m and pays €25m in dividends. If the company has 15 million outstanding shares the earnings per share is:
EPS= (100-25)/15= €5.00.
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"Earnings Before Interest, Taxes and Amortizations", that is, the result of operations before interest, taxes, and write-offs of goodwill and of other excessive values.
This is a measure of results which permits comparisons over time and which is independent of financing costs, and of write-offs of goodwill and of excessive values which impact the company.
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A measure of results which is based on the result of operations before interest, taxes, write-offs of goodwill and of other excessive values (EBITA) in relation to net sales, expressed in percent.
Calculated as follows: EBITA/net sales and stated in percent (%).
"Earnings Before Interest, Taxes, Depreciations and Amortizations", that is the result of operations before interest, taxes, depreciation, write-offs of goodwill and of other excessive values.
This is a measure of results which permits comparisons over time and which is independent of financing costs, and of write-offs of goodwill and of excessive values which impact the company.
EBITDA is also used as an approximate measure of the company's cash flow as derived by calculation from its profit and loss statement.
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A measure of results which is based on the result of operations before interest, taxes, depreciation, write -offs of goodwill and of other excessive values (EBITDA) in relation to net sales, expressed in percent.
Calculated as follows: EBITDA/net sales and stated in percent (%).
A very short presentation of oneself, one's company or product. The idea is to be able to make a short and interesting presentation in the course of a ride in an elevator. Preferably between two floors! The goal is to get a follow-up meeting where it will be possible to provide more comprehensive information about oneself and one's offer.
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Enterprise Value, or debt-free company value, is defined as the market value of the company's equity capital plus interest-bearing liabilities, as reduced by its liquid assets (cash).
One way to calculate EV is to multiply the operating profit (e.g., EBITDA) by a multiple which is set by the market (the so-called EV-multiple).
Example: If the company's operating profit (e.g. EBITDA or EBITA) is €100M and the multiple is set at 7, the company's enterprise value will be EV= €700M. An estimate of the "market value" of the shares (the equity capital) can then be obtained by deducting the company's interest-bearing liabilities.
Usually this means an energetic and ambitious person who takes the initiative and sees possibilities where others see problems. The entrepreneur is often the founder, or a significant owner, of a growth company. Some examples of successful entrepreneurs are Ingvar Kamprad (IKEA), Bill Gates (Microsoft) and Steve Jobs (Apple).
If a person has started several successful enterprises, that person is called a serial entrepreneur.
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Equity (Capital) is the element on the balance sheet which constitutes the difference between the company's assets and its liabilities. In a corporation, equity is the shareholders' capital (or stockholders' capital) and is therefore booked as indebtedness to the owners. The equity consists in part of the capital which the owners have contributed (the share capital) and in part of the profits which the company has generated (retained earnings).
Even if the equity is the shareholders' capital, it cannot be paid out in whatever way the shareholders or the company may want. The country's legislation (The Companies Act) governs when and how the owners' capital may be taken out. Regard must also be had to the company's capacity to pay dividends and to its financial situation.
Equity can be divided into "Restricted Equity" and "Unrestricted Equity":
Restricted Equity
Unrestricted Equity
Sometimes the concept "adjusted equity capital" (AEC) is used, which entails the reported equity being adjusted by various items on the balance sheet. As an example, any excessive values of assets (e.g., real estate) and other reserves on the balance sheet may be added (net after taxes). Possible negative items should also be taken into account. The adjusted equity capital, however, is usually higher than the reported equity capital.
Compare also with "Share capital".
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A term for the relationship between equity capital in the company and the total assets on the company's balance sheet. The equity/assets ratio is measured in percent and is a measure of the company's capital structure, i.e., the division of the total capital between equity capital (the shareholders' capital) and debts (loans).
Equity/asset ratio= Equity capital/Total assets.
The equity/assets ratio shows how large a share of the total capital is made up of the equity capital. An equity/assets ratio of 25% shows that the company's financing is 25% equity and 75% loans.
An equity capital/assets ratio of 50% thus means that the company's financing is equally divided between equity capital and loans.
The equity/assets ratio is a measure of the financial risk in a company. A high ratio entails a lower risk -- and vice versa. How high should the equity/assets ratio be? It depends on the industry and on the phase in the life cycle in which the company finds itself. Many larger, mature companies have a goal of having a ratio greater than 30%. If a company is growing powerfully, or is in an acquisition situation, a much lower ratio may be defensible.
Too high an equity/assets ratio is not optimal either. It may be a sign that the company is overcapitalized and could increase the dividends to its owners -- unless the company plans an expansion or a substantial acquisition.
An alternative measure of the company's capital structure is the debt ratio, which gives the relationship between debts and equity capital. Read more under "Lever".
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A term for the relationship between equity capital in the company and the total assets on the company's balance sheet. Synonyms are "Solidity" and "Equity/Assets ratio".
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The value of all shares in the company. There may, however, be a difference between the book value and the market value of equity. One method for estimating the market value is to take the company's total value (Enterprise Value) and reduce it by interest-bearing net liabilities (taking liquid assets/cash into account). Equity Value is sometimes abbreviated "EqV".
Calculated as follows: EqV= EV - interest-bearing debts + cash= market value of the equity.
Compare with "Enterprise Value".
An escrow is a financial instrument held by a third party on behalf of two or more other parties in a business transaction. One example is the payment for a property deposited into an escrow account (a blocked account, a trust) in a bank waiting for the outcome of the final inspection.
The parties to a contract (escrow contract) have agreed on the terms for how and when the payments from the escrow can be done.
An escrow gives the seller the security that the buyer can complete the purchase while waiting for the outcome of the inspection. At the same time, the buyer gets a security to get back all or part of the payment if the property is not of the quality that the seller promised. The blocked funds are transferred to the seller only when the conditions of the sale are met.
Another example is that parts of the purchase during acquisition are deposited into an escrow account as security for the guarantees that the seller of the company gives to the buyer. It can be a commitment from the seller that lasts over a number of years, and where installments from the escrow account to the buyer take place if the buyer makes no warranty claims.
Suppose a company is sold for 100 million and 10 % (10 million) is deposited in an escrow on a blocked bank account as security for the three-year guarantees that the seller gave the buyer. The funds on the escrow account are also the seller's maximum commitment to cover any warranty claims.
The parties have also agreed that the guarantee commitment fades with time, and that one third should therefore be paid to the seller every year, that is, 3.3 million per year, unless the buyer has warranty claims.
If, however, it turns out that the company's inventories were valued at a price 2 million too high and the seller accepts the buyer's claims, a payment from the escrow account of 2 million is transferred to the buyer as a compensation for the inadequacy.
The party (for ex. a bank) that offers and is responsible for an escrow takes a fee of some percentage to cover the costs of administering the account and manage the payments.
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An abbreviation of European Private Equity & Venture Capital Association. EVCA was founded in 1983 and is an industrial association for persons active in the European venture capital market. The principal office is in Brussels.
Members are investors/venture capital companies and advisors who participate in business transactions (corporate finance, legal advisors and accounting firms). EVCA has more than 1,200 members.
You can search the membership on EVCA's home page to find advisors and investors suitable for various types of financing, situations and amounts.
Many countries have their own domestic Private Equity & Venture Capital Association, e.g. BVK (Germany), NVCA (USA) or BVCA (Britain).
This is a multiple (a constant) which, when multiplied by the operating profit (e.g. EBITDA), gives the company's so-called "Enterprise Value" (EV). The EV multiple varies with the company's industry and over time (the business cycle). A mature company, sensitive to the business cycle, may be valued by a multiple of five (5), while a growth company, not sensitive to the business cycle, may be valued by a multiple of 10.
The multiple is also affected by the market's tolerance for risk. A good economy and a positive view of the business climate raises the EV multiple.
A change of ownership when the old owners dispose of/sell their shares (exit) and new owners come into the company. This is a term which is often used by investors, especially Venture Capitalists and Private Equity, who are known for their exits. They invest and create value as owners in businesses for a limited time in order later to profit from their investment in an exit. An exit can be made in various ways, for example by a sale within the industry or through a listing of the company's shares on a securities exchange.
If there are several owners who together own the company, an exit is usually governed by a shareholders' agreement (the SHA).
Exit is a word which is sometimes associated with great drama. But it must be remembered that it only involves a change of ownership and that not everyone who works in the company actually exits. The management and all other employees remain and work there after an exit. And to put in in perspective, one should also remember that there are continual exits on the securities exchange, when listed shares are sold and bought.
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Exit (sale) of a company may be accomplished in a number of different ways, for example through a:
In all of these processes the goal is to create a competitive situation where several buyers make offers for the company in a more or less structured auction. The intention is to get the best possible price and the best possible terms and conditions.
A structured exit process, which is not a listing on a securities exchange, may be divided into the following phases:
A structured exit process takes some 6-12 months to carry out and is very demanding of work by the owners, the company's management and the advisors who lead the process. It is a challenge, and a difficult balancing act, to carry out an exit process and at the same time focus on the company's day-to-day business, transactions and customers -- on "business as usual".
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A financing of a company which needs capital in order to expand and grow its business. The financing may be done with loans, new issuances of securities, or owner contributions.
As an example, the capital may be used for investment in building up inventory in connection with increasing sales, in production equipment, or in order to finance new services and market channels.
A synonym is "Growth capital.