BZT Dictionary®

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Guarantee

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Guaranties

When a business is sold, the buyer often requires the principal owners (or the owners who have substantial influence in the company) to guarantee that the description of the company and its business agrees with reality.

For example, the guaranties may be that the parent company owns the shares in the subsidiaries, that the value of the inventory on the balance sheet is correct, that there is no known important agreement which is in the process of being terminated, etc. If it later appears that the inventory was too highly valued in the informational material provided to the buyer, those who provided the guaranty will be liable to compensate the buyer for the difference in amount.

In the sale agreement between the seller and the buyer, the guaranties are often specified in what is called "the guaranty catalogue", which is a special part of the agreement. What guaranties are given and how large the compensation is to be for any breach of the guaranties are often the most complicated parts of the negotiation between seller and buyer.


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GDP
GDP

"GDP" (Gross Domestic Product) is a measure of the total production of goods and services within a country. Compare this with GNP/GNI (gross national product/gross national income) which also includes what is produced outside of the country by businesses which are owned by the country's citizens. The measuring period is usually one year (e.g., rolling 12 months), but may also encompass one or several quarters.

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It is important to distinguish between nominal GDP and GDP measured in fixed prices. Assume that a country produces only two goods: mobile telephones and cars. During the first year 1 million telephones and 200,000 cars are produced. One telephone costs €200 and one car costs €30,000. This means that GDP for year 1 will be:

  • 1,000,000 telephones @ €200 + 200,000 cars @ €30,000= €200M + €6,000M= €6,200M.

Nominal GDP for the year will thus be 6.2 billion Euros.

Assume that during the second year 1.2 million telephones and 210,000 cars are produced. At the same time, the price of a telephone increases to €220 and of a car to €33,000. GDP for year two will then be:

  • 1,200,000 telephones @ €220 + 210,000 cars @ €33,000= €264M+€6,930M= €7,1940M.

Nominal GDP for year two will thus be nearly 7.2 billion Euros, which is an increase of over 16%. But this increase depends partly on an increase in volume and partly on an increase in price. Calculating GDP with fixed prices will correct for the price increase between the two years. We take the volumes from year two and the prices from year one. GDP with fixed prices will be:

  • 1,200,000 telephones @ €200+210,000 cars @ €30,000= €240M+ €6,300M = €6,540M.

GDP for the second year will instead now be approximately 6.5 billion Euros. This is an increase of 5.5%, which shows a significantly lower growth as compared with the increase in nominal GDP. The difference also shows that the manufacturers have succeeded in increasing their prices in parallel with the increase in volume -- inflation-driven growth.

GDP is used principally to see the growth in a specific country from one period of time to another. But GDP per capita is also used to compare growth and living standards between countries.

Measuring by comparing numbers between countries has its deficiencies, however, and is subject to a great deal of criticism. The most important objection is that not all production is included in GDP -- e.g., all "do-it-yourself-jobs", unpaid, non-profit or black-market work is not included.

Another deficiency is that it is difficult to determine the value of the public sector's production. This is taken at what it costs, not at the value it delivers. But despite these deficiencies GDP is an accepted, established and much used measure.

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Gearing

The term describes the relationship between a company's equity capital and its liabilities and is usually expressed in percent (%). Another relationship which is often used is operating profit before financial items in relation to net indebtedness (for example EBITDA/net debt).

Gearing serves to increase the return on equity capital, that is, the owners' contributions, by a supplementary financing with loans at lower interest than what the company pays on equity capital.

A good balance between equity capital and borrowed capital is healthy for the business, but a highly geared (borrowed) company means higher financial risk. If the enterprise loses profitability the gearing will act as negative lever on the return.

Guarantee
GNP

"GNP" (Gross National Product) or GNI (Gross National Income) is a measure of the country's total production of goods and services. As distinguished from GDP, GNP also includes production based outside of the country's borders (offshoring) in businesses owned by the country's citizens. See also "GDP".


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Golden parachute
Golden parachute

A golden parachute is a contract between a company and a key employee. The agreement gives the key person right to a substantial compensation if the employment is terminated by the company. Usually it is the CEO and certain members of management group that are covered by a contract with the right to a golden parachute.

The purpose of such contract is to provide certain key employees security when major changes occur. A common situation where the parachute clause is used is when the management board of a company decides to dismiss the CEO. The compensation can for example consist of a cash payment, a severance grant during a fixed period of time, retirement benefits or share-based instruments.

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Another example is in case of acquisition. If the management of the company that is bought feels that their jobs are threatened after the acquisition, they may decide to leave the company before the buyer makes the evaluation about which key persons they would like to keep. It may go so far that the managers try to prevent a takeover if they think they will be dismissed when the acquisition is completed.

A golden parachute gives these key persons a financial security in case they lose their jobs and it means they can await the buyer's plans and decisions regarding business activities. It also indirectly gives the buyer of the company some certainty that the key employees would remain in the company after the acquisition.

Even high-ranking state or municipal officials and politicians may have some kind of golden parachute that can be used if they are fired or lose their political mandate. In this case it is often an intention to give an official, who has perhaps limited his career to one (1) employer, the financial security to be able to overcome a change.


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Goodwill

A term for the values (item on the balance sheet) which exceed the booked value of the company's assets. In conjunction with a purchase of a company or a business, goodwill may consist of established trademarks, patents, know-how, etc.

If the company has a goodwill item on its balance sheet, that item may be re-valued every year, which can lead to write-downs or write-ups of its value which can affect the profit and loss statement.

Grass roots financing

"Grass roots financing" is a method of financing a company, or a project, in which many (private) investors each make a relatively small investment. Usually these investments are coupled with high risk and are used, for example, to finance the start-up phase of a new business.

Growth capital

A term for the capital a company or an enterprise needs so as to be able to grow in a goal-oriented and consistent fashion.

A company in a growth phase may encounter problems with liquidity (cash) since the business must expand in several directions simultaneously. For example, this may involve financing of product development, new product lines, start-up of a sales company, or build-up of inventory.

The financing can be done through new loans or a new securities issuance, which will in addition increase the equity capital and strengthen the balance sheet.

A synonym is "Expansion capital".