Decoding the Secret Language of Angels, VCs, and Eric Schmidt

Whether you're a start-up looking for Uncle Oliver to give you some love money, a technology company seeking a venture round, or a growth business hoping to get noticed by Google CEO, Eric Schmidt, you need to know the language deal makers use when making investments and buying companies.

Language is often used as a way to divide groups into like-minded and affiliated individuals. Corporate development executives, mergers and acquisitions professionals, venture capitalists, angels and money men and women tend to use their own special language made up of technical jargon, acronyms, lingo and tribal references. Understand their banter, and you immediately identify yourself as a worthy member of their club -- which is important if you want their money.

Here's a cheat sheet of jargon and acronyms you may run into on the road to attracting investment in -- and ultimately selling -- your business:

BATNA: "Best alternative to a negotiated agreement" refers to your options if you don't take the deal offered. The better your BATNA, the harder a negotiator you can be when selling your business. If good old Uncle Oliver wants 60 percent of your company for his $10,000, can you go it alone?
Downstroke: As a seller of a business, your downstroke is the minimum you stand to gain from the deal. Let's say you are offered $1 million cash for your company with an extra $500,000 possible if you meet certain thresholds into the future. Your downstroke is the million-dollar up-front payment.
Tipping Basket: When someone offers to buy your company, that person assumes there will be little things that are not exactly as you said they were in the negotiations. In using a "tipping basket clause" in the agreement, the acquirer is offering to put all of those little things into a basket and, as long as they do not exceed a specific amount, agree to ignore them.
If, however, the little things surpass a certain point, the basket "tips over," and the buyer will want compensation for all of the things that were in the basket. For example, let's say you agreed to have $4,000 in the cash register on the day the deal closes, and you leave only $3,000. The buyer is out $1,000. If your agreement includes a $75,000 tipping basket, the discrepancy is ignored.

But if you agreed to leave $100,000 cash in your business, and you left only $5,000, the $95,000 discrepancy is too large for the acquirer to ignore, the basket "tips over," and the acquirer will demand to be compensated for the entire amount of the discrepancy ($95,000 in the example).

PE: Investors talking about a stock's PE are referring to its price to earnings ratio, but in deal making, when PE is used as a noun, it usually refers to a private equity company.
Earn-out: An acquirer buying your company will likely pay you some money up front and also offer to pay you an additional sum of money in the form of an "earn-out" if you meet certain milestones (usually tied to profit, revenue, customer retention, etc.) in the future.
Turn: A turn relates to the multiple of your earnings a buyer is willing to pay for your business. For example, if you are considering an offer that amounts to four times your earnings before interest, taxes, depreciation and amortization (EBITDA), your adviser may say he thinks he can get an "extra turn" out of the acquirer, by which he means he thinks he can get the acquirer to pay five times EBITDA for your company instead of four.
VTB: When a buyer would like you to finance part of the deal, that's a "vendor take-back." For example, if you offer to sell your business for $1 million, and there is a 30 percent VTB, you get $700,000 now and are paid the other $300,000 with interest by the new owner over time. Depending on the way the deal is legally structured, if the new owner fails to pay you your $300,000, you usually get your company back -- albeit in worse shape than you left it.
Papering: "Papering a deal" refers to the point at which the businesspeople at the negotiation table turn an agreement in principle over to the lawyers to structure a legal agreement.
What kind of jargon have you heard the money men and women use? Have you ever felt left out of their club? Anything stump you? What lingo would you add to the list above?

Read more:

• When Profit is the Enemy of Value
• RIP to RFPs: Why You Should Stop Chasing Bids for Business
• Building a Business: 4 Milestones Worth Celebrating
• 3 Reasons Why Your Name Isn't a Good Company Name

John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies and was named one of America's most influential marketers by BtoB Magazine in 2008. Think you can sell your business? Take the Sellability Index Quiz.
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