Amortization

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What It Means

Amortization has two common meanings in the realm of finance and Acquisitions:

1. It can refer to the process of paying down debt through regular scheduled payments. (Amortization of Debt)

2. It can refer to the process of writing down, also known as expensing, the value of an intangible asset over time. (Amortization of Intangible Assets)

Why It’s Important

Amortization of Debt - Debt amortization involves breaking out the repayment of a loan, both principal and interest, into a series of predictable payments that have a consistent value. Car loan payments and mortgage payments are both examples of loan amortization. While the amount of the payments are held constant over time, the portion of each payment that is applied to the principal balance slowly increases over time.

Many times, debt that arises as part of the capital structure in an Acquisition is not Amortized. Buyers will often seek to defer repayment of the principal balance to a later time, planning to use operating revenue from the company to cover those costs down the road. However, if the Buyer is unsuccessful in growing or operating the business, they may struggle coming up with the cash for that future principal Balloon Payment. This potential for future non-payment can represent a serious risk for Sellers considering financing part of the Acquisition.

Amortization of Intangible Assets - Amortization of Intangible Assets attempts to tie the cost of an asset to the revenues it is expected to generate over its useful life. The process works very similar to the depreciation of tangible assets, wherein a portion of the total cost of an asset is expensed over a number of years. Those Amortized expenses serve as a Tax Shield against future revenues.

Related Terms

• Acquisition

• Balloon Payment

• Debt Service

• Liquidation Preference

• Seller Financing

• Senior Debt

• Subordinated Debt

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