M&A Terminology
Understanding key M&A terms is essential for anyone involved in buying, selling, or investing in a business. The process involves numerous concepts—from valuation and due diligence to earn-outs and purchase agreements—that can quickly become complex. Working with knowledgeable advisors who can clearly explain these terms ensures you make informed decisions and avoid costly misunderstandings. By building a solid grasp of the language of M&A, you can approach transactions with confidence and clarity, knowing you are equipped to navigate each stage effectively.
Definitions
General M&A Terminology and Roles
Accretive acquisition
A deal where the acquisition adds more to the value of the acquiring company than the acquisition cost the acquirer.
Business angels
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Business broker
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Buy-In/Management Buy-Out (BIMBO)
A buy-out where a mixed team of existing internal managers and external managers purchases the business.
Buy side
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Buy-out
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Contingencies
Conditions allowing the buyer to walk away or renegotiate. Common examples: financing, adverse business changes, or key personnel loss.
Investment banker
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
IOI (Indication of Interest)
A preliminary expression of interest before a formal LOI, outlining general deal terms and valuation.
Limited Liability Company (LLC)
A business structure that offers liability protection to owners while allowing profits to be taxed once at the individual level.
Lock-in period
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Lower Mid-Market
Refers to deals involving companies with $5M–$50M in annual revenue.
LP (Limited Partner)
Passive investors in a fund or deal who provide capital but don’t manage operations.
M&A professional
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Main Street
Refers to small business deals (<$5M annual revenue).
Management Buy-In (MBI)
Occurs when a team of external managers buys out the shareholders to take over the running of the business.
Management Buy-Out (MBO)
Occurs when the existing management team purchases the business from the shareholders.
Market Terms
Standard or commonly accepted deal or contract terms.
MIPA
The equivalent of an SPA for LLCs.
Operator
A person (e.g., GM or COO) hired to run the business after acquisition.
Post acquisition integration
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Prop deal (or Proprietary deal)
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Sell side
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
SMB
Small and medium-sized businesses. In M&A, typically refers to business acquisitions valued under $10M–$15M.
Sponsor (Deal Sponsor or Fund Sponsor)
An individual or firm that originates, structures, and manages an acquisition or investment fund.
Stock Purchase Agreement (SPA)
The main transactional agreement for deals structured as stock purchases.
Strategic acquirer (or a strategic)
A company with existing assets that become more valuable if they own the seller's business. They evaluate the business based on what it is worth in their hands.
Synergy
The idea that combining two companies will deliver an impressive payback, often by helping the resulting firm sell more.
Target
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
Trade purchaser
An industrial buyer of companies, as opposed to a financial purchaser like a Venture Capitalist (VC).
Up-Market
Deals that are larger in size compared to a reference tier. For example, lower-mid-market deals may be up-market relative to main street deals.
Vertical integration
The sale of a business to continue as a standalone entity, as opposed to a sale to a trade purchaser.
WIP (works in progress)
Customer orders that have been placed but not yet completed. Can be subdivided into orders made but not started, and orders started but not completed.
Valuation Terms and Methods
Add-Backs
Adjustments made to a business’s profit to calculate SDE or EBITDA, usually to normalize for owner-specific or one-time expenses.
Adjusted EBITDA
Earnings before interest, taxes, depreciation, and amortization, adjusted to reflect the profitability of the business in a buyer’s hands (e.g., normalizing for owner compensation or one-time expenses).
Asset valuation
Valuing a business by adding up all assets and subtracting liabilities. Represents total value of all assets, tangible and intangible.
Basic multiple
A valuation basis used to determine how many times earnings someone is prepared to pay to acquire an interest in a company.
Book value (Net asset value, Net worth)
Total value of assets (net of liabilities) as stated in the company’s accounts; calculated as assets minus liabilities on the balance sheet.
Capex (Capital Expenditure)
The cost of replacing and maintaining the capital infrastructure of a business, crucial for modeling cash flow in capital-intensive operations.
Capitalization of Earnings
A method used to value ownership interests.
Cash Flow from Operations (CFO)
Cash generated from normal business operations; often used as a measure of earnings or to assess financial health.
Debt Servicing
Funds used to pay the principal and interest on borrowed money.
Discounted cash flow (DCF)
Valuation method estimating the present value of future cash flows the acquirer expects to receive.
DSCR (Debt Service Coverage Ratio)
A measure of how well cash flow covers debt obligations (free cash flow ÷ debt service). Banks typically require ≥1.4.
Earnings
The net profit of a business, distinct from total revenue.
EBIT (Earnings Before Interest and Tax)
The underlying profit from trading, before it is affected by the business's tax status or financing.
EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization)
Used as a measure of the "cash" generated by trading activities.
Fair Market Value (FMV)
The price at which a willing buyer and seller would exchange an asset under no compulsion and with full knowledge of the facts.
Goodwill
The difference between the company's market value (what someone is willing to pay for it) and the fair market value of its net assets (assets minus liabilities).
Gross Margin
Sales revenue minus cost of goods sold, expressed as a percentage of revenue; indicates core profitability.
Investment thesis
The strategic reason(s) a company may choose to invest in or acquire a business.
Market valuation
Valuing a business by comparing it to prices achieved for similar businesses recently sold.
Multiple
The multiplier applied to SDE or EBITDA to determine valuation (e.g., 3× SDE).
Net Book Value (NBV)
The value of an asset recorded on the balance sheet, equal to its original cost minus accumulated depreciation.
Normalizing (Recasting, Adjusting)
A process of adjusting the Profit & Loss (P&L) statement to show how the company would perform in someone else’s hands, often by removing one-time expenses.
Normalized Financial Statements
Financial statements adjusted to remove one-time, discretionary, or non-business items for clearer valuation.
P/E ratio (Price to Earnings Ratio)
How many times current earnings someone is willing to pay for a company. High P/E usually indicates expectation of high growth.
PE (Private Equity)
Investment firms that acquire businesses for strategic exits or cash flow.
Pro Forma
Projected or hypothetical financial results used for forecasting or deal modeling.
Quality of earnings (Q of E)
An analysis of historical EBITDA provided by an outside CPA firm, specializing in reviewing financial documentation, used to validate assumptions about the business.
Regression Analysis
A statistical method used to identify relationships between variables, sometimes applied to forecast business performance.
ROI (Return on Investment)
A measure of profitability calculated as (Gain from Investment – Cost of Investment) ÷ Cost of Investment.
ROIC (Return on Invested Capital)
A measure of return generated from capital invested in a business, after accounting for operating costs and debt servicing.
Seller’s discretionary earnings (SDE)
Often used for small businesses with annual revenue under $1 million.
Working capital
Money required to cover costs of employing staff until revenue comes in; usually calculated as accounts receivable + inventory – accounts payable and other short-term liabilities.
Deal Documentation and Process
Confidential Information Memorandum (CIM) (or SIM, The Book, Confidential Information Presentation/CIP)
A detailed document prepared by the seller (or intermediary) to provide the acquirer with enough information about the business, operations, and financials to generate an initial offer.
Data room
A facility made available to a purchaser and their advisors where company information can be inspected.
Definitive purchase agreement
The final, binding agreement signed by both buyer and seller, unlike the typically nonbinding LOI.
Due diligence
A process, usually undertaken by accountants or solicitors on behalf of the buyer, involving extensive checks into any aspect of the business that may affect the buyer's desire to proceed with the purchase or influence the offer price.
Expression of Interest (EOI)
A less formal document than an LOI, providing only a range of value (e.g., three to five times EBITDA) they might be willing to offer rather than a firm bid.
Heads of terms (or Heads of agreement)
A document that sets out the price and key terms that have been agreed upon, subject to due diligence and contract.
Initial Public Offering (IPO) (or Flotation)
The process when large organizations offer shares for sale into the wider market, typically by becoming listed on a stock exchange.
Letter of Intent (LOI)
A short, non-binding contract that precedes the binding definitive purchase agreement, outlining the general terms of the transaction.
Management accounts
Detailed accounts produced by the accountant that provide a breakdown of costs, sales, transactions, etc., typically reviewed during due diligence.
NDA (Nondisclosure Agreement)
A contract stating that certain proprietary information will be disclosed for the purpose of pursuing discussions relating to the potential sale and purchase of the business.
Teaser
A short (one-to-two-page) document prepared by the seller's intermediary to entice potential acquirers into learning more about a business, typically disguised so the company name is not revealed.
Deal Structure and Payment Terms
APA (Asset Purchase Agreement)
The main transactional agreement for deals structured as an Asset Purchase.
Asset based finance
Lending that is based on specific classes of assets (e.g., commercial mortgages, leasing, hire purchase).
Asset Purchase
A business acquisition deal where you purchase substantially all of the operating assets of the selling company. Typically safer since you don’t inherit liabilities, and it provides tax benefits via a step-up in asset basis.
Asset Sale
When the buyer acquires the assets of a business rather than its shares. The seller retains the company entity and any excluded assets or liabilities.
Consideration
The price an acquirer pays for a business.
Debt
Financing provided by lenders or financial institutions for the acquisition.
Downstroke
The minimum amount of money the seller stands to make from an acquisition, paid up front (the initial cash payment).
Earnout
A scenario where the seller stands to gain additional compensation if they stay on after selling and the business hits specific goals or thresholds post-sale.
Equity
Funds brought to the table by shareholders for the acquisition.
Equity Injection
The buyer’s required contribution to a deal
F Reorg (F Reorganization)
A tax-free restructuring that allows certain stock or asset purchases to be treated more favorably under IRS rules.
Full Standby
A seller note structure that counts toward equity injection if payments are deferred until the main loan is repaid.
Forgivable Note
The opposite of an earn-out: part of the seller note may be forgiven if the business underperforms.
Funding Stack
The combination of all funding sources (debt, equity, seller notes, etc.) that make up the purchase price.
Good Faith Deposit
A deposit made to demonstrate seriousness in a deal. Its refundability is often negotiated.
Purchase Price
The total amount paid for a business, including assets, inventory, and any agreed working capital.
Purchase Price Tax Allocation
IRS-required categorization of the purchase price across seven asset classes, affecting taxes for buyer and seller.
Roll-Over Equity
When a seller retains minority ownership after sale, often to align incentives or attract investors.
Stock Purchase
A transaction in which the buyer acquires the ownership shares of a company rather than its individual assets.
Stock Rollover (or Exchange of shares)
A payment structure where the seller accepts shares in the acquiring company in lieu of cash for some or all of the purchase price.
Stock/Share Sale
A transaction in which the buyer purchases ownership shares in the company, acquiring both its assets and liabilities unless specifically excluded.
Term Sheet (lending)
A document outlining the terms and conditions under which a bank or lending institution is willing to provide financing for an acquisition.
Working Capital Peg
A negotiated target amount of working capital the seller must deliver at closing. Shortfalls may adjust the purchase price post-closing.
Vendor Note (or Seller Note)
A financing structure where the seller lends the buyer the money (or provides credit) to fill the gap in financing; the buyer pays this over time, usually with interest.
Working Capital True-up
Post-closing process comparing actual working capital to the agreed peg. Differences are reconciled between buyer and seller.
338 or 336 election
An IRS election allowing a stock purchase to be treated, for tax purposes, as an asset purchase. Both parties must agree and sign the election.
Legal and Contractual Terms
Basket
A clause setting a threshold amount of losses or damages that must be incurred before the acquirer is entitled to compensation for breaches of warranties or disclosure failures.
Caps and Baskets
Limits on the seller’s financial liability if reps and warranties are breached post-closing. The cap is the maximum liability; the basket is the minimum threshold before payment applies.
Change in Control Provision
A contract clause requiring notification or consent if there’s a change in control; failure to comply can terminate contracts or cause defaults.
Compromise agreement
A document an exiting director/employee may be asked to sign which limits their ability to make future claims against the business (e.g., for unfair dismissal or outstanding bonuses).
Covenants
Restrictions or promises on the parties (e.g., seller may be restricted from working for a competitor for a set time/area, or promises regarding how the business will be managed pending completion).
Disclosure letter
A letter usually attached to or referred to in the sales contract that specifies certain items of information, such as exceptions to any general warranties given.
Escrow
An amount of money held by a lawyer for a specified period after the M&A transaction closes to deal with any disputes that may arise.
Exclusivity clause
A contractual clause, usually seen in heads of agreement or LOIs, that gives the purchaser exclusive rights to negotiate a deal with the seller for a set period.
Indemnification (or Indemnities)
Compensation for loss or harm, often provided by the seller against specific risks promised in the purchase agreement.
Legal Due Diligence
A lawyer’s review of contracts, structure, and risks to ensure the deal and business are legally sound.
Non-competition covenant
A post-completion covenant where the seller is required to sign an agreement preventing them from competing with the acquired business for a set time or geographical area.
PG (Personal Guarantee)
A personal commitment to repay a loan, allowing creditors to claim personal assets if default occurs.
Private Placement
A securities law exemption (under Reg D 506b/506c) allowing private investment solicitation.
QSBS (Qualified Small Business Stock)
A tax benefit for C-corp stockholders who hold original-issue shares for 5+ years, potentially exempting up to $10M from capital gains.
Re-trading
When one party in a negotiation tries to renegotiate a deal term (often the price) after an agreement in principle has been made.
Representations and warranties (Reps and warranties)
Promises the seller makes about their company (e.g., stating they are unaware of pending legal disputes). Breach of a warranty may allow the buyer to claim damages.
Reps and Warranties (Representations and Warranties)
Promises or statements made by the seller about the company’s condition; breach may allow the buyer to claim damages.
Shareholders agreement
Required when only part of a shareholding is sold, detailing the rights and responsibilities of all shareholders.
Share Sale Agreement
The agreement detailing exactly what the seller gets for their money and covering the obligations of both parties, typically used when selling the shares in a formal limited liability company.
TUPE (Transfer of Undertakings Protection of Employment Regulations)
Rules governing the treatment of employees on the sale of a business, generally making the purchaser responsible for taking on existing employees on existing terms.