Definitions
M&A has its own complicated language. Understanding the frequently used terms is important for anyone involved in the M&A process, whether as a buyer, seller, or advisor.
Non-Disclosure Agreement (NDA)
A legal agreement ensuring the confidentiality of shared information between parties during the M&A process.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
A measure of a company’s profitability that is used in determining valuation.
Adjusted EBITDA
EBITDA can be adjusted for one-time expenses or owner benefits which are not necessary for the operation of the business.
Confidential Information Memorandum (CIM)
A document provided to potential buyers containing information about the selling company, its operations, financials, and growth opportunities.
LOI (Letter of Intent)
A document outlining the intent of both parties regarding the terms of a transaction, including purchase price, closing date, exclusivity, and other key details.
Exclusivity Clause
A clause in the Letter of Intent restricting the seller from engaging in discussions with other potential buyers for a certain period
Multiples
A common valuation method based on a multiple of adjusted EBITDA, with industry averages ranging typically from 3-6x.
Due Diligence
The process of conducting an in depth review of a company’s operations, finances, and legal standing before completely a transaction.
Quality of Earnings
Verification of the financials typically performed by the buyers CPA firm to ensure accuracy and reliability.
Stock Purchase Agreement/Asset Purchase Agreement
Final contracts for the acquisition, detailing whether the sale involves the stock or assets of the entity.
Private Equity Group
Investment firms that purchase companies with the goal of generating financial returns for their investors.
Strategic Buyer
Companies operating in a similar field as the seller looking to acquire complementary businesses to expand their services or market presence.
Representations and Warranties
Representations and warranties are statements made by the seller regarding the accuracy and completeness of information provided about the company being sold. Reps are assertions about past or existing facts, while warranties are promises about future actions or outcomes. If any of these statements are later found to be untrue or inaccurate, the buyer may have grounds for legal recourse.
Fundamental Reps vs. Non-Fundamental Reps
Fundamental representations are essential statements regarding key aspects of the business, including ownership, financial condition, and legal compliance. Non-fundamental reps cover other aspects of the business that are important but may not have as significant an impact on the overall transaction.
Earn-Out
An earn-out is a provision in an agreement where a portion of the purchase price is contingent upon the future performance of the acquired company.
Equity Roll Over
Some sellers decide to use a portion of their purchase price to roll their equity into stock and become a partial owner of the company making the acquisition. This often translates to an even higher purchase price when they sell this equity years later and get a “second bite of the apple.”
Second Bite of the Apple
A term that refers to a sale where a business owner rolls equity over into a minority position in the acquiring company after the transaction. When that company then sells, the original seller has a second liquidity event. The first bite of the apple occurs when the private equity group buys the business, and the second bite occurs when they sell the business, usually three to seven years later. The goal is for the business owner to receive a two to four times return on their investment.
Seller Financing
The seller in a transaction issues a promissory note issued by the buyer to the seller as part of the purchase price, typically with a specified repayment schedule and interest rate. Sellers who offer seller financing typically receive a higher valuation.
Hold Back/Escrow
A hold back is an agreed upon amount (generally 10 percent) of the purchase price that is held in escrow for an agreed upon time (usually between 12 to 24 months) to ensure there are no discrepancies with the agreement or billing. Some sellers prefer to purchase Reps and Warranty Insurance.
Reps & Warranty Insurance
A type of insurance policy that covers the indemnification for certain breaches of the representations and warranties in the purchase agreement.