Selling your business is one of the biggest financial transactions of your life. The process can be intimidating if you haven’t bought or sold a business before.
For one thing, you may be negotiating with investors and private-equity groups that have been involved in buying and selling multiple businesses. They understand the expectations and terminology for every phase of the process.
So, to help private business owners prepare for the process of selling their enterprise, we compiled a white paper: “Demystifying M&A Jargon: A Newcomer’s Glossary of the Language of Mergers and Acquisitions.”
Here are 25 of the definitions you can find in the recently updated version of the glossary: “Demystifying M&A Jargon.”
M&A (Mergers and Acquisitions): A general term that refers to how companies transfer or combine ownership and assets.
A merger is a voluntary fusion of two companies into an entirely new legal entity.
An acquisition occurs when one company gains control over another company by purchasing 50% or more of another company’s assets or shares.
Asset Deal: An agreement in which the acquiring company gains ownership of some or all of the assets of the target company.
CapEx: In an M&A transaction, CapEx (or Capex) typically means Capital Expenditure. It represents the funds that a company invests in acquiring or upgrading physical assets, such as equipment, property, or facilities. Understanding the CapEx involved in an M&A deal helps evaluate the financial implications and potential synergies between the merging entities.
CIM (Confidential Information Memorandum): The “pitchbook” the seller’s advisory firm produces to market the seller’s business to potential buyers. The seller’s advisory firm sends a CIM to potential buyers who responded to a brief investment teaser document that didn’t name the company being sold.
The CIM names the company being sold and provides an overview of its products and services. It also includes information about the company’s ownership, management team, physical locations, production equipment, workforce, competitors, earnings history, and other relevant details.
Commercial Real Estate Clause: Outlines the terms and conditions related to any properties owned or leased by the target company in an M&A transaction. It addresses issues such as:property valuation, transfer for ownership or lease, rights of assignment, lease terms, and potential liabilities associated with the real-estate assets.
Divestiture: When a public or private corporation sells off business units that aren’t directly related to its core business.
Due Diligence: A thorough review of the business before the sale is completed. The due diligence process examines criteria, such as the company’s target markets, customer base, growth prospects, accounting practices, profitability of each profit line, existing facilities. expansion plans, competitors, pricing strategies, financial history, labor relations, legal issues, environmental compliance, marketing practices, inventories, suppliers, and strategic partnerships.
The goal of due diligence is to avoid unpleasant and costly post-sale surprises. In certain circumstances, the due diligence process is regulated. In other situations, the buyer has a firm list of criteria that the seller must address.
Earn-out: A negotiable provision in the purchase agreement that makes a portion of the final sales price dependent on the achievement of certain objectives, such as forecasted growth in revenues. An earn-out is a way for the buyer to keep a seller engaged during the post-sale transition period. It provides the seller with an incentive to meet performance expectations.
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization): Banks and private-equity groups use this number to estimate the operating cash flow of a business.
EBITDA reflects revenues from sales minus the cost of goods sold (COGS) and the sales, administrative, and general expenses (SG&A) required to produce those revenues. EBITDA does not include the current value of equipment used to make or deliver the products or services.
EBITDA is a common measurement of the financial performance of a company because it indicates how much a company might have earned based on their own decisions. The EBITDA number strips out interest, tax, depreciation, and amortization because these costs will vary from place to place based on decisions made by government officials, lenders, and regulators.
Indemnity Clause: A contractual provision in which one party agrees to compensate the other for losses, damages, or liabilities that may arise from specific events or circumstances related to the transaction. It helps allocate risk between the parties involved and provides a level of protection against potential financial or legal risks.
IOI (Indication of Interest): Also known as a LOI (Letter of Intent or Letter of Interest). A letter that officially confirms a buyer’s interest in acquiring a company. It provides an “opinion of value” for the acquisition target and outlines the general conditions for completing a deal. Clauses in the letter will require exclusivity and confidentiality.
The letter of intent/indication of interest is not the same as the legally binding purchase agreement (contract) to determine the final price and conditions of the sale. An indication of interest letter simply signals that a potential buyer wants to begin the due diligence process.
Many deals fall apart between the time a letter of interest is received and the due diligence process is completed.
Liabilities: Legal responsibilities that haven’t yet been paid. This includes debts, interest, or taxes, salaries, and expenses.
LBO (Leveraged Buyout): An acquisition that uses a significant amount of debt to finance the cost of the acquisition. Typically, the assets of the combined companies are used as collateral.
Liquidation: The sale of all of a company’s assets. Liquidation Value is the net amount that can be realized if the business is closed and the equipment, real estate, and other assets are sold. Forced Liquidation Value is the value at which all assets are sold quickly, such as through an auction.
M&A Auction: A strategy of bringing a company to market by creating a structured sales process that involves getting different buyers to compete in a bidding process for the company. Auctions can be effective when run by a capable advisor, but they are a lot of work for the company that is for sale. Additionally, despite the use of non-disclosure agreements, it is nearly impossible to keep an auction confidential. This means the seller’s employees, customers, vendors, and competitors will know the company is for sale.
Middle Market: Companies that have annual (gross) revenues between $5 million and $1 billion. The middle-market companies are divided into three tiers:
- Lower Middle Market (LMM): These target companies have annual revenues in the range of $5 million to $50 million.
- Middle Market companies have revenues in the $50 million to $500 million range.
- Upper Middle Market companies have annual revenues from $500 million to $1 billion.
MBI (Management Buy-In): An outside manager or management team obtains the financing needed to acquire a target company with a management void. The managers retain operational control while holding equity.
MBO (Management Buy-Out): A process in which the management of a company acquires all or some of the ownership of the company they manage
Multiple of Earnings: Casually referred to as a “multiple,” this is one way to determine the value of a business during a sale. It involves multiplying a company’s profits by a certain number to end up with a value. A “multiple” can be based on the earnings for one year or the earnings over a number of years.
Purchase Agreement: Legal contract that confirms the negotiated details of the final payment and the mechanics of how the two companies will be consolidated. Experienced M&A lawyers can help business sellers evaluate all of the covenants, conditions, tax implications, and termination provisions included in the purchase agreement.
Purchase Price Adjustments: A component of most purchase agreements that protects the buyer and seller in the event the balance sheet of the acquiring company does not meet the expectations of either party at closing. The mechanics of the adjustments are negotiated and part of the final purchase agreement.
Strategic Investor: Individuals or companies that invest in a company to gain access to proprietary technology, expertise, or a geographic location that will help the investors acquire strategic advantages instead of just financial returns.
Tuck-in Acquisition: A larger company completely absorbs a smaller company. The smaller company does not maintain any of its original systems or organizational structures after the acquisition.
Working Capital: A crucial measure of a company’s financial health and its ability to meet its short-term financial commitments. Working capital refers to the difference between a company’s current assets (such as cash, accounts receivable, and inventory) and its current liabilities (such as accounts payable and short-term debt) It represents the funds a company has available to cover its day-to-day operational expenses and short-term obligations.
Working Capital Adjustment: The most common purchase-price adjustment in an M&A agreement. It is an adjustment to the purchase price based on a negotiated level of working capital to be in the business at the time of the sale. (The adjustment is usually based on historical performance)
Additional working capital results in an increase in the purchase price and lower working capital results in a reduction of the purchase price. Cash is generally not included in determining the working capital adjustments.
Click here to download the full glossary.
Disclaimer: The definitions in this glossary are intended as a basic introduction to the type of verbiage you may hear from M&A advisors and potential investors in your company.
State governments and federal agencies such as the Security & Exchange Commission (SEC) may frequently update the rules and regulations governing M&A transactions. So, the legal definitions of some of these words may change over time.
To ensure that your business has access to the most up-to-date definitions and guidance, include an attorney experienced in mergers and acquisitions on your M&A advisory team.
Please contact me (rock@rocklamanna.com) if you would like to clarify these terms or suggest additional words or phrases that should be included in this glossary.