Common Terminology
Like many industries, M&A has its own complicated language. Understanding the frequently used terms is crucial for anyone involved in the M&A process, whether as a buyer, seller, or advisor.
Here is some of the common terminology:
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The consolidation of companies or assets through various transactions, including mergers, acquisitions, consolidations, recapitalization, and asset purchases.
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An agreement ensuring the confidentiality of shared information between parties during the M&A process.
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A method used to estimate the transaction value of a company by comparing its financial performance to similar companies that have recently sold.
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A measure of a company's profitability, often used in determining its valuation.
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EBITDA can be adjusted for one-time expenses or expenses not likely to occur after the transaction, providing a more accurate representation of the company's profitability.
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An agreement specifying the relationship between parties, the fee structure, and exclusivity terms between the advisor and the client.
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A detailed document provided to potential buyers containing information about the selling company, its operations, financials, and growth opportunities.
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A formal document from a buyer indicating their genuine interest in purchasing the business and suggesting a valuation range.
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A document outlining the intent of both parties regarding the terms of the deal, including purchase price, closing date, exclusivity, and other key details.
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A clause in the LOI restricting the seller from engaging in discussions with other potential buyers for a specified period.
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A common valuation method based on a multiple of adjusted EBITDA, with industry averages ranging typically from 4-6x.
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The process of conducting a comprehensive investigation of a company's operations, finances, and legal standing before finalizing the deal.
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Verification of the financials provided by the seller to ensure accuracy and reliability.
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Final contracts for the acquisition, specifying whether the sale involves the stock or assets of the company.
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Investment firms that purchase companies with the intention of generating financial returns.
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Wealth management firms serving ultra-high-net-worth individuals, often investing directly in companies.
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Private equity funds formed by individuals to acquire and operate a single target company.
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Companies operating in the same field as the seller, acquiring complementary businesses to expand their services or market presence.
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The terms and conditions of an M&A deal refer to the specific provisions, requirements, and obligations outlined in the agreement between the buyer and the seller. These terms typically cover various aspects of the transaction, including purchase price, payment terms, closing conditions, representations and warranties, indemnification provisions, and post-closing arrangements.
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Reps 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.
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Fundamental reps are crucial statements about the core aspects of the business, such as its 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. Fundamental reps typically have stricter indemnification provisions and may have longer survival periods than non-fundamental reps.
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In an M&A agreement, a basket is a threshold amount of losses or damages that the buyer must exceed before being entitled to indemnification from the seller. Caps, on the other hand, set the maximum liability of the seller for indemnification obligations. These mechanisms help manage the risk associated with potential breaches of reps and warranties.
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Earn-outs are provisions in an M&A agreement where a portion of the purchase price is contingent upon the future performance of the acquired company.
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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 moving forward. This often translates to an even higher purchase price when they sell this equity years later and get a “second bite of the apple.”
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A term that refers to a sale transaction where a business owner retains a minority position in the company after the transaction and then sells the company again. The first bite of the apple occurs when the private equity (PEG) buys the business, and the second bite occurs when the PEG sells the company, usually three to seven years later. The goal of many PEGs' second bite is for the business owner to receive a two to four times return on their investment.
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Sellers' notes, also known as promissory notes, are debt instruments issued by the buyer to the seller as part of the purchase price, typically with a specified repayment schedule and interest rate.
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Clawback provisions allow the buyer to reclaim a portion of the purchase price or
compensation paid to the seller under certain circumstances, such as if the seller breaches representations and warranties or if there is a material adverse change in the business after the transaction closes.
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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.
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This type of insurance policy covers the indemnification for certain breaches of the representations and warranties in the purchase agreement. It is designed to provide additional flexibility in addressing these obligations and reduces the need for an escrow.
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A true-up mechanism is used to adjust the purchase price based on the actual performance of the acquired company relative to certain agreed-upon financial metrics or targets. True-up provisions ensure that the seller receives fair compensation if there are discrepancies between the estimated and actual financial performance of the business.
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Exclusivity provisions grant the buyer a period of time during which the seller is prohibited from soliciting or negotiating with other potential buyers. Exclusivity gives the buyer the opportunity to conduct due diligence and negotiate the terms of the deal without competition from other parties.