Definitions: M&A Terminology
Terms and vocabulary commonly used during an M&A process
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's a summary of some of the main concepts covered:
Mergers and Acquisitions (M&A): The consolidation of companies or assets through various transactions, including mergers, acquisitions, consolidations, recapitalization, and asset purchases.
-Seller Example:
You own a behavioral health company and decide to sell 100% of it to a larger provider expanding into your state. That transaction is an M&A deal.
NDA (Non-Disclosure Agreement): An agreement ensuring the confidentiality of shared information between parties during the M&A process.
-Seller Example:
Before a buyer sees your financials or client data, they sign an NDA so they cannot share that information with competitors or use it against you.
MVP-Market Valuation Projection: A method used to estimate the transaction value of a company by comparing its financial performance to similar companies that have recently sold.
-Seller Example:
Your Athena advisor reviews your EBITDA and comparable deals and tells you what your business may be worth. That’s your MVP range before going to market. This is an agency-specific title.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of a company's profitability, often used in determining its valuation.
-Seller Example:
Your company generates $1.5M in EBITDA. Buyers will use that number as the starting point to determine how much they’re willing to pay.
Adjusted EBITDA: EBITDA adjusted for one-time expenses or expenses not likely to occur after the transaction, providing a more accurate representation of the company's profitability.
-Seller Example:
You run a $200K personal expense and paid a one-time $150K legal fee. These are added back, increasing your EBITDA from $1.5M to $1.85M—raising your valuation.
Fee/Engagement Agreement: An agreement specifying the relationship between parties, the fee structure, and exclusivity terms between the advisor and the client.
-Seller Example:
This is the agreement to sign when engaging your M&A advisor at Athena.
CIM (Confidential Information Memorandum): A detailed document provided to potential buyers containing information about the selling company, its operations, financials, and growth opportunities.
-Seller Example:
After buyers sign an NDA, they receive your CIM outlining your services, financials, growth opportunities, and why your company is attractive.
IOI (Indication of Interest): A formal document from a buyer indicating their genuine interest in purchasing the business and suggesting a valuation range.
-Seller Example:
A buyer submits an IOI saying they would value your business between $9M–$11M, subject to further diligence. This helps weed out the top contenders to submit an LOI later. A seller may accept multiple IOIs, provide further details, and then solicit LOIs.
LOI (Letter of Intent): A document outlining the intent of both parties regarding the terms of the deal, including purchase price, closing date, exclusivity, and other key details.
-Seller Example:
A buyer submits an LOI offering $10.5M, with 80% cash at close and 20% tied to performance over 2 years, and when signed/accepted, exclusivity and Due diligence begins.
Exclusivity Clause: A clause in the LOI restricting the seller from engaging in discussions with other potential buyers for a specified period.
-Seller Example:
After signing an LOI, you agree not to speak with other buyers for 90 days while this buyer completes diligence.
Multiples: A common valuation method based on a multiple of adjusted EBITDA, with most healthcare industry averages typically ranging from 4-6x (there are always exceptions).
-Seller Example:
If your adjusted EBITDA is $2M and the agreed multiple is 6x, your valuation is $12M.
Due Diligence: The process of conducting a comprehensive investigation of a company's operations, finances, HR, regulatory, and legal standing before finalizing the deal.
-Seller Example:
The buyer requests contracts, payroll data, payer mix, and compliance records (to name just a few) to confirm your business performs as represented.
QofE (Quality of Earnings): Verification of the financials provided by the seller to ensure accuracy and reliability.
-Seller Example:
An accounting firm reviews your financials and confirms your $2M EBITDA is accurate and sustainable, supporting the buyer’s price.
SPA/APA (Stock Purchase Agreement/Asset Purchase Agreement): Final contracts for the acquisition, specifying whether the sale involves the stock or assets of the company.
-Seller Example:
Stock Sale: Buyer purchases your company entity and assumes liabilities.
Asset Sale: Buyer only purchases selected assets (clients, contracts, equipment), leaving liabilities behind.
Terms and Conditions: 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.
-Seller Example:
You agree to sell your company for $12M, but the terms include:
· $9M paid at closing
· $2M tied to an earn-out
· $1M held in escrow for 18 months
The “terms and conditions” are what determine how much you actually receive and when, not just the headline price.
Reps and Warranties (Representations and Warranties): Reps and warranties are statements made in the Purchase agreement, 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.
-Seller Example:
You state that your financials are accurate and there are no undisclosed lawsuits.
If a lawsuit surfaces after closing that you didn’t disclose, the buyer may come back to recover damages.
Fundamental Reps vs Non-fundamental Reps: 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.
-Seller Example:
If you misrepresent ownership of the company (fundamental), your liability could be significant and long-lasting.
If a minor vendor contract issue arises (non-fundamental), your exposure is usually smaller and time-limited
Basket and Caps: 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.
-Seller Example:
Basket: Buyer can’t make a claim unless total damages exceed $100K
Cap: Your total exposure is capped at $1M
If a $25K issue arises, you don’t owe anything. If total claims hit $500K, you may owe that, but never more than the $1M cap.
Earn-outs: 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.
-Seller Example:
You sell for $10M, with:
$8M paid at closing
$2M paid if the company hits $3M EBITDA next year
If performance drops, you may never receive that $2M.
Equity Roll: 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”.
-Seller Example:
Instead of taking 100% cash, you roll $2M into the new platform and retain 20% ownership—giving you upside when the company grows.
Second Bite of the Apple: 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.
-Seller Example:
You sell your company to a private equity-backed platform and roll equity.
Five years later, that larger company sells—and your $2M rollover turns into $6M.
That’s your “second bite.”
Sellers’ Notes: 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.
-Seller Example:
Out of a $10M deal:
$8M paid at closing
$2M is a seller’s note paid back over 3 years with interest
You’re effectively helping finance the deal.
Clawbacks: 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.
-Seller Example:
If you guarantee that revenue will stay stable and it drops significantly due to misrepresentation, the buyer may claw back part of your proceeds.
Hold Back/Escrow: A hold back is an agreed-upon amount (generally 10%) of the purchase price that is held in escrow for an agreed-upon time (usually between 12-24 months) to ensure there are no discrepancies with the agreement or billing. Some sellers prefer to purchase Reps and Warranty Insurance.
-Seller Example:
$1M (10%) of your deal is placed in escrow for 18 months.
If no issues arise, you receive the full amount.
If problems are discovered, funds may be used to cover them.
Reps & Warranty Insurance: 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 reduce the need for an escrow.
-Seller Example:
Instead of $1M sitting in escrow, the buyer purchases insurance.
This allows you to receive more cash at closing and reduces your post-sale exposure.
True-up: 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.
-Seller Example:
You agree to deliver the business with $500K in working capital.
At closing, it’s only $400K.
The buyer reduces your purchase price by $100K to “true-up” the difference.
Exclusivity: Definition:
Exclusivity is a provision—usually in a Letter of Intent (LOI)—that prevents you, as the seller, from negotiating with or soliciting other buyers for a defined period of time while one buyer completes diligence and works toward closing.
-Seller Example (What It Actually Feels Like)
You receive multiple strong offers and choose one buyer. As part of signing the LOI, you agree to a 90-day exclusivity period.
During those 90 days:
·You cannot engage with other buyers, even if they come forward with a better offer
·Your advisor must pause outreach and discussions
· You are effectively “off the market” while this buyer completes diligence
Types of Buyers
PEG (Private Equity Group): Investment firms that purchase companies with the intention of generating financial returns.
-Seller Example:
A PE firm acquires your business and plans to combine it with others, then sell the larger platform in 3–5 years. Usually looking to build a larger platform to sell later.
Family Office: Wealth management firms serving ultra-high-net-worth individuals, often investing directly in companies.
-Seller Example:
A family office buys your company and plans to hold it long-term, often with less pressure to sell quickly.
Search Fund: Private equity funds formed by individuals to acquire and operate a single target company.
-Seller Example:
A former operator raises money, buys your business, and becomes your successor CEO.
Strategic Buyer: Companies operating in the same field as the seller, acquiring complementary businesses to expand their services or market presence.
-Seller Example:
A larger ABA provider acquires your company to expand into your region and leverage your referral base.
Strategic Buyer with Equity Backing: A strategic equity-backed buyer is an operating company in your industry (a strategic buyer) that has financial backing from a private equity firm. In simple terms, it’s a company that knows how to run your business and has institutional capital behind it to grow through acquisitions.
-Seller Example (What This Looks Like in a Deal)
You own an ABA company. A larger ABA platform approaches you:
· They already operate in multiple states (strategic operator)
· They are backed by a private equity firm providing capital
They offer to acquire your company to:
· Expand into your geography
· Add your clinical team and referral base
·Grow EBITDA through scale and shared infrastructure
Seller Advisory Team
M&A Advisor
Definition: Guides you through the sale process.
-Seller Example:
Your advisor runs the process, markets your company, negotiates offers, and helps you avoid costly mistakes.
M&A Attorney
Definition: Legal expert for transaction documents.
-Seller Example:
Your attorney reviews the purchase agreement to ensure you are protected from future liabilities.
Accountant / Financial Advisor
Definition: Helps with financial clarity and tax implications.
-Seller Example:
Your accountant advises how the deal structure impacts your after-tax proceeds.
Understanding these terms and concepts is helpful when navigating the complex landscape of mergers and acquisitions successfully. Having a knowledgeable advisor on your side will make it even easier.
