M&A Glossary: Definitions Of Key Terms With Examples

M&A Glossary: Definitions Of Key Terms With Examples

M&A Glossary: Definitions Of Key Terms With Examples

1 July 2024

GLOSSARY

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Navigating the complex world of mergers and acquisitions (M&A) can be daunting. Understanding the technical jargon and acronyms used in M&A transactions is crucial for buyers and sellers to make informed decisions. Whether you are on your way to selling, buying or advising companies, this glossary will provide helpful insight into demystifying the process. It may prove especially helpful when engaging in conversation with other professionals in M&A as most of these terms are regularly used.

At Foundy, we aim to simplify and streamline the sell-and-buy side processes with our end-to-end AI-powered M&A portal and fundraising tool. The portals are packed with specialist tools to streamline sourcing, due diligence, negotiation, legal documentation and post-acquisition integration. They also contain templates, step-by-step education guides, downloadable resources, and a fantastic community where people with similar interests and ambitions can meet.

To help you get started, we've compiled a glossary of 50 essential M&A terms to enhance your knowledge and confidence in your next deal. After you have finished, be sure to check out the other free resources available.

Glossary of M&A Terms

1. **LOI (Letter of Intent)**

- **Definition:** A preliminary, non-binding document outlining the basic terms of a potential agreement between two parties. Here is an example of a template.

- **Example:** A company interested in acquiring another might issue an LOI to outline the purchase price and key terms before conducting due diligence.

2. **EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)**

- **Definition:** A measure of a company's operating performance that excludes interest, taxes, depreciation, and amortization.

- **Example:** A company with a net income of £1 million, interest expenses of £200,000, taxes of £300,000, depreciation of £100,000, and amortization of £50,000 would have an EBITDA of £1.65 million.

3. **Due Diligence (DD)**

- **Definition:** The comprehensive appraisal of a business by a prospective buyer to establish its assets, liabilities, and commercial potential.

- **Example:** Before acquiring a company, the buyer conducts due diligence to review financial records, legal matters, and operational aspects.

4. **SPA (Sale and Purchase Agreement)**

- **Definition:** A legal contract that finalizes the terms and conditions of the sale of a company.

- **Example:** After agreeing on the terms, the buyer and seller sign a SPA to legally transfer ownership of the business.

You can access a detailed template for a SPA alongside many other expert templates after subscribing to a Foundy portal. These documents cost between £15k to £50k to prepare.

5. **VDR (Virtual Data Room)**

- **Definition:** An online repository for storing and distributing documents during the M&A process.

- **Example:** The seller uploads financial statements and legal documents to the VDR for the buyer to review during due diligence.

Foundy has an advanced data room tool embedded into our portal. It has a customisable template with folders laid out for you. It goes far beyond data storage, though. It offers users advanced analytics so that you can see who is most active, which can help you engage with prospects.

6. **PE (Private Equity)**

- **Definition:** Capital investment made into companies that are not publicly traded.

- **Example:** A private equity firm acquires a controlling stake in a manufacturing company to improve its operations and profitability.

7. **VC (Venture Capital)**

- **Definition:** Financing provided by investors to startup companies and small businesses with perceived long-term growth potential.

- **Example:** A tech startup receives VC funding to develop its new software product and expand its market presence.

Inside a Foundy portal, there is a list of tens of thousands of active VC investors and angel investors that you can filter based on specific criteria so that you can build a tailored list for your business.

8. **NDA (Non-Disclosure Agreement)**

- **Definition:** A legal contract establishing a confidential relationship between parties to protect proprietary information.

- **Example:** The buyer and seller sign an NDA before sharing detailed financial and operational information.

9. **Earnout**

- **Definition:** A provision in an acquisition agreement that allows the seller to receive additional compensation based on the future performance of the business.

- **Example:** The seller receives an additional £500,000 if the business meets certain revenue milestones within two years.

10. **Term Sheet**

- **Definition:** A non-binding agreement setting forth the basic terms and conditions under which an investment will be made.

- **Example:** The term sheet specifies the investment amount, valuation, and ownership percentage for a venture capital deal.

11. **Acqui-hiring**

- **Definition:** Acquiring a company primarily to recruit its employees rather than to gain control of its products or services.

- **Example:** A tech giant acquires a small startup to bring its skilled engineers into the company.

12. **Basket**

- **Definition:** A threshold amount in an acquisition agreement that must be exceeded before indemnification claims can be made.

- **Example:** The basket amount is set at £100,000, meaning claims below this amount are not actionable.

13. **Churn Rate**

- **Definition:** The rate at which customers stop doing business with an entity over a given period.

- **Example:** A SaaS company has a monthly churn rate of 5%, indicating that 5% of its customers cancel their subscriptions each month.

14. **Cliff Vesting**

- **Definition:** A vesting schedule where employees gain access to their full benefits or stock options all at once after a specified period.

- **Example:** Employees receive 100% of their stock options after three years of service.

15. **Synergies**

- **Definition:** The potential financial benefit achieved through the combining of companies.

- **Example:** The merger of two companies leads to synergies by reducing overlapping administrative costs.

16. **Adjusted EBITDA**

- **Definition:** EBITDA with adjustments for non-recurring, irregular, or one-time items.

- **Example:** Adjusted EBITDA excludes one-time legal settlements and restructuring costs to reflect normal operations.

17. **Target**

- **Definition:** The company identified for acquisition.

- **Example:** The target company is a profitable e-commerce platform with a strong customer base.

18. **Accretion**

- **Definition:** The increase in the value of an asset over time.

- **Example:** The acquisition is expected to be accretive, increasing the buyer's earnings per share.

19. **Amalgamation**

- **Definition:** The combination of one or more companies into a new entity.

- **Example:** Two regional banks amalgamate to create a larger, more competitive financial institution.

20. **Backward Integration**

- **Definition:** A form of vertical integration where a company acquires another company that produces the raw materials or inputs required for its products.

- **Example:** A car manufacturer acquires a steel plant to ensure a steady supply of raw materials.

21. **Bootstrap Effect**

- **Definition:** An increase in earnings per share as a result of a merger or acquisition, without any real increase in earnings.

- **Example:** The merger boosts the combined company's EPS due to the reduction in outstanding shares.

22. **Cash Consideration**

- **Definition:** The portion of the purchase price given to the target in the form of cash.

- **Example:** The buyer offers £10 million in cash consideration for the acquisition.

23. **Drag-Along Rights**

- **Definition:** Rights that enable a majority shareholder to force minority shareholders to join in the sale of a company.

- **Example:** The majority shareholder exercises drag-along rights to sell the entire company to a new buyer.

24. **Tag-Along Rights**

- **Definition:** Rights that allow minority shareholders to sell their shares on the same terms as the majority shareholder.

- **Example:** Minority shareholders use tag-along rights to sell their shares when the majority shareholder sells theirs.

25. **Indemnification**

- **Definition:** A provision in a purchase agreement that provides protection to the buyer if certain representations and warranties are not true.

- **Example:** The seller agrees to indemnify the buyer for any undisclosed liabilities discovered post-acquisition.

26. **Working Capital**

- **Definition:** The difference between a company's current assets and current liabilities.

- **Example:** A company with £500,000 in current assets and £300,000 in current liabilities has a working capital of £200,000.

27. **UCC Filing (Uniform Commercial Code Filing)**

- **Definition:** A legal form that a creditor files to give notice that it has an interest in the personal property of a debtor.

- **Example:** A lender files a UCC-1 statement to secure its interest in the borrower's inventory and equipment.

28. **Survival Period**

- **Definition:** The length of time after the closing during which the representations and warranties must be true.

- **Example:** The survival period for representations and warranties is set at 18 months post-closing.

29. **Term Loan**

- **Definition:** A loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate.

- **Example:** The company secures a £2 million term loan with a five-year repayment schedule.

30. **WACC (Weighted Average Cost of Capital)**

- **Definition:** The average rate of return a company is expected to pay its security holders to finance its assets.

- **Example:** A company with a WACC of 8% needs to generate returns above this rate to create value for its investors.

31. **MOU (Memorandum of Understanding)**

- **Definition:** A document outlining the agreement between multiple parties before a formal contract is finalized.

- **Example:** Two companies sign an MOU to collaborate on a joint venture.

32. **TTM (Trailing Twelve Months)**

- **Definition:** A measure of a company's financial performance over the most recent 12-month period.

- **Example:** The company's TTM revenue is calculated by summing the revenue from the last four quarters.

33. **HB (Hold Back)**

- **Definition:** Cash kept in escrow to cover any unaccrued or unanticipated liabilities post-sale.

- **Example:** £100,000 is held back in escrow to cover potential warranty claims.

34. **YOY (Year Over Year)**

- **Definition:** A method of comparing financial performance metrics from one year to the next.

- **Example:** The company's YOY revenue growth is 10%, indicating a 10% increase compared to the previous year.

35. **MRR/ARR (Monthly Recurring Revenue/Annual Recurring Revenue)**

- **Definition:** Revenue metrics used primarily in SaaS and subscription-based businesses.

- **Example:** The SaaS company has an MRR of £50,000, translating to an ARR of £600,000.

36. **EV (Enterprise Value)**

- **Definition:** The total value of a company, including debt and excluding cash.

- **Example:** A company with a market capitalization of £5 million, debt of £2 million, and cash of £1 million has an EV of £6 million.

37. **Equity Value**

- **Definition:** The value of a company available to shareholders, calculated as enterprise value minus debt plus cash.

- **Example:** The company's equity value is calculated by subtracting its debt from its enterprise value and adding cash.

38. **Cash Free, Debt Free**

- **Definition:** A valuation method where the buyer does not acquire the company's cash or assume its debt.

- **Example:** The buyer agrees to a cash-free, debt-free purchase price of £10 million.

39. **GAAP (Generally Accepted Accounting Principles)**

- **Definition:** Standard accounting principles used to prepare financial statements.

- **Example:** The company's financial statements are prepared in accordance with GAAP.

40. **Q of E (Quality of Earnings)**

- **Definition:** A report that assesses the sustainability and accuracy of a company's earnings.

- **Example:** The Q of E report highlights that a significant portion of earnings is derived from non-recurring sources.

41. **IOI (Indication of Interest)**

- **Definition:** A preliminary, non-binding offer to acquire a company.

- **Example:** The buyer submits an IOI outlining the proposed purchase price and key terms.

42. **APA (Asset Purchase Agreement)**

- **Definition:** A legal document outlining the terms and conditions of the sale of a company's assets.

- **Example:** The APA details the transfer of the company's equipment, inventory, and intellectual property.

43. **UPA (Unit Purchase Agreement)**

- **Definition:** A legal document outlining the terms and conditions of the sale of units in a company.

- **Example:** The UPA specifies the number of units being sold and the purchase price per unit.

44. **Exclusivity Agreement**

- **Definition:** A contract where the seller agrees not to negotiate with other potential buyers for a specified period.

- **Example:** The seller signs an exclusivity agreement, committing to negotiate only with the buyer for 60 days.

45. **De Minimis**

- **Definition:** A provision that sets a minimum threshold for claims in a sale and purchase agreement.

- **Example:** The de minimis threshold is set at £10,000, meaning claims below this amount are not pursued.

46. **Depreciation**

- **Definition:** The reduction in the value of tangible fixed assets over time.

- **Example:** The company's machinery depreciates by £50,000 annually.

47. **Amortization**

- **Definition:** The reduction in the value of intangible assets over time.

- **Example:** The company's patent is amortized over 10 years.

48. **Dilution**

- **Definition:** The reduction in the ownership percentage of existing shareholders due to the issuance of new shares.

- **Example:** The issuance of new shares for a capital raise results in a 10% dilution for existing shareholders.

49. **Disclosure Letter**

- **Definition:** A document listing exceptions to the warranties provided by the seller in a sale agreement.

- **Example:** The disclosure letter notes an ongoing legal dispute that could affect the company's liabilities.

50. **Goodwill**

- **Definition:** The excess purchase price over the fair value of the net identifiable assets of the acquired company.

- **Example:** The buyer pays £2 million in goodwill for the strong brand and customer loyalty of the target company.

Understanding these key M&A terms can significantly enhance your ability to navigate the complexities of business acquisitions. Whether you're a buyer or a seller, having a solid grasp of this terminology will empower you to make more informed decisions and negotiate better deals. At Foundy, our M&A portal and fundraising tool are designed to support you throughout this journey, offering a seamless and efficient way to manage your transactions.

Explore Foundy today to take advantage of our comprehensive resources and expert guidance in the M&A landscape. If you are fundraising, check out our advanced platform for capital raising. We have over 1000 lenders embedded into the tool.

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Contact us

Office 10

Wingate Business Exchange

64-66 Wingate Square

London, SW4 0AF


Foundy has a friendly team who are based in cities across the UK, USA, and Australia including London, New York, Texas, Washington D.C and Melbourne.

Business Whatsapp +447711444115

Scan this code to start a WhatsApp chat with Foundy

WhatsApp

Copyright © 2024 Foundy (Registered as BTB Holdings Ltd.) We own the registered trademark

Contact us

Office 10

Wingate Business Exchange

64-66 Wingate Square

London, SW4 0AF


Foundy has a friendly team who are based in cities across the UK, USA, and Australia including London, New York, Texas, Washington D.C and Melbourne.

Business Whatsapp +447711444115

Scan this code to start a WhatsApp chat with Foundy

WhatsApp

Copyright © 2024 Foundy (Registered as BTB Holdings Ltd.)

We own the registered trademark