M&A Glossary:
- Break-Up Fee: A fee that is payable to the seller or buyer if the other party backs out of a transaction after signing a letter of intent; penalty for causing due diligence without closing the deal.
- Buyer (Financial): A financial buyer is an equity sponsor that uses institutional and private capital to create a portfolio of operating companies.
- Buyer (Strategic): A strategic buyer is an actual operating company (usually in the same or a similar business) that makes acquisitions in order to grow.
- Confidentiality Agreement: A binding contract that holds signatories liable for damages resulting from the disclosure of proprietary information.
- Covenants: Promises to do or not to do something (e.g. covenant not to compete/non-compete agreement).
- Definitive Purchase Agreement/Asset Purchase Agreement: The binding contract that makes the divestiture official, subject to the final change of ownership.
- Divest, Divestiture: To sell off or the act of selling off an asset.
- DSO: Days Sales Outstanding; average number of days required to collect accounts receivable.
- Due Diligence: An inspection of the operational, and financial records of the company to allow the buyer to verify the representations made by the seller.
- Earn Out: Opportunity for a seller to increase total consideration above the enterprise value of the company by staying with the new owner to achieve agreed upon performance objectives in exchange for additional consideration.
- EBITDA: Earnings Before Interest Taxes Depreciation and Amortization: a universal measure of financial performance calculated by adding interest, depreciation and amortization back to the pretax net profit, commonly used to derive the enterprise value of a company in conjunction with a multiplier.
- EBITDA, Adjusted (AEBITDA): A normalized EBITDA calculated by adding back reasonable personal and non-recurring expenses subject to explanation and review.
- Enterprise Value: The anticipated selling price of a company based on a valuation analysis. Actual selling price may be higher or lower depending on market conditions.
- G&A: General and Administrative: expenses other than those associated with the direct cost of goods and services provided including officer salaries, rent, interest, depreciation and other discretionary expenses.
- Gross Profit: A measure of financial performance determined by subtracting the direct cost of goods and services provided from the revenue. Gross Profit does not include officer salaries and other discretionary G&A expenses.
- Letter of Intent (LOI): A written offer based on the representations of the seller that is usually non-binding (except for confidentiality and “no-shop” provisions) and subject to due diligence.
- M&A: Mergers and Acquisitions: the buying and selling of companies.
- Non-Recurring Operating Expenses: Unscheduled one-time expenses that are added back into the adjusted EBITDA calculation because they do not impact the revenue, gross profit or earnings trends.
- Promissory Note: A written promise by the buyer to pay a specified portion of the total consideration (usually with interest) at an agreed upon time after closing, subject to the satisfaction of all outstanding contingent liabilities by the seller.
- Recast or Restated Financials: Financial statements that present the calculations used to determine the adjusted EBITDA.
- Representations and Warranties: Statements that another party is relying on as factual (e.g. “the company does not have any tax liens”).
- Asset Sale: In an asset sale the buyer only buys certain core assets of the company usually not including cash, accounts receivable and any liabilities.
- Stock Sale: In a stock sale the buyer buys the entire corporation usually including all assets and liabilities.
- Transactional Attorney: An attorney who specializes in M&A transactions.
- Valuation: The act of estimating the value of a business opportunity.
- Value Drivers: Individual company characteristics that can impact enterprise value.
