As the world of mergers and acquisitions (M&A) continues to evolve, understanding the language and terminology associated with these transactions becomes increasingly important. Whether you’re a seasoned professional or new to the M&A landscape, this comprehensive guide will provide you with the knowledge necessary to navigate the complex world of mergers and acquisitions with confidence.
The Most Common Mergers and Acquisitions (M&A) Acronyms and Terms
Explore the top 78 most common M&A acronyms and terms that you need to know to stay ahead in the ever-changing business landscape. Gain a competitive edge and make informed decisions by expanding your knowledge of these essential concepts.
An improvement in per-share metrics post-transaction (after issuing additional shares). Acquirer The firm which is purchasing a company in the acquisition (the buyer).
The purchase of the controlling interest or ownership of another company.
The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.
Restructuring a company’s debt and equity mixture, most often with the aim of making a company’s capital structure more stable; a partial sale of a company which allows a seller a liquidity event plus a retention of partial ownership of stock, generally by a private equity investor.
5. Restructuring Charges
Any fees or charges related to early debt repayments that are part of a restructuring.
Target company playing along with the less desirable bid and stalling for time while waiting for a better offer to appear.
7. Sensitivity Analysis
A method of testing how sensitive certain outputs in the model are to changes in certain assumptions.
8. Share/Stock Deal
The acquirer purchases all the shares for the target (and assumes all assets and liabilities).
9. Hold Back (HB)
A hold-back is cash kept back in an escrow account, usually for 12 months, and is there in case there are any uncured or unanticipated liabilities or expenses that arise post sale that should have been taken care of by the seller prior to the close if they were known. It can also cover items such as open accounts receivables being collectible, or customers being retained during that time period.
10. Year Over Year (YOY)
This is really the process of comparing one year over another year, both from a financial statement perspective as well as other management data. Common YOY metrics are revenue, sales, receivables, payables, inventory, customer counts, etc.
11. Monthly Recurring Revenue and Annual Recurring Revenue (MRR/ARR)
Monthly Recurring Revenue and Annual Recurring Revenue. These are terms used mostly in respect to revenue when dealing with hosted solutions or Software as a Service (SaaS) revenue or Anything as a Service (AaaS).
12. Enterprise Value or Total Enterprise Value (EV or TEV)
These economic measures reflect the market value of a business. Unlike EBITDA, it includes the debt of a company and subtracts the cash and cash equivalents. TEV can be used to compare two companies with different levels of debt and equity.
13. Post-Money Valuation
The value of a company after investors invest in a given round of financing.
14. Pre-Money Valuation
The value of a company before investors invest in a given round of financing, or value based on transaction value without consideration of capital structure.
15. Preferred Stock
Stock that gives its holders certain rights, preferences and privileges over holders of common stock and other securities.
16. Pro Forma Shares Outstanding
The number of shares outstanding after the transaction has closed and additional equity has been issued. Purchase price allocation The breakdown of the total purchase price between net identifiable assets and goodwill (used for tax purposes and must be agreed upon by buyer and seller).
17. Angel Investor
A wealthy individual (accredited investor) who provides seed or early-stage financing from his or her own funds in return for equity. Angel investors sometimes provide industry knowledge and contacts, and sometimes play a direct role on the board, but infrequently participates in management. Angels invest either as individuals or in groups.
18. Asset Deal
The acquirer purchases only the assets of the target company (not its shares).
19. Backward Integration
A company acquires a target that produces the raw material or the ancillaries which are used by the acquirer. It intends to ensure an uninterrupted supply of high-quality raw materials at the fair price.
Generally used with startup companies, meaning the financing of business efforts with personal, existing and often scarce resources.
The net income “line” of the income statement.
22. Stock Consideration
The portion of the purchase price given to the target in the form of shares of the acquirer’s stock.
Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.
Cost savings and revenue enhancements that are expected to be achieved in connection with a merger/acquisition.
25. Tag-Along Rights
These rights enable the holder to participate in a sale of stock from another shareholder to a third party, typically in proportion to the number of shares the holder holds in the company. Co-sale rights are usually designed and intended to protect the holder if a founder or a majority shareholder decides to sell his, her or its interest in the company. The co-sale rights holder can participate in the sale, usually with the same terms and conditions as the founder or majority shareholder.
26. Target (Acquiree)
The firm that is being acquired (the seller).
27. Normalized Earnings
Economic benefits adjusted for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.
28. Offer Price
The price offered per share by the acquirer.
29. Other Closing Costs
This may include due diligence fees, legal fees, accounting fees, etc. related to the deal.
30. Pari Passu
A Latin term referring to the equal treatment of two or more parties in an agreement. For example, an investor may want to have a certain right that is pari passu with investors in a previous financing round.
31. Portfolio Company
A company that has received an investment from a venture capital fund is said to be a portfolio company of that venture capital fund.
32. Deal Structure
Typical deal structure may include stock, seller debt, earn outs or other valuables besides cash. The complex nature of deal structure is an important reason why middle-market intermediaries are often hired.
A worsening of per-share metrics post-transaction (after issuing additional shares).
34. Discontinued Operations
Operations that have been or will be discontinued by the company. These items are reported separately on the income statement.
35. Discount for Lack of Control
An amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control.
36. Discount for Lack of Marketability
An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
An earnout is part of a sale transaction where part of the price to be paid is conditional on future performance. This performance is usually tied to either revenue, gross profit margin, customer retention and/or employee retention. Most earnout periods last from 1 – 3 years. And earnout amounts can be calculated either on an annual, bi-annual, or quarterly basis. However, annuals are most common.
38. Quality of Earnings Report (QofE)
This is a report prepared typically by a CPA firm during the due-diligence period. This report (either paid for by the buyer or seller) provides a detailed analysis of all the components of a company’s revenue and expenses, and provides key analysis into the customer revenue, working capital, EBITDA adjustments or normalizations. While not an audit or a review, it does focus specifically on the key aspects a buyer would want to know when purchasing the company. It also assesses the sustainability and accuracy of historical earnings as well as the achievability of future projections. Many times, this report is at the request of the board of directors, or of a private equity firm funding an acquisition for a strategic buyer in their portfolio.
39. Business Cycle
A recurring pattern of expansion and contraction in the economy. The average cycle is three to four years.
40. Capital Expenditure (CAPEX)
A large expenditure which acquires a new capital asset or improves the useful life of an existing capital asset. The cost is spread/expensed over the useful life of the asset. A company’s CAPEX needs is a consideration when valuing a business. Large CAPEX needs would reduce the amount of cash a buyer could expect from their investment.
41. Capital Asset Pricing Model
An element of modern portfolio theory. A mathematical model showing an “appropriate” price, based on relative risk combined with the return on risk-free assets.
Term used to describe a company’s permanent capital, long-term debt and equity.
43. Liquidation Value
The amount which is available if the assets of the business are sold off and converted to cash.
The purchasing company acquires all of the target company’s shares/assets when the target company ceases to exist (acquirer survives).
The inverse of the capitalization rate; common measure of value to compare pricing trends on deals.
46. Net Book Value of Assets
Book value of assets minus book value of liabilities. Net cash/Net debt deal Purchase price assumes that the seller retains all balance sheet cash and pays all third-party/interest-bearing debt. When the term is used, it should be supplemented by a specific definition.
47. Net Debt
Cash asset less company debt.
48. Fully Diluted Shares Outstanding
The number of shares a company has outstanding after options, convertible securities, etc. are exercised.
49. Golden Parachute
An employment contract that guarantees extensive benefits to the executive if the executives are made to leave the company.
The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).
51. Horizontal Integration
Merging of companies in the same lines of business, usually to achieve synergies.
52. Identifiable Assets
An asset that can be assigned a fair value and can include both tangible and intangible assets.
53. Earn Out
An arrangement in which sellers of a business may receive additional future payments if certain performance metrics are met.
54. Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)
EBITDA is a measure of cash-flow that excludes the capital (or debt) service of the business, which helps with comparability from one transaction to another. A multiple of EBITDA is the most commonly used valuation metric for private companies.
55. Exclusivity (no-shop) Requirement
A contractual requirement that prevents a company from soliciting or negotiating other deals for a specified period of time, while it is exclusively negotiating with a potential investor, group of investors or acquirers.
56. Economies of Scale
Fixed costs decrease because merged companies can eliminate departments with repetitive functions or gain operational efficiencies.
57. Economies of Scope
A gain of more specialized skill or technology due to the merger.
58. Indication of Interest or Express of Interest (IOI or EOI)
An IOl is a non-binding letter prepared by the buyer to the seller in which the main purpose is to express a genuine interest in purchasing the company, but the issuer hasn’t yet had the opportunity to review sufficient data (due diligence) regarding the company. An IOI will offer an approximate price range. An IOI may be issued in advance of an LOl if the buyer is really serious, there are other buyers also interested and there is a sense of urgency to getting some information into the sellers’ hands. An lOl will also give you an idea of who is serious and who is not.
59. Confidential Information Memorandum (CIM)
The CIM is prepared early in the sell-side process. It provides an overview of the company, including summary financial statements, metrics, KPl’s and customer data and is designed to put the seller in the best possible light while providing sufficient detail to the buyers so they can prepare an initial lOl or LOI.
All intangible assets like goodwill, patents, trademarks, unamortized debt discounts and deferred charges.
61. Intrinsic Value
The estimated value of the business using discounted cash flow analysis (often on a per-share basis).
62. Letter of Intent (LOI)
The LOI is a document that outlines the preliminary terms of an agreement. While this is typically a non-binding document in most respects (except non-disclosure and non-compete), it is important to list out the key aspects of the deal in this document as it will serve as the foundation of the definitive purchase agreement. Once an LOI is accepted it typically prohibits the seller from speaking with other buyers for a specified time period: An IOl does not. A Memorandum of Understanding (MOU). A MOU is very similar to a LOI but is used when there are more than two parties involved.
63. Leveraged Buyout
This is the acquisition of a company using significant amounts of debt to increase returns on investment.
65. Discount for Lack of Voting Rights
An amount or percentage deducted from the per-share value of a minority interest voting share to reflect the absence of voting rights.
The sale, for cash or for securities, of a segment of a company to a third party which is an outsider.
67. Drag-Along Rights
Rights that enable a shareholder or group of shareholders (usually those who own a controlling interest in the company) to compel other shareholders to sell their stock in the event a purchaser desires to purchase more than what the controlling shareholder(s) own(s).
68. Due Diligence
In the process of an acquisition, the acquiring firm is often allowed to see the target firm’s internal books, operations and internal procedures. The acquiring firm reviews all areas of the target to satisfy their interests. Offers are made contingent upon the resolution of the due diligence process.
69. Capital Structure
The composition of the invested capital of a business enterprise; the mix of debt and equity financing.
69. Cash Consideration
The portion of the purchase price given to the target in the form of cash.
70. Cash Flow
Cash that is generated over a period of time by an asset, group of assets or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows.
Provisions in the legal agreements on loans, bonds, or lines of credit. Usually written by the lender to protect its position as a creditor of the borrowers.
72. Sales and Purchase Agreement (SPA)
This is the document, also referred to as the Definitive Agreement that is the main legal binding contract outlining the agreed upon conditions of the buyer and seller. Other agreements such as the Non-Compete or Ongoing Services Agreement are typically in addition to the SPA. You can plan on spending a month or more going back and forth with redlines before both parties are finally happy with all the definitions, terms, and conditions.
73. Trailing Twelve Months or Last rolling Twelve Months (TTM or LTM)
Most buyers want to see the most recent annualized information. While the calendar or fiscal year end numbers are important, there may be many months in between year end and when buyers are looking at the company. Providing TTM is a common request for financial statements and other company data.
74. Term Sheet
A document which outlines the key terms of a proposed transaction. The term sheet is typically nonbinding, except for certain provisions.
75. Timing of Synergies
How long it is estimated to take to realize the synergies in the transaction.
76. Transaction Close Date
The date on which the transaction is expected to be officially completed.
77. Vertical Integration
Merging with companies that are in its supply chain. It is composed of both forward and backward integration.
A derivative security that gives the holder the right to purchase securities (usually common stock) from the issuer at a specific price within a certain timeframe.
The Take Away
You are now armed with the knowledge of the top 78 most common M&A acronyms and terms that are essential in 2023. By diving into this comprehensive guide, you have exhibited your commitment to staying informed and staying ahead in the ever-changing landscape of mergers and acquisitions. But remember, this is just the tip of the iceberg.
If you’re eager to unlock further insights, strategies, and connect with an industry expert who can help you buy profitable businesses and achieve your goals, get started here!