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M&A Jargon Buster

A breakdown of 150+ common pieces of M&A jargon and technical language.

When I sold my company, I found the jargon and technical language overwhelming and frustrating.

It felt like jargon was used deliberately, as a weapon. It makes first-time sellers feel foolish or embarrassed to push back on something that doesn't make sense. Or maybe it's just a way for advisors to feel smart?

But once you scrub away the jargon, the concepts make intuitive sense and there's a clear path to understanding the issues.

So here's a glossary of 167 commonly used terms in M&A deals, written to help selling business owners get on top of technical language and jargon. I suggest you just use Control + F to find the term you're looking for.

Enjoy!

Acquisition Financing

👉 The funding needed by the buyer to buy the company. It can involve a combination of its existing cash reserves, debt (in the form of Third Party Financing or Seller Financing) or shares in the buyer's company. It may also include Bridge Financing.

Actual Cash

👉 The price often includes the value of cash in the company at the time of completion. This must be estimated at the time of closing and then compared to actual cash later once accounts are available. See Purchase Price Adjustment and Debt Free Cash Free.

All Cash Deal

👉 A transaction where the buyer pays the full purchase price in cash, rather than using stock. This cash may come from the buyer's own funds, debt, or other financing sources. All cash deals provide sellers with immediate liquidity and remove the risks associated with payment in stock or other forms of consideration. Compare to a Stock Deal.

Anti-Embarrassment Clause

👉 An anti-embarrassment clause protects the seller from the risk of the buyer quickly reselling the acquired asset at a higher price. This clause, seen sometimes in the US but less common elsewhere, ensures that the seller receives additional compensation if the asset is sold for a higher price within a specified period.

Asset Purchase

👉 An acquisition where the buyer agrees to purchase specific assets and liabilities of the seller, rather than buying the company’s shares. This approach allows the buyer to select which assets and liabilities to acquire, often minimizing exposure to unwanted risks. This approach is more common in distressed sales or turnaround situations. Compare to a Share Purchase.

Asset Purchase Agreement

👉 In an Asset Purchase, an Asset Purchase Agreement (APA) is the contract that transfers ownership of those assets from the sellers to the buyer and finalises the terms and conditions of their sale. This is different from an SPA used in a Share Purchase.

Auction

👉 A competitive process in which multiple potential buyers submit bids to acquire a company or its assets. The seller can choose the best bid, based on price and other terms. Auctions are a great way to maximize the sale price through a competitive bidding process between keen buyers, creating Competitive Tension. Usually, the process is run by M&A Advisors.

Bad Leaver

👉 An employee who leaves a company under unfavorable conditions, such as being fired for misconduct. In an exit, bad leavers who have options in an Employee Stock Option Scheme will typically forfeit these and not be entitled to convert these to shares to be sold in the deal. The converse is a Good Leaver.

Basket

👉 A clause in an SPA which sets a minimum threshold for warranty and indemnity claims. Potential claims are pooled, and can only be pursued once their total value exceeds the amount of the basket. If the value of the claims is less than the basket amount then no claim can be made against the seller. This protects the seller from minor claims and ensures only significant issues are addressed. See also Tipping Basket, De Minimis and Warranty.

BATNA

👉 Best Alternative to a Negotiated Agreement. The best possible outcome a party can achieve if negotiations fail. Knowing your BATNA provides leverage in negotiations and helps avoid agreeing to unfavorable terms. The term was made famous by Chris Voss, a negotiation expert who wrote the book "Never Split the Difference." In M&A, a strong BATNA could be another buyer or continuing to grow the business without making any deal. If the other party knows you have a strong BATNA, it helps to strengthen your negotiation position.

Beauty Contest

👉 A process where a company invites multiple M&A Advisors to pitch their services and strategies. This helps the company select the most suitable advisor based on expertise, approach and costs.

Bible

👉 A comprehensive collection of all documents relating to the transaction. It is prepared after the deal has completed by lawyers and shared with all parties for reference to key documents.

Boilerplate Clause

👉 Boilerplate clauses are standard provisions found in contracts such as the Share Purchase Agreement that are often pre-drafted and used to address common issues like dispute resolution, confidentiality, etc. These terms are not typically heavily negotiated.

Bolt On Acquisition

👉 An acquisition where a company buys another company to add to its existing operations, often to broaden their product set or to expand into a new market. This type of acquisition is typically smaller and complementary to the buyer’s core business. Compare to Horizontal M&A and Vertical M&A.

Break Up Fee

👉 A fee paid by the seller to the buyer if the seller withdraws from the deal. This fee compensates the buyer for their costs and time invested, ensuring commitment from the seller. In contrast, a Reverse Break Up Fee is paid by the buyer to the seller if the buyer cannot complete the transaction under specified conditions. These fees are uncommon in most smaller private M&A deals. This may be covered by Cost Coverage terms agreed between buyer and seller.

Bridge Financing

👉 Also called a bridge loan. Short-term financing used by the buyer to fund the purchase price until permanent financing is arranged, ensuring the deal can proceed without delays. A kind of Acquisition Finance.

Bring Down Certificate

👉 A document confirming that the representations and warranties made at the signing of the M&A agreement are still true and accurate at Closing. This certificate is typically required as a Closing Condition and is only needed when there is a Split Closing.

Business Warranty

👉 See Warranties for an overview of warranties generally. A business warranty, distinct from a Fundamental Warranty, covers aspects of the company’s operations such as the status of customer contracts, employees, historical financial information, property, legal claims and so forth.

Buyer's Covenants

👉 Promises or obligations that the buyer agrees to uphold after the acquisition is completed. These covenants can include maintaining certain business operations, providing funding or not making changes that could unfairly impact the business. They are especially important in deals involving earnouts, where the seller needs assurance that the buyer will run the company in a way that allows earnout targets to be met. For example, a covenant might require the buyer to invest in marketing or keep key personnel to ensure business continuity and growth.

Call Option

👉 A financial contract giving the buyer the right, but not the obligation, to purchase an asset at a predetermined price within a specific period. In the context of a deal structured as a partial acquisition (where sellers keep some of the shares), a call option allows the buyers to buy the remaining shares from the sellers at an agreed price. This is often paired with a Right of First Refusal, and/or a Put Option giving the sellers the right to force sale of these shares to the buyer on specific terms.

Cap Table

👉 A table showing the ownership structure of a company, including details of equity shares, preferred shares, options, and convertible securities. It’s crucial in M&A to understand the distribution of ownership between sellers. See Fully Diluted Basis.

Capital Gains Tax

👉 Capital gains tax is the tax paid by shareholders who have sold their shares in the company at a profit.

Certain Funds

👉 A seller might ask for confirmation from the buyer that it has the necessary financial resources available to pay the purchase price on Completion without financing issues. See Acquisition Finance.

Change of Control

👉 A clause in contracts that allows one party to terminate if there's a change in ownership of the other party. This issue is often flagged in Due Diligence. If contracts with key customers or suppliers include these change of control clauses, these customers or suppliers may use them to terminate or to negotiate better terms, harming the business. Buyers will usually try to get written confirmation from these customers or suppliers that they won't invoke their change of control rights before closing the deal.

Clawback

👉 A clause which obliges the seller to repay some of the purchase price if certain conditions are not met after the deal. These are usually related to financial performance. This has the same end result as an Earnout, but rather than the buyer holding back some of the purchase price until conditions are met, the whole amount is paid upfront and then 'clawed back' later. These are less popular with buyers as they take the risk of having to reclaim funds from the sellers, which may be difficult.

Closing

👉 The final stage in an M&A transaction where all the agreed-upon terms are fulfilled, payment is made and ownership is officially transferred from the seller to the buyer. Also called Completion. This usually happens simultaneously with the signature of contracts, but there can sometimes be a delay whilst certain conditions (called Closing Conditions) are met – this is called a Split Closing.

Closing Conditions

👉 These are specific requirements that must be fulfilled before an M&A transaction can be completed. In a Split Closing, these conditions are necessary for the deal to close – the buyer will not be obliged to go ahead and complete the deal (paying the price) until evidence is seen that these have all been met. These conditions can include regulatory approvals or shareholder consents, and are detailed in a schedule of the SPA usually called a Closing Checklist. Also called Conditions Precedent.

Closing Meeting

👉 The final meeting in an M&A transaction where all documents required for Closing are signed, funds are transferred, and ownership is officially transferred. This meeting finalizes the deal and ensures all conditions are met.

Club Deal

👉 A club deal is an acquisition in which several private equity firms or investors pool their resources to buy a company. This can be challenging for sellers as they must negotiate with multiple buyers, each of whom has their own advisors, which can cause delays and increase fees.

Comfort Letter

👉 A comfort letter is a letter issued by an accounting firm or financial institution affirming the accuracy of financial statements or the soundness of a deal. This is sometimes required by the Management Committee of the buyer before they can proceed.

Commercial Due Diligence

👉 An in-depth investigation into the business aspects of a company being acquired, including market position, competitive landscape, and commercial viability. This analysis helps buyers assess the potential risks and benefits of the transaction, and to determine the price that they are willing to pay. This typically happens early in the process, in parallel with the negotiation of the Letter of Intent which details the key terms of the deal and alongside Financial Due Diligence and Legal Due Diligence.

Competitive Tension

👉 The strategy of creating competition among potential buyers to increase the sale price and improve terms. By fostering a sense of urgency and competition, the seller can achieve a better outcome in the transaction. This can be achieved through an Auction, or just by having multiple active bidders.

Completion

👉 See Closing.

Completion Accounts

👉 Completion accounts are financial statements drawn up following the Completion of an M&A transaction to determine the final purchase price and any adjustments that are needed. The Consideration often contains components for cash and debt, or is calculated based on a multiple of earnings or other metrics. But, up-to-date financial information is usually not available on the day the deal completes to calculate these amounts. Therefore, these amounts are estimated and the completion accounts are later prepared once actual amounts are available as at the date of completion. A Purchase Price Adjustment can then be made.

Conditions Precedent

👉 Another name for Closing Conditions.

Consideration

👉 The total amount paid by the buyers for the business. This includes up-front and deferred components. Also called Purchase Price. See Deferred Consideration.

Cost Coverage

👉 An agreement on how transaction-related costs (e.g., legal fees, due diligence expenses) will be covered by the parties involved in an M&A deal. This ensures clarity and prevents disputes over who is responsible for various costs.

Cross-Border M&A

👉 Cross-border M&A involves transactions where the buyer and the target company are based in different countries, adding complexity to the deal due to legal and regulatory differences.

Data Room

👉 A secure online repository where documents and information related to the company being sold are stored. It allows potential buyers to conduct Due Diligence efficiently and securely. Historically in physical form, these are now stored online in a Virtual Data Room or VDR.

Data Room Index

👉 A structured list or table of contents for the documents and files contained in the data room. This index helps users navigate and locate specific information quickly during the Due Diligence process. A well-organised seller will keep a well organised Data Room with a clear index.

Data Room Rules

👉 Guidelines and protocols for accessing and using the Data Room. These rules ensure that sensitive information is handled securely and that all users understand their responsibilities and limitations.

De Minimis

👉 A threshold amount below which no claims for breach of Warranty can be made. This protects the seller from many small claims which may waste time and incur legal costs to defend. If a Basket is also used, claims can only be added to the 'basket' if they are greater than the de minimis amount.

Deal Announcement

👉 Public statements made by the company, buyer and seller to disclose the deal. This announcement will be negotiated and agreed in advance, to agree how the deal is explained to the public and whether details such as price are shared.

Deal Breaker

👉 A critical issue or condition that, if not resolved, would cause the termination of an M&A transaction. Deal breakers can include regulatory hurdles, significant liabilities found in Due Diligence or failure to agree on key terms. See also Red Flag.

Deal Team

👉 The group at the buyer or seller working to get the deal done. For the buyer, this includes the M&A or corporate development team (if they have one), plus certain senior execs and external advisors like M&A Advisors, lawyers, and accountants. The deal team coordinates due diligence, negotiations, and closing activities.

Debt Free Cash Free

👉 This is a valuation method where a company's valuation is assessed without considering its debt and cash. The buyer first assumes the company is hypothetically sold without any debt or cash. Once this is agreed with the seller, then the value of any cash held at closing is added to the purchase price, whilst the value of debt held at closing is subtracted from the purchase price to give the final Consideration to be paid. This calculation is made as part of the Purchase Price Adjustment.

Deferred Consideration

👉 Deferred consideration is part of the Consideration that is paid after the closing of a transaction subject to meeting certain conditions or milestones. These can be financial targets or other specific conditions such as a patent approval or similar. This operates similarly to an Earnout.

Disclosure

👉 Information provided by the seller detailing any exceptions or issues related to the Warranties given. This process ensures that the buyer is aware of potential liabilities or risks before signing the deal. Critically, the buyer cannot make warranty claims for issues which they were already informed about in disclosure. This is a critical step to mitigate the seller's liability for breach of warranty claims. Disclosures are typically made in a Disclosure Letter, which accompanies the SPA and is signed at the same time. See General Disclosures and Specific Disclosures.

Disclosure Letter

👉 A document provided by the seller that states any exceptions or qualifications to the warranties made in the sale agreement. For example, is a warranty states that "The company is not party to any ongoing litigation", a disclosure would give details of any current claims, their value and the impact on the business. The buyer in then informed about this, and cannot later sue for a breach of warranty. See Disclosure above for more on this.

Discounted Cash Flow

👉 Shortened to DCF, this is a valuation method that estimates the value of an investment based on its expected future cash flows, which are adjusted (discounted) to reflect their present value. This method helps determine the attractiveness of an investment. Buyers might use this method to derive the price they are prepared to offer, based on the financial projections prepared by management.

Distressed Sale

👉 The sale of a company or its assets under conditions of financial distress, such as bankruptcy, insolvency, large litigation or other urgent financial pressures. These sales are typically at low prices.

Document Request List

👉 A list of documents and information requested by the buyer for review during Due Diligence. This list helps ensure that all necessary information is provided for a thorough evaluation of the target company.

Drag Along

👉 A clause that allows majority shareholders to force minority shareholders to join in the sale of the company. This ensures that the deal can proceed smoothly without minority shareholders blocking it. Drag along rights are set out in the articles of the company or in a Shareholder Agreement. In the UK, drag along rights typically kick in once sellers owning more than 80% or 90% of shares want to sell.

Due Diligence

👉 A comprehensive appraisal of a company undertaken by a prospective buyer to evaluate its assets, liabilities, commercial potential, and financial performance. This process helps the buyer make an informed decision on whether to buy, at what price and on what terms, and what protection (such as warranties and indemnities) are necessary to protect them against any risks identified. See Warranty and Disclosure.

Due Diligence Report

👉 A comprehensive report summarising the finding of the due diligence analysis. This is usually prepared by the buyer's legal, financial advisors and M&A advisors and presented to them with recommendations on whether to proceed and on what terms.

Earnout

👉 A structure where the seller receives only some of the payment upfront, with the remainder to be paid based on the future performance of the business. This helps to protect the buyer from performance which does not meet forecasts (they won't have to pay the earnout amounts), and incentivises the seller to contribute to the ongoing success of the business post-acquisition. Earnouts can be useful when there is uncertainty about the business’s prospects or when the parties have differing opinions on its valuation.

Earnout Period

👉 The time frame during which the financial performance of the acquired company is measured to determine additional compensation to be paid to the seller under the Earnout.

EBITDA

👉 Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's operating performance that excludes these non-operating expenses. EBITDA is commonly used as the financial metric in calculating Valuations using the Valuation Multiple approach and in Earnout targets.

Employee Stock Option Scheme

👉 A program that gives employees the option to purchase shares of the company at a predetermined price, sometimes lower than their market value. This can incentivize employees to stay with the business long-term, and aligns their interests with shareholders. These are subject to very specific rules on eligibility, and accounting and tax regulation. These are relevant on an exit and these options can typically be exercised and the employees are issued shares which are sold to the buyer. Also called Employee Management Incentives or Employee Stock Option Plans. See Good Leaver and Bad Leaver.

Escrow

👉 A financial arrangement where a third party Escrow Agent holds and regulates the payment of funds for the buyer and seller, with the money only released once agreed conditions are met. This is often used to cover an amount for warranty claims where the buyer is concerned about recovering funds – especially if there any many individual sellers rather than one corporate seller.

Escrow Agent

👉 A neutral third party that holds funds, documents, or other assets in Escrow on behalf of the buyer and seller until all conditions of the transaction are met. The escrow agent ensures that the deal is completed fairly and securely.

Escrow Agreement

👉 An escrow agreement is a legal document between buyer, seller and Escrow Agent which outlines the handling of funds held in Escrow, payment of interest and the rules on when funds can be paid out.

Estimated Cash

👉 An estimate for the amount of cash in the business on the date of Closing. The acquisition price often includes the cash in the company at the time of completion, which is first estimated (called Estimated Cash) and then compared to Actual Cash later once accounts are done. This process is part of Purchase Price Adjustments. See also Debt Free Cash Free.

Exchange Ratio

👉 The exchange ratio is the number of shares the acquiring company will offer to the target company's shareholders in a share-for-share transaction. This is only relevant if part of the consideration is shares in the buyer's company.

Exclusivity

👉 An agreement where the seller agrees not to negotiate with other potential buyers for a specified period. This gives the buyer certainty that they are the only party with the right to purchase the company during the exclusivity period. The terms of this are detailed in the Letter of Intent or a separate exclusivity agreement.

Expert Determination

👉 A process where an independent expert is appointed to resolve a dispute between buyer and seller. The expert's decision is usually binding. In M&A, experts are often used to resolve valuation disputes, determine Earnout payments, or assess specific technical or financial issues.

Fairness Opinion

👉 An independent assessment provided by a financial advisor or investment bank that evaluates the fairness of the terms and price of an M&A transaction. It is often used by boards of directors to justify that the deal is in the best interest of shareholders.

Fee Cap

👉 A fee cap is a limit set on the total amount that can be charged by advisors (such as lawyers, accountants, or M&A Advisors) for their services in an M&A transaction. This ensures that the advisory fees do not exceed that amount without agreement from the seller.

Final Offer

👉 A final offer is the last and most definitive proposal made by a buyer during negotiations, indicating their final terms for the acquisition. Also called a best and final offer. This is most relevant in an Auction process where bidders will make multiple rounds of bids.

Financial Audit

👉 An examination of a company's financial statements and related operations to ensure accuracy and compliance with accounting standards, prepared by an independent third party auditor. This audit provides assurance to the buyer about the company's financial health. Conducted as part of the Financial Due Diligence.

Financial Buyer

👉 An investor, such as a private equity firm, that acquires companies primarily for financial return rather than strategic benefits. Financial buyers focus on improving and eventually selling the acquired company for a profit. Compare to a Strategic Buyer.

Financial Due Diligence

👉 The process of examining the financial aspects of a target company, including its financial statements, tax filings and forecasts. This helps the buyer assess the financial health and risks of the acquisition.

Financial Projections

👉 Financial projections are forward-looking statements based on assumptions about future revenues, expenses, and other financial metrics, often used in valuation. These projections are shared with the buyer as part of the due diligence process. Growth rates and projected financial performance are used to determine the business's valuation.

Force Majeure

👉 Force majeure is a contract clause that frees parties from liability or obligation when extraordinary events or circumstances beyond their control occur. A force majeure event can unwind the deal between signing and closing if such events significantly impact the target company's business. A recent example is a global pandemic!

Fully Diluted Basis

👉 This refers to the total number of shares that would be outstanding if all convertible securities (e.g., options issued to team members or advisors, warrants, convertible debt) were exercised. It's important to determine which options would convert in the deal to calculate the price per share and how much each shareholder will be paid. See Cap Table.

Fundamental Warranty

👉 These are the Warranties which relate to core aspects like the sellers' ownership of shares and their authority to sell. These warranties are using given by each seller with Several Liability (meaning they are each responsible for the statement about their own shares, but not statements of others).

General Disclosures

👉 The broad information shared with the buyer in the Disclosure Letter which relate to general information such as that on public registers. Compare to Specific Disclosures which relate to specific warranties and certain facts relevant to them.

Golden Handcuffs

👉 Financial incentives given to key employees to retain them within a company, often involving deferred compensation or stock options. In an acquisition, they may be offered by the buyer to key executives in the company to encourage them to stay and contribute to the growth of the company.

Golden Parachute

👉 A golden parachute is a substantial financial compensation package awarded to executives if they are terminated as a result of a merger or acquisition. This is used when executives are not needed by the buyer after the deal.

Good Leaver

👉 An employee who leaves a company under favourable conditions, such as retirement or voluntary resignation with proper notice. In an exit, bad leavers who have stock options will typically be allowed to exercise their options held in an Employee Stock Option Scheme, receive shares and then sell these to the buyer.

Heads of Agreement, Heads of Terms

👉 Another name for the Letter of Intent.

Hold Harmless

👉 A clause in the sale contract where one party agrees not to hold the other party responsible for certain risks, losses, or damages. This protects parties from potential legal claims arising from specific actions. Examples include protecting the buyer from claims related to the seller's pre-closing activities or liabilities.

Holdback

👉 A portion of the purchase price that is withheld and paid out later, often used to ensure the seller meets specific conditions or performance targets. Holdbacks protect the buyer from potential risks and uncertainties. Also called Deferred Consideration.

Horizontal M&A

👉 A merger or acquisition when a company buys a competitor. This type of M&A is designed to increase market share, reduce competition, achieve economies of scale or helping the buyer improve their product or brand by buying the competitor. Read more in The SIX strategies that drive M&A.

Indemnity

👉 A contractual provision where one party agrees to compensate another for any loss or damage that occurs for a specific breach of contract. If Due Diligence finds certain issues (like an ongoing litigation against the company, or a tax issue that is yet to be resolved) the buyer will insist on an indemnity being added to the sale contract. This sits alongside claims which can be made for breaching a Warranty.

Information Memorandum

👉 A detailed document prepared by the seller that provides potential buyers with information about the company, its operations, financial performance, and strategic plans. Similar to a pitch deck for fundraising, this is used to attract interest from buyers. If you work with an M&A Advisor, they will help prepare this for you.

Initial Data Request

👉 The initial list of documents and information requested by the buyer during the due diligence process. This helps the buyer begin their evaluation of the company. This is then followed by further requests as they deepen their research and want to dig deeper into certain issues.

Integration Plan

👉 A detailed strategy for combining and aligning the operations, cultures, and systems of the company into the buyer's group as part of the Post Merger Integration. This plan is often shared by the buyer as part of their bid to demonstrate how they intend to integrate the acquired company and realize synergies.

Joint and Several Liability

👉 If sellers are bound with joint and several liability, each seller is individually responsible for claims made against the sellers. This means the buyer can pursue any one seller for the full amount of a claim. This is commonly requested by buyers for Warranty or Indemnity claims, where an individual seller may be held liable for the entire loss resulting from a breach of warranty. That seller can then go to the other sellers for contribution to the payment on a pro rata basis.

Knowledge Qualifier

👉 This limits the seller's Warranty liability to information they actually knew or should have reasonably known when giving the warranty. Say an issue comes to light later that was not disclosed, that would normally lead to a warranty claim by the buyer. If the seller didn't know about it (and shouldn't have reasonably known) then the knowledge qualifier stops the buyer from being able to claim. Buyers will typically strongly resist knowledge qualifiers, for obvious reasons.

Leakage

👉 In a Locked Box structure, this is the extraction of value from the company by the seller between the locked box date and the closing date. This ensures the company's value remains intact until the transaction is finalised. Leakage can include unauthorised dividends, excessive management fees, payments to directors, non-ordinary course related party payments, manipulation of working capital, or any other quasi-transfer of value to the seller. Leakage is carefully defined, with exclusions to permit the sellers to continue running the business in the ordinary course.

👉 Legal Due Diligence involves a thorough investigation of the legal aspects of a company being acquired. This includes reviewing contracts, litigation history, intellectual property rights, employment agreements, and compliance with laws and regulations. The goal is to identify any legal risks or liabilities that could impact the transaction. This analysis helps buyers understand the legal standing of the target company and make informed decisions. This early in parallel with Commercial Due Diligence and Financial Due Diligence and the negotiation of the Letter of Intent.

Letter of Intent

👉 The first key document of an M&A deal, often shortened to LOI. It's a non-binding document which outlines the high-level terms between buyer and seller. It forces parties to agree on price, the split between upfront and deferred payments, plans for management after the sale, expectations on due diligence and warranties, timelines, exclusivity and any other key expectations. It becomes the basis for drafting the full-form Share Purchase Agreement. Although non-binding, it's seen as improper to deviate from what's agreed in the LOI without good reason (like new data coming to light). Also called a Heads of Terms, Heads of Agreement or Term Sheet – they all mean the same thing.

Leverage

👉 The use of borrowing by the buyer to finance an acquisition. Leverage can increase the potential return on investment (by reducing the equity that the buyer needs to contribute), but also increases risk. Common in Private Equity deals.

Limitations on Claims

👉 Provisions that limit the amount and time period for which a buyer can make claims against the seller for breaches of the sale agreement. These limitations provide certainty and protect the seller from indefinite liability.

Liquidation Preference

👉 A provision that gives certain preferred shareholders the right to receive their investment back before common shareholders in the event of liquidation. This ensures that certain investors have priority in recovering their investment. These are set out in the Shareholder Agreement.

Lock Up

👉 A period during which shareholders are restricted from selling their shares on the open market. This applies usually where the consideration for the acquisition is publicly-traded shares in a buyer. This is designed to ensure stability and prevents significant changes in ownership immediately after the transaction – 12 months is common.

Locked Box

👉 In a locked box mechanism, the parties agree the final purchase price using metrics (such as levels of cash and debt) from the company’s financial position at a previous date, called the locked box date. This is usually the date of the most recent audited financial statements. This price is not adjusted later. The buyer is then under strict rules of how it has operated the business since the locked box date, with restrictions on removing money from the business (called Leakage). This is supported by an Indemnity in case any leakage has happened. The alternative is to use Completion Accounts and a Purchase Price Adjustment.

Long Stop

👉 In a Split Closing, the final deadline by which all Closing Conditions (AKA Conditions Precedent) must be met and the deal must be completed. If the long stop date is reached without completion, either party may have the right to terminate the agreement. This may result in a Break Fee being due.

M&A Advisors

👉 Professionals (firms or individuals) who assist companies through M&A deals. They can support on both the buyer and seller side. They provide expert guidance on valuation, negotiation, due diligence, deal structuring and manage the process and comms with the other party. A good advisor will ensure the client gets a deal aligned to their goals, with the best possible terms. They are not essential, but a good advisor is especially useful in complex deals, difficult regulatory environments, businesses with specific issues or risks or ones where it's difficult to find a buyer. See Beauty Contest, Success Fee and Retainer for more.

Management Committee

👉 A group of senior executives at the buyer who oversee and guide the M&A process, making key decisions and ensuring that the transaction aligns with the company’s strategic goals. This committee will give the deal team guidance on what it can and cannot agree to in negotiations, and the final approval to sign documents.

Management Presentation

👉 A presentation given by the company’s management to potential buyers. It provides an overview of the company’s operations, financial performance, and strategic plans. This is usually at the start of discussions between buyer and seller, and the first major opportunity to pitch the company and the benefits of a deal. Usually accompanied by an Information Memorandum.

Management Q&A

👉 Part of the due diligence process where potential buyers ask questions about the target company, and the sellers provide detailed answers to clarify information and address concerns.

Material Adverse Change

👉 A significant negative change in the target company's business, financial condition, or prospects. This is sometimes used to give the buyer to withdraw from the deal if there's a Split Closing and a MAC occurs before closing.

Materiality Threshold

👉 In Due Diligence, a materiality threshold is the agreed level below which issues won't be reviewed by the buyer. This might be set based on values of contracts (so small contracts are ignored) or employees with salaries below a certain amount (so their employment agreements are not reviewed). This helps the diligence to move quickly and not get stuck on small matters. Sellers will push to set this as high as possible.

Minority Shareholder

👉 A shareholder who owns less than 50% of a company's shares and therefore has limited control over company decisions. This can be employees who have exercised stock options, investors or family members of the founders. See Drag Along and Tag Along, and Shareholder Agreement.

Non-Compete

👉 A clause that prevents the seller or key employees from starting or joining a competing business for a specified period after the transaction, protecting the buyer from direct competition after the deal.

Non-Disclosure Agreement

👉 An NDA ensures confidentiality by prohibiting parties from disclosing or using proprietary information shared during the M&A process. This is usually signed at the start of the process before any information is shared by the buyer.

Non-Solicit

👉 A clause that prohibits the seller or key employees from poaching employees or customers from the buyer’s company for a specified period after the transaction.

Paying Agent

👉 A financial institution appointed to handle the disbursement of funds in a transaction. The paying agent ensures that funds are paid to the correct parties correctly. This is especially useful in companies with large numbers of shareholders, or where banks need to be repaid with funds from the acquisition.

Payment Waterfall

👉 Also called a Distribution Waterfall. This is the order in which shareholders and debtholders receive payments from the proceeds of a transaction. Typically, senior debt holders are paid first, followed by junior debt holders, preferred shareholders, and finally common shareholders. This is agreed between the parties to ensure everyone is aligned on how the purchase price will be allocated.

Post Closing Adjustment

👉 Another name for Purchase Price Adjustment. Also called a True Up.

Post Merger Integration

👉 The process of combining and reorganizing the acquired company into the buyer's group, to realise synergies and achieve the strategic goals of the transaction. This phase is critical for the success of the deal. This plan for this is outlined in the Integration Plan, which is a detailed strategy for how the PMI will be conducted.

Power of Attorney

👉 A legal document authorizing one person to act on behalf of another in legal or business matters. In M&A, a Power of Attorney may be used to facilitate the signing of documents and other formalities. For example, it allows one seller to sign on behalf of all sellers or a designated person within the buyer's deal team to sign on behalf of the company.

Preferred Bidder

👉 The bidder who is selected as the most suitable buyer after initial rounds of bidding. This bidder often gets exclusive negotiation rights to finalise the transaction for a period of time.

Price Chip

👉 A tactic used by buyers to reduce the price agreed in the Letter of Intent. This often occurs during the due diligence phase when buyers find issues or risks that justify a lower price. The buyer then "chips" away at the original price, seeking concessions from the seller. A common tactic of buyers is to include a high price in the LOI, knowing that they plan to chip away later, deliberately seeking issues in DD to justify this. Strong sellers can push back to stick to the original price.

Private Equity

👉 Private equity (PE) firms are investment firms that acquire companies with the goal of improving their value and selling them for a profit, to provide a return for their own investors. PE equity buyers are known for their strategic approach, often involving restructuring, streamlining operations, and accelerating growth. They typically use a combination of their own capital and borrowed funds to finance these acquisitions.

Process Letter

👉 A document sent by the seller to potential buyers outlining the rules and procedures for submitting bids. This is essential in an auction, but also useful if just negotiating with buyers. It sets expectations, timelines, required documents, and evaluation criteria for bids. An M&A Advisor will assist with this.

Purchase Price

👉 Another name for the Consideration, the total amount paid by the buyers for the business. This includes up-front and deferred components.

Purchase Price Adjustment

👉 Often the Consideration contains components for cash and debt, or is calculated based on a multiple of earnings or other metrics. But, up-to-date financial information is usually not available on the day the deal completes. Therefore, these amounts are estimated and the Purchase Price is paid using those estimates. Completion Accounts are later prepared with actual amounts as at the date of Completion. An adjustment to the price can then be made to reflect the delta between the estimated and actual figures. If actuals are higher, the buyer pays more. If actuals are lower, the seller refunds some of the price (typically from an amount held in Escrow for this purpose). Compare to a Locked Box mechanism, which is a different approach.

Put Option

👉 A financial contract giving the holder the right, but not the obligation, to sell an asset at a predetermined price within a specific period. In a deal structured as a partial acquisition (where sellers keep some of the shares in the company), a put option allows the seller to sell these remaining shares to the buyer at an agreed price. See Call Option.

Red Flag

👉 A red flag is a warning sign or potential issue identified during due diligence that could seriously impact the price to be paid, or cause the buyer to walk away from the deal entirely. Examples of red flags include discovering undisclosed legal liabilities or significant discrepancies in financial statements. If serious enough to stop the buyer wanting to proceed entirely, that's called a Deal Breaker.

Representations and Warranties

👉 Another term for Warranties.

Retainer

👉 An ongoing monthly fee paid to M&A advisors to secure their services and ensure their availability throughout the acquisition. This is typically a small proportion of the overall fees, with the majority being paid in a Success Fee if the sale goes ahead.

Reverse Break Up Fee

👉 A fee paid by the buyer to the seller if the buyer cannot complete the transaction. This fee compensates the seller for their time and expenses and provides assurance that the buyer is serious about the deal.

Right of First Refusal

👉 A contractual right that gives an existing shareholder the opportunity to buy shares before the company offers them to external parties – this ensures that current stakeholders have the opportunity to retain or increase their ownership before new investors are introduced. This is found in the Shareholder Agreement. This can cause issues in an exit, and is an issue which the buyer will assess in Due Diligence.

Roadshow

👉 The name for a series of Management Presentations made by the company’s management to potential investors or buyers. It’s used to generate interest and provide detailed information about the company.

Roll Up

👉 A strategy where a company acquires multiple smaller companies within the same industry and integrates them into a single larger entity. This approach is common amongst PE buyers, designed to increase market share and reduce costs.

Scope of Work

👉 A detailed description of the tasks and responsibilities assigned to advisors in an M&A transaction. It outlines the expected deliverables, timelines, and fees for their services.

Seller Financing

👉 Also called Seller Note, this is a financing arrangement where the seller provides a loan to the buyer to facilitate the purchase. This includes an interest rate and a timeline for repayment, which are agreed upon during the negotiation. The buyer can repay the seller using the cash flow generated by the business after the deal has closed. Seller Financing can help bridge financing gaps and make the deal more attractive to buyers, sometimes increasing valuation. They are especially useful if Third Party Financing is not available or very expensive.

Seller's Covenants

👉 Promises made by the seller to undertake or refrain from certain actions between the signing and closing of the deal. Relevant in a Split Closing. These covenants help preserve the value of the company during the transition and protect the buyer from any harm caused by the seller or management of the company during that time.

Service Agreement

👉 The employment contract for execs who will continue running the business post-acquisition. This includes usual terms like pay and bonuses, performance targets, notice period and non-competes. For sellers who will continue working in the business post-sale, this is a key document and can be heavily negotiated.

Set Off

👉 A provision that allows one party to offset a claim against amounts it owes to the other party. This is a practical tool to make payments simpler between buyer and seller. For example, a Post Closing Adjustment might be set off against a Warranty claim so only the net amount is payable from one party to the other.

Several Liability

👉 With Several Liability, each party is only responsible for their share of specific obligations or debts, not the entire amount owed. This contrasts with joint liability, where each party can be held responsible for the full amount. This arrangement is often used to protect individual sellers from being held accountable for the actions or liabilities of others. Fundamental Warranties are usually given on a several basis by each shareholder.

Share Purchase

👉 In a share purchase, the buyer acquires the target company's shares from the shareholders, effectively taking ownership of the entire company, including all its assets and liabilities. This differs from an asset deal where only certain assets are bought. This type of transaction can have tax implications and may be more complex due to the transfer of all liabilities.

Share Purchase Agreement

👉 The main and most critical document in an acquisition. This document outlines the terms and conditions for the sale and purchase of shares in a company. It includes details on: Price and payment terms, including any adjustments or earnouts. Warranties and provisions for recourse by the buyer. Conditions Precedent that must be met before the transaction can be completed. Obligations for both parties post-closing, such as non-compete agreements.

Shareholder Agreement

👉 A legal document outlining the rights, responsibilities, and obligations of a company’s shareholders. It becomes crucial during exit negotiations, as it governs key aspects like the transfer of shares and the decision-making process for selling the company. For example, the agreement may include a Right of First Refusal, ensuring existing shareholders have the first opportunity to buy shares before they are sold to outsiders. Another clause could be a Drag Along and Tag Along rights. This document will be carefully reviewed by the buyer as part of their due diligence.

Specific Disclosures

👉 Information provided by the seller to the buyer in Disclosure, relating to specific warranties in the Share Purchase Agreement (SPA). Unlike General Disclosures, they are specific to a particular warranty. Like all disclosures, they protect the seller from future warranty claims by the buyer for breaches of warranties by sharing any known issues before the deal is signed.

Split Closing

👉 A process (also called Split Completion) where there is a delay between (1) signing contracts and (2) the transfer of ownership and payment. This is needed when parties want to lock in the terms of the deal, but the transfer of ownership cannot happen until certain conditions are met. Typically, that's regulatory approvals, other third party approvals or financing arrangements for the buyer. These conditions are called Conditions Precedent or Closing Conditions.

Split Completion

👉 See Split Closing.

👉 A sponsor is a key individual at the buyer who advocates for and drives the acquisition deal forward. This can be the CEO or CFO, or the head of a business unit that aligns with the company to be bought. This person is responsible for championing the transaction within their organization, coordinating due diligence, securing internal approvals, and managing post-acquisition integration. The sponsor ensures alignment between the acquired company and the buyer's strategic goals, addressing any challenges that arise during the process. Their role is critical for a smooth and successful acquisition.

Stock Deal

👉 When the Purchase Price is made in shares of the buyer, rather than cash. This can help a buyer by removing the need to secure financing, and can increase the overall Consideration paid to the buyer. However, this has downsides for the sellers, especially if the buyer's shares are not easily sold or there is a long Lock Up period.

Strategic Buyer

👉 A company that acquires another company for strategic reasons, such as expanding market share, entering new markets, or achieving synergies. Strategic buyers often look for long-term value creation.

Strategic Premium

👉 The additional value a Strategic Buyer is willing to pay over the market value of a company due to expected synergies and strategic benefits from the acquisition. As a buyer, finding a buyer willing to pay this premium is a key way to increase your price.

Success Fee

👉 A payment made to advisors or brokers upon the successful completion of a transaction. This can be paid only at completion of the deal, or broken into milestone payments at various stages of the deal process based on achieving specific goals. Usually paid alongside a Retainer Fee.

Synergy

👉 The potential benefits that result from combining two companies, such as cost savings, increased revenue, or enhanced capabilities. Synergies are a key driver for many M&A transactions, and the main way that buyers will justify a Strategic Premium.

Tag Along

👉 A right that allows minority shareholders to join in the sale of shares by majority shareholders, ensuring they can sell their shares on the same terms. This protects minority shareholders from being left behind. The terms of this are usually set out in the Shareholder Agreement, including the threshold of shares which are being sold (expressed as a % of total shares) for the right to be invoked.

Target Working Capital

👉 The expected amount of working capital in the business at closing, as agreed between buyer and seller. This is based on historical levels of working capital in the business. This is compared to actual levels of working capital and Post Closing Adjustments are made. This ensures the buyer receives a company with the expected level of working capital and is compensated if this is lower than planned. See Working Capital.

Tax Covenant

👉 A document that outlines the agreement between the buyer and the seller regarding tax liabilities. It protects the buyer from any undisclosed tax liabilities that may arise after the acquisition. Usually the seller agrees to reimburse the buyer for certain tax-related costs that are due to pre-acquisition periods. This ensures that any unexpected tax issues do not affect the buyer post-acquisition.

Tax Deed

👉 Another name for the Tax Covenant.

Teaser

👉 A brief document that provides an overview of the target company and the investment opportunity – a shorter and less detailed version of the Information Memorandum. It’s used to generate initial interest from potential buyers or investors without disclosing confidential details, and is usually only one or two pages long.

Term Sheet

👉 See Letter of Intent.

Third Party Financing

👉 Funding obtained from external sources, such as banks or investors, to finance an acquisition.

Tipping Basket

👉 A Basket sets a minimum threshold for warranty and indemnity claims, where claims are pooled and can only be pursued once their total value exceeds the amount of the basket. In a Tipping Basket, once the total claim value exceeds this threshold, the buyer can recover the entire amount, not just the excess over the threshold.

Top Line DD

👉 A preliminary due diligence review aimed at identifying major risks or issues that could derail the transaction. This quick assessment helps decide whether to proceed with a full due diligence process.

True Up

👉 See Purchase Price Adjustment.

Valuation

👉 The process of determining the worth of a company or its assets. This is done by both the buyer and seller to understand the value they place on the business and therefore the amount at which they'd be prepared to do a deal. Various methods are used, with a Valuation Multiple the most common, as well as DCF.

Valuation Multiple

👉 A valuation method used to estimate the value of a company. A financial metric of the company is chosen (often EBITDA), and this is scaled up this by the Valuation Multiple to give the valuation. So if you have a business making £5m of EBITDA per year, and the buyer decides that an 8x EBITDA multiple is a fair price, then the price offered is £40m. It's a useful short-hand way of getting to a price, and for comparing prices paid for different companies. For more see What are valuation 'multiples'?

Vendor Due Diligence

👉 A process where the seller conducts a thorough investigation and analysis of their own business before putting it up for sale. This is done to identify any potential issues and provide a clear, accurate picture of the company to prospective buyers. VDD is useful because it speeds up the sale process by preemptively addressing potential concerns and allows the seller to maintain more control over the due diligence process. If there are Multiple Bidders, this is especially useful and it saves the same DD being repeated by each buyer.

Vertical M&A

👉 A merger or acquisition between companies operating at different stages of the supply chain. This type of M&A can help the buyer to control a key part of supply chain (e.g. owning a provider of a key input into their business), create efficiencies and reduce costs. Compare to Horizontal M&A between competitors.

Warranties

👉 Statements of fact made by the seller to the buyer about the company’s condition. These are made at the time of the transaction. These statements cover a wide range of topics such as: financial history, financial health, tax filings, legal compliance, properties, employees, ownership of IP, customer contracts and so forth. An example might be: "The company is not party to any current litigation". If any these statements are later proven to be false at the time they were made, the buyer can make a claim for breach of the warranty to compensate them for the loss as a result of that breach. See Disclosure for an explanation of how the seller can inform the buyer upfront if there are any issues with the warranties made.

Warranty & Indemnity Insurance

👉 Insurance used to protect the buyer against financial losses from breaches of warranties or indemnities. It's used to reduce risk for the seller, helping them to offer wider warranty coverage to the buyer and reduce the need for extensive negotiations over warranties and indemnities. This helps to smoothen negotiations, especially where buyer and seller are split on what protection is reasonable. The cost of W&I Insurance can be borne by either the buyer or the seller, and is often split between both parties.

Warranty Cap

👉 The maximum amount a seller is liable to pay for breaches of warranties. This cap protects the seller from unlimited financial exposure while still providing the buyer some recourse for significant breaches. This is a key point and is typically agreed within the Letter of Intent.

Working Capital

👉 The difference between a company's current assets and current liabilities. This is cash, accounts receivable and inventory, less accounts payable, short term debt and other liabilities. It represents the company's short-term liquidity. It is a key measure for ensuring business continuity. In M&A, the buyer will want to ensure that the company has sufficient working capital at the time of the deal so it can continue to operate smoothly post-acquisition.

Working Capital Adjustment

👉 See Working Capital. The buyer wants to know that the company has sufficient working capital at the time of the deal so it can continue to operate smoothly post-acquisition. Therefore a level of expected working capital (called Target Working Capital) is agreed between buyer and seller, based on historical levels of working capital in the business. Later, as part of the Post Closing Adjustments, the actual level of working capital is calculated and the purchase price is adjusted based on the delta between the estimated and actual working capital at closing. This ensures the buyer receives a company with the expected level of working capital and is compensated if this is lower than planned.