Having a primary understanding of a few general terms used in an M&A business transaction can aid in making the process simpler. The world of Mergers & Acquisitions often uses a surplus of abbreviations, buzzwords, and acronyms that can be difficult to interpret without knowledge of the definitions of these terms.
This guide to M&A Jargon will help anyone in the business of sales and acquisitions unravel and understand some of the most common M&A terms used with privately held companies.
• The income of a company from its normal business activities.
• Earnings Before Interest, Tax, Depreciation, Amortization
• The EBITDA is the cash flow of a company without accounting for interest payments or interest income, tax bills, and certain noncash expenses (depreciation and amortization).
EBITDA with adjustments
• EBITDA with adjustment
• An owner of a business takes a larger salary share than mostindustry standards, so a buyer might want to add back part of that salary to arrive at a more reasonable level of earnings.
• Another adjustment a company might make is if certain employees won’t work for the company after the deal is complete, adding back their salaries is appropriate.
• Add backs are adjustments that can be described as an itemon the income statement that is non-core, one-time or personal. Add-backs are items that should be “added back” to the netincome and/or zeroes out on the income statement.
• The valuation multiple is a multiplier used to compute abusiness’s value with a measure of the company’s earnings. In M&A, the company’s EBITDA is often the economic benefit used.
Confidential Information Memorandum (CIM)
• The Confidential Information Memorandum contains materialused in a sell-side engagement to market a business to prospective buyer.
• The letter of intent is a term sheet indicating interest inpurchasing the business.
• A non-disclosure agreement is required to be signed by apotential buyer before receiving more information about the seller.
• Due diligence is the research done before entering an agreement with another party. Due diligence is performed by companies that are looking to make. It refers to the investigation a seller performs on a buyer, and a buyer performs on a seller.
• Escrow is a way of transferring a company from the seller and money from the buyer through the use of a third party which is neutral.
• A purchase agreement is a contract that documents all of the agreed-upon terms between the buyer and the seller in an M&A transaction.
• In M&A deals, this is the document that controls the actualclosing and any open orunresolved issues part-time.
• Equity represents the amount of money that would be returnedto a company’s shareholders if all of the assets were liquidatedand all of the company’s debt was paid of.
• Equity is found on a company’s balance sheet and is one of themost common financial metrics employed by analysts to assessthe financial health of a company.
• Deal sourcing is the process by which firms identify investment opportunities, ensuring that a larger volume of deals is sourcedis imperative to keeping up a viable deal flow.