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 most industry 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 item on the income statement that is non-core, one-time or personal. Add-backs are items that should be “added back” to the net income and/or zeroes out on the income statement.
- The valuation multiple is a multiplier used to compute a business’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 material used in a sell-side engagement to market a business to a prospective buyer.
Letter of Intent (LOI)
- The letter of intent is a term sheet indicating interest in purchasing the business.
Non-disclosure Agreement (NDA)
- A non-disclosure agreement is required to be signed by a potential 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 actual closing and any open or unresolved issues part-time.
- Equity represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid of.
- Equity is found on a company’s balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company.
- Deal sourcing is the process by which firms identify investment opportunities, ensuring that a larger volume of deals sourced is imperative to keeping up a viable deal flow.