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Know Your M&A Jargon

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.

Revenue

1. The income of a company from its normal business activities.

EBITDA

1. Earnings Before Interest, Tax, Depreciation, Amortization.
2. 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).
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EBITDA with adjustments

1. EBITDA with adjustment.

2. 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.

3. 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

1. 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.

Multiple

1. 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.

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Confidential Information Memorandum (CIM)

1. The Confidential Information Memorandum contains material used in a sell-side engagement to market a business to a prospective buyer.

Letter of Intent (LOI)

1. The letter of intent is a term sheet indicating interest in purchasing the business.

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Non-disclosure Agreement (NDA)

1. A non-disclosure agreement is required to be signed by a potential buyer before receiving more information about the seller.

Due Diligence

1. 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

1. 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.

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Purchase Agreement

1. 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.

2. In M&A deals, this is the document that controls the actual closing and any open or unresolved issues part-time.

Equity

1. 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.

2. 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

1. 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.

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