M&A Glossary

A short document, usually signed once a buyer’s offer is accepted, that sets out the price, structure and key terms of a deal. Most of it is non-binding; exclusivity, confidentiality and expense provisions usually are binding.

In practice. The LOI is where a seller has the most leverage. Terms that matter, such as the working capital approach, escrow size, rollover and the indemnity package, are worth settling here rather than in the purchase agreement, after the buyer has exclusivity.

See also: Exclusivity, Net working capital adjustment, Escrow and holdback, Rollover equity

Read more: How to Sell Your Company: A Founder’s 90-Day Prep Playbook

A binding promise by the seller not to solicit or negotiate with other buyers for a set period, usually given in the LOI.

In practice. Sellers should keep the period short, tie any extension to the buyer’s progress, and ask that exclusivity end automatically if the buyer proposes to reduce the price or change other key terms.

See also: Letter of intent

A dealmaker who sources and leads acquisitions without a committed fund, raising equity deal by deal from capital partners such as family offices and funds.

In practice. The negotiation that matters most is with the capital partner: the closing and management fees, usually set in a services agreement with the company, and the sponsor’s promoted interest, set in the acquisition vehicle’s operating agreement.

See also: Rollover equity, Letter of intent

Read more: Demystifying Independent Sponsor Deal Structures

An accounting firm’s analysis of a target’s historical earnings that tests reported EBITDA, removes one-time items and supports the working capital target.

In practice. Buyers commission their own. A seller can commission a sell-side QoE before going to market so the first EBITDA debate happens on its timeline, not after an LOI is signed.

See also: Net working capital adjustment, Enterprise value and equity value

The buyer’s investigation of the target’s legal, financial, tax, commercial and operational affairs before signing.

In practice. Findings feed straight into the purchase agreement: specific indemnities for known issues, closing conditions, price adjustments, or exclusions from representations and warranties insurance.

See also: Disclosure schedules, Representations and warranties insurance, Representations and warranties

Enterprise value is the price for the business as a whole, before accounting for its cash and debt. Equity value is what the owners actually receive: enterprise value plus cash, less debt and debt-like items, adjusted for working capital.

In practice. Most LOIs state a headline enterprise value. The bridge to equity value, and above all what counts as debt, is where real money moves.

See also: Cash-free, debt-free, Net working capital adjustment

The usual pricing convention in which the seller keeps, or is paid for, the target’s cash and pays off its indebtedness at closing, so the buyer acquires the business with no net debt.

In practice. The negotiation is over debt-like items: deferred revenue, accrued but unpaid bonuses, pre-closing taxes, customer deposits and deferred capital expenditure. Each one reduces the price dollar for dollar, so the definition of Indebtedness deserves a line-by-line read.

See also: Enterprise value and equity value, Net working capital adjustment, Locked box

A mechanism that adjusts the purchase price up or down by the amount the target’s working capital at closing exceeds or falls short of an agreed target, usually called the peg.

In practice. The peg is often set from a trailing average, adjusted for seasonality. Sellers lose money when the peg is set high, when accounting principles shift between the peg and closing, or when an item is counted both as debt and in working capital.

See also: Cash-free, debt-free, Quality of earnings report, Locked box

Read more: Working Capital Adjustments in M&A

A pricing mechanism, widely used in European deals, in which the price is fixed by reference to a balance sheet dated before signing, with no post-closing adjustment.

In practice. Instead of a true-up, the buyer is protected by a covenant against leakage, meaning value flowing to the seller after the locked box date, which the seller must repay. U.S. buyers acquiring European businesses, including football clubs, should expect to see it.

See also: Net working capital adjustment, Cash-free, debt-free

Part of the purchase price paid after closing only if the business hits agreed targets, such as revenue, EBITDA or a regulatory milestone.

In practice. Earnouts bridge valuation gaps and generate disputes. What decides those disputes is how the metric is calculated, what the buyer must or must not do in running the business after closing, and whether the efforts standard is defined.

See also: Escrow and holdback, Enterprise value and equity value

Read more: Johnson & Johnson v. Fortis: Earnout Disputes

Equity in the buyer, or its parent, that a seller receives in place of part of its cash proceeds.

In practice. Structured correctly, a rollover can be tax-deferred. The value of the second bite depends less on the percentage rolled than on the terms: the class of equity, whether it sits alongside the sponsor’s or behind it, and what happens to it if the seller leaves.

See also: F reorganization, Letter of intent, Independent sponsor

Read more: Rollover Equity in M&A: Tax Deferral and Seller Protections

A deal in which the buyer acquires selected assets and assumes only specified liabilities of the target, rather than buying its equity.

In practice. Buyers like the liability protection and the stepped-up tax basis. The cost is execution: contracts, permits and leases have to be assigned one by one, and many require third-party consent.

See also: Stock purchase, F reorganization, Purchase price allocation

A deal in which the buyer acquires the target’s shares or membership interests, so the company, with all of its contracts and liabilities, changes hands intact.

In practice. Simpler to close, because contracts stay with the company subject to change-of-control clauses. Because historical liabilities come along, the buyer leans harder on diligence, indemnities and insurance.

See also: Asset purchase, Reverse triangular merger, Indemnification

Read more: Essential Clauses in Stock Purchase Agreements

A structure in which a buyer subsidiary merges into the target, the target survives as a wholly owned subsidiary of the buyer, and the target’s owners receive the merger consideration.

In practice. Used where a target has many holders, because once the required vote is obtained it binds them all without every holder signing, subject to appraisal rights. Because the target itself survives, its contracts generally stay in place. It is a common structure for the sale of a venture-backed company.

See also: Stock purchase, Drag-along

A pre-closing restructuring, usually of an S corporation target, that lets the buyer acquire an LLC and receive a stepped-up tax basis in its assets, while the operating business stays in the same legal entity and avoids most contract assignments.

In practice. The owners contribute their shares to a new holding corporation, the new holding corporation elects to treat the target as a qualified subchapter S subsidiary, the target converts to an LLC under state law, and the buyer purchases the LLC interests. It is often the cleanest route to a step-up, and it makes rollover equity easier to structure. The steps and elections have to be sequenced with tax counsel.

See also: Asset purchase, Rollover equity, Purchase price allocation

Statements of fact about the target and the parties, made at signing and usually again at closing, that allocate the risk of what the buyer does not know.

In practice. The negotiation is less about the statements themselves than the qualifiers on them, such as knowledge, materiality and lookback periods, and what happens if one turns out to be wrong.

See also: Disclosure schedules, Fundamental representations, Materiality scrape, Indemnification, Representations and warranties insurance

The core representations, typically organization, authority, capitalization, title to equity and brokers, and often taxes, which survive longer and can be recovered against up to a higher cap than general representations.

In practice. Buyers try to expand the list. Sellers should resist adding operational representations, because the fundamental label usually means exposure up to the full purchase price.

See also: Representations and warranties, Cap, Survival period

The seller’s exceptions to its representations and warranties, delivered with the purchase agreement. A matter properly disclosed is generally carved out of the seller’s indemnity for breach of the related representation.

In practice. Schedules take longer than most sellers expect. Over-disclosure is usually safer than under-disclosure, and a provision applying each disclosure to other sections where its relevance is reasonably apparent avoids technical breaches.

See also: Representations and warranties, Sandbagging, Indemnification

A provision that reads materiality qualifiers out of the representations when determining whether a breach occurred, when calculating losses, or both.

In practice. A double scrape, for breach and losses, favors the buyer. Paired with a deductible basket, a scrape for calculating losses only is a middle ground.

See also: Representations and warranties, Basket

The seller’s contractual obligation to reimburse the buyer for losses from breaches of representations and covenants and from specified known risks, subject to negotiated limits.

In practice. The economics sit in the limits: basket, cap, survival period, escrow, and whether indemnification is the exclusive remedy. With representations and warranties insurance, seller exposure for general representations can drop to a small retention or to zero.

See also: Basket, Cap, Escrow and holdback, Survival period, Sandbagging, Representations and warranties insurance

Read more: M&A Indemnification: Baskets, Caps, Escrows and Sandbagging

The amount of losses a buyer must absorb before it can recover under the indemnity. A deductible basket covers only losses above the threshold; a tipping basket, once exceeded, covers losses from the first dollar.

In practice. Baskets are usually stated as a percentage of the purchase price and apply to general representations only, not to fundamental representations, covenants or fraud.

See also: Cap, Indemnification, Materiality scrape

Read more: M&A Indemnification: Baskets, Caps, Escrows and Sandbagging

The most a seller can be required to pay under its indemnity, usually stated separately for general representations, fundamental representations and other claims.

In practice. The cap for general representations is typically a fraction of the purchase price and often matches the indemnity escrow. Fundamental representations are usually capped at the purchase price. Fraud is usually excluded from the cap, and under Delaware law a seller generally cannot contract out of liability for its own intentional misrepresentations in the agreement.

See also: Basket, Escrow and holdback, Fundamental representations

Read more: M&A Indemnification: Baskets, Caps, Escrows and Sandbagging

How long after closing a party can bring a claim for breach of a representation or covenant.

In practice. General representations survive for a negotiated period measured in months. Fundamental and tax representations usually run longer, often until shortly after the statute of limitations expires. State law affects how far a contract can shorten or extend the time to sue, so the governing law matters.

See also: Fundamental representations, Escrow and holdback

A buyer’s ability to recover for breach of a representation it knew about before closing. A pro-sandbagging clause preserves the claim; an anti-sandbagging clause bars it.

In practice. Delaware courts have generally allowed recovery regardless of the buyer’s knowledge unless the contract says otherwise. The position under other states’ law, including Texas, is less settled, so the agreement should address it expressly.

See also: Representations and warranties, Indemnification, Disclosure schedules

Read more: M&A Indemnification: Baskets, Caps, Escrows and Sandbagging

A buyer-side insurance policy that covers losses from breaches of the seller’s representations, letting the seller limit its own exposure to a small retention or walk away with no indemnity.

In practice. Policies exclude known issues and matters flagged in diligence, so specific indemnities still matter, and underwriting depends on the quality of the buyer’s diligence. In the UK and Europe it is called W&I insurance.

See also: Indemnification, Due diligence, Cap

A defined change or event so significant to the target that it lets the buyer refuse to close, or that qualifies a representation.

In practice. The carve-outs in the definition, such as general economic conditions, industry-wide changes and changes in law, do most of the work. Delaware courts have rarely found that an MAE occurred, so buyers should not treat the clause as an easy exit.

See also: Bring-down condition, Interim operating covenants

The seller’s promises about how the business will be run between signing and closing, usually to operate in the ordinary course and not to take listed actions without the buyer’s consent.

In practice. Sellers should ask that consent not be unreasonably withheld and carve out actions already planned. Antitrust law limits how much control a buyer can exercise before closing.

See also: Material adverse effect, Hart-Scott-Rodino filing

The closing condition that the seller’s representations remain true at closing, measured against a stated standard.

In practice. The standard matters more than the wording of any single representation: true in all respects, in all material respects, or except where failures would not amount to an MAE. Sellers should push for the MAE standard for general representations.

See also: Material adverse effect, Representations and warranties

A premerger notification filed with the FTC and the Department of Justice for transactions above size thresholds that are adjusted every year, followed by a waiting period, generally 30 days, before closing.

In practice. Check the thresholds early. They apply to the voting securities and assets held as a result of the deal, not just the headline price, and the filing fee and preparation time belong in the deal timeline.

See also: Interim operating covenants

A portion of the purchase price set aside at closing to secure the seller’s post-closing obligations. An escrow is held by a third-party agent; a holdback is kept by the buyer.

In practice. Separate escrows are often used for the working capital true-up and for indemnity claims. Sellers should tie release dates to survival periods and prefer an escrow to a holdback.

See also: Indemnification, Cap, Net working capital adjustment

Read more: M&A Indemnification: Baskets, Caps, Escrows and Sandbagging

The seller’s post-closing promises not to compete with the business, solicit its employees or customers, or disparage it, given to protect the goodwill the buyer is paying for.

In practice. Courts generally give more latitude to non-competes given by owners selling a business than to employee non-competes, but duration, geography and scope still have to be reasonable under the governing state’s law.

See also: Transition services agreement, Rollover equity

An agreement under which the seller or its affiliate keeps providing services such as IT, payroll or shared facilities to the business for a period after closing.

In practice. Common in carve-outs. Price, service levels, term and the exit plan should be agreed before signing rather than left to closing.

See also: Asset purchase

The closing spreadsheet showing every payment made at closing, including seller proceeds, debt payoffs, transaction expenses and escrow deposits, with wiring instructions.

In practice. Confirm every set of wiring instructions by phone with a known contact. Wire fraud at closing is a real and recurring risk.

See also: Escrow and holdback, Cash-free, debt-free

The allocation of the purchase price among the acquired assets for tax purposes in an asset deal, including the purchase of a disregarded LLC after an F reorganization, under Section 1060 of the Internal Revenue Code and its residual method.

In practice. Buyers prefer allocations to assets they can depreciate quickly; sellers prefer allocations taxed at capital gain rates. Both sides report the allocation on IRS Form 8594, so the agreement should fix the method.

See also: Asset purchase, F reorganization