Every industry has a lot of jargon that insiders use. At Aventis, to the extent it’s possible, we try to communicate with clients in plain language, but often very specific terminology is necessary. In order to bring you up to speed with the terms you might encounter, we put together this glossary of M&A terms. We hope this glossary helps you get up to speed with investors, advisors, and consultants that you work with during your M&A journey. With this glossary, you’ll be able to navigate conversations with confidence and have a better understanding of the process overall.
Adjusted EBITDA is a variant of the traditional EBITDA metric with certain adjustments in order to give a more accurate picture of a company’s profitability. These adjustments can include items such as one-time expenses, non-operating income, and owners’ personal costs. By taking these factors into account, the adjusted EBITDA provides a more holistic view of a company’s overall financial health than regular EBITDA.
Bootstrapping is the process of building a company without the use of capital from external investors. It typically involves using own savings, money from friends and family, and credit to get the business off the ground.
A cap table (or capitalization table) is a summary of the equity ownership in a company. It lists the names of all the shareholders, their respective ownership percentages, and the value of their shares. The cap table is often used to track the dilution of equity as new shares are issued. The cap table can also be used to calculate each shareholder’s percentage of voting rights. This is important for companies with multiple shareholders, as it can help to prevent deadlock situations.
Discounted Cash Flows (DCF) valuation is a method of estimating the intrinsic value of a company by discounting its future cash flows to present value. There are two main steps in DCF valuation: estimating the company’s future cash flows, and discounting those cash flows to present value. In the first step, we need to estimate the company’s future cash flows. This requires making assumptions about the company’s sales, expenses, capital expenditures, and other factors. In the second step, we discount the company’s future cash flows to present value. This is done using a discount rate, which is typically the cost of equity for the company. It is important to remember that DCF valuation is based on a number of assumptions about the future, so it is not an exact science.
Due diligence is the process of investigating a potential investment to confirm the data provided and assess the risks involved. Due diligence is an integral part of the M&A process, as it helps buyers understand what they are getting into and identify any red flags that could impact the deal. The due diligence process almost always includes financial and legal due diligence. Financial due diligence assesses the financial health of the target company, including its revenue, expenses, cash flows, and debt. Legal due diligence reviews contracts and agreements to ensure that there are no outstanding liabilities or potential issues that could arise from the deal.
An earn-out is a type of performance-based payment made as part of an acquisition. It is used to incentivize the seller to continue growing the business post-acquisition. An earn-out can be structured in various ways, but is typically based on either revenue or profit growth. In most cases, an earn-out is paid out over a period of time, and is often tied to specific milestones. For example, the seller may only receive the full amount if certain revenue targets are met within the first two years after the acquisition.
EBIT stands for earnings before interest and taxes, it can be calculated two ways: by subtracting cost of goods sold (COGS) and operating expenses from revenue, or by subtracting depreciation and amortization from EBITDA. It is a measure of a company’s profitability that includes all income and expenses, except for interest and taxes. The EBIT calculation is used to assess a company’s ability to generate profits.
An escrow is a deposit of funds or securities with a third party, to be delivered upon the fulfillment of certain conditions. In mergers and acquisitions (M&A) transactions, an escrow account is typically used to hold the buyer’s purchase price until all the conditions of the sale have been met. For example, the buyer may agree to release the funds in escrow only after the seller has transferred all of the assets and intellectual property associated with the business. Once all of the conditions have been satisfied, the escrow agent will release the funds to the seller. Using an escrow account in an M&A transaction can help to protect both buyers and sellers by ensuring that all of the terms of the deal are met before any money changes hand
Exclusivity is often a key part of M&A deals. Exclusivity means that the parties agree not to entertain offers from or engage in discussions with any other potential counterparties during the course of the M&A negotiations. It allows the parties to focus their efforts on negotiating with each other, rather than worrying about competing offers. The exclusivity period can last for weeks or months, depending on the complexity of the deal.
A financial investor is an investor that acquires a business solely to generate a financial return. The financial investors are primarily interested in the company’s financial metrics and the potential to generate value by improving the company’s operations. Venture capital funds and private equity funds are examples of financial investors.
An Information Memorandum (IM) is a document typically used in M&A transactions that provides information about a company that is for sale to potential buyers. The IM generally includes financial information, an overview of the company’s business, information about the management team, and details about the sales process. The goal of an IM is to generate interest from potential buyers and help them to understand the key value drivers of the business. While an IM is not required in all M&A transactions, it can be a helpful tool for both buyers and sellers.
An initial public offering (IPO) is the process by which a privately held company raises capital by selling shares to the public for the first time. IPOs are a vital funding source for companies looking to grow and expand their businesses. When a company goes public, it sells shares of stock to investors in exchange for cash. The cash raised from the IPO can finance new projects, pay off debt, or add to the company’s reserves.
In an M&A context, financial leverage refers to using debt to finance a target company’s acquisition. The acquirer takes on debt to increase its returns on equity and be in a position to make larger deals. The increased leverage also increases the risk of the investment, as the target company has to repay the debt and faces the risk of insolvency or bankruptcy if it fails to meet its financial obligations.
Leveraged Buyout (LBO)
LBO is an abbreviation for Leveraged Buyout. LBO is a type of acquisition that is financed mainly by debt. In an LBO transaction, a company is purchased using a combination of debt and equity. LBOs are often used to finance private equity firms’ acquisition of public companies. LBOs can also be used to take a public company private. The use of leverage in an LBO increases the risk of the transaction, but it also increases the potential return on investment. LBOs are often complex transactions that require a high degree of financial and legal expertise.
Liquidation preference gives shareholders the right to receive their investment back before any other shareholders if the company is sold. This means that if the company is sold for less than the amount of the shareholders’ investment, the shareholders will still get their money back. This preference can be given to all shareholders or just to certain shareholders, such as preferred shareholders.
A management buy-out (MBO) is a type of business transaction in which a company’s management team purchases the company from its current owners. Management will often seek an MBO opportunity when they feel the company is undervalued. In some cases, management teams may also pursue an MBO to avoid being acquired by another company. An MBO can be an attractive option for management teams because it allows them to retain control of the business and realize a significant financial return on their investment. However, MBOs can also be risky propositions, and they often require a substantial amount of debt financing.
A milestone fee is a payment levied by an investment bank or financial advisor for achieving a specific milestone in a transaction, such as signing an LOI or completing a due diligence process.
Multiples valuation is a method used to estimate a value of a company by benchmarking multiples of a target company against multiples of comparable public companies or multiples in precedent transactions. The approach provides a quick way to estimate the value of a company without needing to build a detailed financial model.
Non-Disclosure Agreement (NDA)
A non-disclosure agreement (NDA) is a document that is used to protect confidential information. In the context of mergers and acquisitions (M&A), an NDA can be used to protect information about the target company, such as financial information or trade secrets. NDAs are typically signed when two parties are in the early stages of negotiation and want to keep the details of their discussions confidential. By signing an NDA, both parties agree not to disclose any of the confidential information to third parties.
Private Equity Fund
Private Equity Fund is a type of financial investor that acquires stakes in private or public companies in order to re-sell them at a profit in a period of time (usually, 3-7 years). After the acquisition, the funds work with the company’s management to increase the company’s value by accelerating revenue growth, improving profitability, and acquiring other businesses.
Representations & Warranties
In an M&A transaction, the buyer often wants some assurance that the target company is what it appears to be—hence, the representations and warranties (R&Ws). These are essentially a “promise” by the seller (usually backed by an indemnity from the company) that certain conditions are or were met. For example, that the company has good title to its assets, is in compliance with environmental regulations, etc. In practice, R&Ws are heavily negotiated between buyer and seller—with the seller typically trying to minimize its exposure and the buyer trying to get as much protection as possible. They can also be a key tool in allocation of risk between the parties post-closing.
A retainer fee is a type of investment banking fee paid by a client to an investment bank or advisor for a specified period of time. Retainer fees are typically paid on a monthly basis, and the investment bank or advisor will usually provide an estimate of the total fees due at the beginning of the engagement.
Share Purchase Agreement (SPA)
A Share Purchase Agreement (SPA) is a contract used in M&A transactions to transfer the ownership of shares from the seller to the buyer. The SPA typically includes the detailed description of transaction terms, as well as provisions such as representations and warranties, covenants, and conditions precedent. M&A transactions can be complex, so it is important to have a qualified lawyer draft the SPA to ensure that all the necessary items are included. A well-drafted SPA can help to protect the interests of both the buyer and the seller and ensure a smooth transition of ownership.
In an M&A transaction with stock payment, the buyer pays the seller with its stock, rather than cash. This payment type is often referred to as a “stock-for-stock” transaction. Stock-for-stock payments have several advantages for both buyers and sellers. For buyers, stock payments can help to reduce the overall cost of the acquisition. For sellers, stock payments can provide continuous ownership in the company and allow them to participate in the future growth of the business. In addition, stock payments can help to avoid any potential tax liabilities that would be associated with a cash sale.
A strategic investor is an investor that acquires a business to improve the position of its own business in addition to generating a financial return. Strategic investors are commonly interested in the target company’s market position, technology, customer base, brand, or other non-financial assets.
Strategic buyers often seek out synergies when considering an M&A target. Synergies are defined as the combined benefits of two companies coming together that exceed the sum of the benefits each would have received if they had remained separate. There are many different types of synergies that can be achieved, but the most common ones are cost savings and revenue growth. Cost savings typically come from combining duplicate functions or eliminating duplicate product lines. Revenue growth can be achieved by expanding into new markets or cross-selling to existing customers.
A teaser is a document that is created by a company in order to generate interest from potential buyers in an upcoming M&A transaction. The teaser will typically include information about the company’s financials, business operations, and growth prospects. The goal of the teaser is to generate enough interest from potential buyers that they will agree to sign a non-disclosure agreement and participate in further discussions. While a teaser can be a helpful tool in generating interest from potential buyers, it is important to note that it is not binding on either party and does not guarantee that a transaction will ultimately take place.
A term sheet is a non-binding agreement that outlines the major terms and conditions of a proposed transaction. It is typically used in venture capital financing but can also be used in other types of transactions, such as mergers and acquisitions. The term sheet serves as a starting point for negotiation and is not legally binding, meaning that either party can walk away from the deal at any time. However, once a term sheet is signed, it is usually followed by a more detailed legal agreement.
Virtual Data Room (VDR)
A Virtual Data Room, also known as a VDR, is a secure online platform that is used to store and share sensitive information during the due diligence process of an M&A transaction. VDRs are designed to give all parties involved in an M&A deal direct access to the same information at the same time, while also providing a high level of security and privacy. VDRs typically include features such as watermarking, granular permissions, and activity logs that help to ensure that only authorized users have access to the data and that all activity is tracked.