M&A Glossary

Below is a topically organized glossary of key terms that will be encountered on many deals.

Purchase Price

• Closing Working Capital: the measure of a selling entity’s working capital at the time of closing.
• Earnout: a term that allows the seller to receive additional payments based on the future performance of the company.
• Estimated Closing Working Capital: the amount of working capital that the selling entity is estimated to have at the closing.
• Working Capital: current assets minus current liabilities.
• Purchase Price Allocation: the allocation of the purchase price for tax purposes among the purchased assets. The allocation will have tax consequences for the buyer and the seller.
• Settlement Statement/Closing Statement: A detailed explanation of payments and other financial items in connection with the closing. It usually provides a detailed breakdown of the purchase price, how the proceeds are distributed, identifies debt and debt-like items, and presents how working capital will impact the transaction.
• Holdback: a portion of the purchase price that is “held back” by the buyer at the closing of the transaction for a specific purpose, often to cover potential risks such as liabilities or accounts receivable that are difficult to collect.

 

Restrictive Covenants:

• Restrictive Covenants: provisions, often found in acquisition agreements, where one party (ordinarily the Seller) agrees to “restrict” their behavior.
• Non-compete: a seller’s promise not to compete against the entity being sold.
• Non-solicitation: a seller’s promise not to solicit or interfere with certain relationships such as relationships with the employees, customers, clients, suppliers, or vendors of the entity being sold.
• Non-disparagement: a promise not to disparage or say anything negative about the other party.
• Non-disclosure: also known as a confidentiality provision, non-disclosure obligations protect sensitive information, confidential information, and trade secrets, ordinarily about the selling entity, from being disclosed to, or used by, unauthorized parties.
• Restricted Period: the length of the obligations under the relevant restrictive covenants.
• Restricted Territory: the geographic scope covered by the non-compete.

 

Contract Terminology

• Representation and Warranty: a promise that certain things are true as of a particular date.
• Sellers Knowledge: the collective knowledge possessed by certain identified people regarding the selling entity and the matters covered by the representations and warranties made by the seller. This concept is a key part of determining the extent of the seller’s responsibility for disclosing certain information and making representations about the selling entity.

 

Closing Documents

• Certificate of Good Standing: a document issued by a state government agency, typically the Secretary of State, to confirm that an entity is duly registered and authorized to conduct business in that state.
• Tax Clearance Certificate: a document issued by a tax authority or government agency to confirm that an individual or entity has satisfied all outstanding tax liabilities and is in compliance with its tax obligations.
• Bring Down Certificate: this document confirms that certain representations and warranties are accurate and complete as of the closing date.
• Secretary’s Certificate: a document signed by the secretary of the relevant party, verifying various aspects of the transaction, such as board approval, compliance with governing documents of the entity and applicable laws, and authorization to proceed with the acquisition.
• Closing Certificate: a legal document issued by the seller to the buyer at the completion of the transaction, typically confirming that all conditions to the closing have been satisfied or waived, and providing assurances to the buyer regarding the seller’s representations and warranties.
• Spousal Consent: the formal agreement or acknowledgment obtained from the spouse of an individual who is selling, transferring, or acquiring assets or shares in a company; typically required in situations where marital property laws or community property laws apply.
• Disclosure Schedules: A document that provides detailed disclosures relating to representations and warranties and other provisions in the agreement. This document is a key part of confirming items that had previously been discussed, and helping manage risk.

 

Related Documents

• Transition Services Agreement: an for the seller to continue to provide services to the buyer for a period of time after closing, to facilitate a smooth transition to new ownership, transfer the seller’s knowledge of the business, etc.
• Third Party Consents: approvals or permissions that the parties involved in the transaction may need to obtain from individuals, entities, or regulatory bodies not directly involved in the acquisition process.
• Contribution and Indemnity Agreement: An agreement between the parties to indemnify each other for certain risks and liabilities.
• Escrow Agreement: a legal arrangement that involves the deposit of funds or assets into a third-party escrow account, with the funds or assets held by the escrow agent until certain conditions of the acquisition transaction are met. When certain conditions are met, relevant portions of the escrow amount are released to the relevant parties by the escrow agent.
• Ancillary Agreements: All of the “little” stuff that makes the big stuff work well. Bills of sale, assignment agreements, corporate authorizing resolutions, etc.

 

Seller Financing Documents

• Promissory Note: A document in which the buyer promises to pay the seller according to agreed-upon terms.
• Security Agreement: a legal document between a the buyer and seller that grants the seller a security interest as collateral for payment of the promissory note or other obligations.
• Subordination Agreement: An agreement for one creditor to be to have lower priority upon foreclosure of a lien relative to another creditor.
• Standby Agreement: an agreement from one creditor to “stand by” and not collect on amounts owed until some approval is received or event has occurred.

 

Indemnification

• Indemnity: one party’s promise to pay for losses that the other party (and often the other party’s employees, agents, officers, affiliates, owners, etc.) incurs from certain events.
• Survival Period: the period for which the indemnity obligations of the parties remain in effect after the closing of the transaction.
• Fundamental Representations and Warranties: the most critical and significant assurances made by the seller to the buyer regarding the business being sold. Breaches of these representations and warranties can have significant implications for the buyer, often entitling them to indemnification or other remedies as specified in the purchase agreement.
• Deductible: just like an insurance deductible, once the amount is reached, the indemnity obligation kicks in for amounts in excess of the deductible.
• Basket: a threshold amount of damages or losses that must be exceeded before the indemnifying party (the party providing indemnity) becomes obligated to reimburse the indemnified party (the party receiving indemnity). Once the threshold has been met, the basket “tips” over and the indemnifying party must pay for all damages or losses from $1.
• Cap: A limit on the maximum amount of damages that can be claimed under an indemnity.

 

Taxes

• Straddle Period: in a stock sale, the tax filing period during which the entity was owned for part of the time by the seller and part of the time by the buyer.
• 338(h)10 election: a tax election that allows the parties in a stock purchase to treat a stock purchase as an asset purchase for tax purposes.
• Built in Gains Tax: often referred to as the “BIG tax”, it applies to certain corporations when they sell appreciated assets within a specified period after converting from a C corporation to an S corporation.
• Purchase Price Allocation: the allocation of the purchase price for tax purposes among the purchased assets. The allocation will have tax consequences for the buyer and the seller.

 

Other Terms:

• Target Company: the business entity or assets that the buyer intends to purchase.
• Blue Sky: any amount paid by a buyer for a target company that exceeds the combined value of the other assets in the transaction.
• Strategic Buyer: a company primarily interested in acquiring the target company to enhance company functions, processes, or infrastructure.
• Financial Buyer: a company primarily interested in acquiring the target company for purposes of increased revenue or cash flow.
• Due Diligence: the process of identifying potential risks, and uncovering any material issues that may impact the transaction.
• Indication of Interest: referred to as an “IOI,” a non-binding proposal or letter submitted by a potential buyer to express their preliminary interest in acquiring a target company. An IOI typically outlines the key terms and conditions of a proposed transaction, including the proposed purchase price, deal structure, financing arrangements, and other relevant terms.
• Letter of Intent: often referred to as an “LOI,” a non-binding document that outlines the key terms and conditions of a proposed transaction. While an LOI is not typically legally binding, it serves as a roadmap for negotiating the final terms of the acquisition agreement and may include some binding terms.
• Teaser: a preliminary document or communication used by a seller or its representatives to generate interest without disclosing confidential or sensitive information about the target company.
• Lien and Litigation Search: identifies outstanding liens or pending litigation that may affect a property or an individual’s or entity’s assets.

 

 Deal Structure

• Asset Sale: a transaction where a business sells its assets to another party, rather than selling the entire business entity itself. In an asset sale, the buyer purchases specific assets and liabilities of the seller, which may include tangible assets such as equipment, inventory, real estate, and intangible assets such as intellectual property, goodwill, customer lists, and contracts.
• Stock sale: a transaction where the buyer purchases the ownership in the target company directly from the selling owners.
• Merger: a transaction in which two or more companies combine their operations to form a single, new entity, often with one company absorbing the other(s).
• F-reorg: a type of tax-free reorganization that allows for the tax-free acquisition of a target corporation’s assets by a subsidiary of the acquiring corporation.
• Leveraged buyout: a financial transaction in which a company or a group of investors acquires another company using a significant amount of borrowed funds or debt to finance the purchase. In an LBO, the assets of the target company, along with its cash flow and future earnings, serve as collateral for the debt incurred to fund the acquisition.
• Sign-and-Delayed Closing: a transaction structure where the parties sign a definitive agreement, to proceed with the acquisition, but the actual closing of the transaction is scheduled for a later date. This structure allows the parties to complete any remaining due diligence, regulatory approvals, or other conditions to closing, before closing the transaction.
• Simultaneous Sign-and-Close: a transaction structure where the signing of the purchase agreement and the closing of the transaction occur concurrently.

 

Financial terms

• Goodwill: the intangible value of a company’s brand reputation, customer relationships, proprietary technology, intellectual property, skilled workforce, and other factors that exceed the value of the company’s other assets.
• EBITDA: Earnings Before Interest, Tax, Depreciation, and Amortization, is exactly that. It is a financial metric used to evaluate a company’s operating performance and profitability.
• Enterprise Value: the total value of a company’s operating assets and operations, taking into account both its equity and debt capital structure. Enterprise value reflects the theoretical takeover price of a company, including both its equity value and its debt obligations.
• GAAP: “Generally Accepted Accounting Principles”, are a set of accounting standards, principles, and procedures that are used by companies to prepare and present their financial statements in a consistent and comparable manner.

 

Other Key Terms

• Data Room: a secure virtual or physical space where sensitive and confidential information about the target company is stored and made available for due diligence by prospective buyers or investors. The data room serves as a central repository for documents, data, and other materials that are relevant to the acquisition process, allowing interested parties to review and assess the target company’s financial, operational, legal, and other key aspects.
• Closing Conditions: specific requirements or contingencies, typically outlined in the acquisition documents, that must be satisfied or waived by the parties involved before the transaction can be completed or “closed.”
• Anti-Sandbagging: a provision that prevents a party from making a claim against the other party for something that was known by the damaged party prior to closing.
• Divestiture: Selling all or part of a business.

 

Financing

• SBA Loan: a loan that is partially guaranteed by the U.S. Small Business Administration (SBA), which reduces the risk for lenders and makes it easier for small businesses to qualify for financing.
• SBA Preferred Lender Programming: “SBA PLP”, is a designation given to select lenders that allows the bank to fast-track processing and servicing SBA-guaranteed loans.
• 504 Loan: a type of loan offered by the SBA to help small businesses acquire fixed assets, such as real estate or equipment, for expansion or modernization.
• 7(a) Loan: a type of loan program offered by the SBA to provide financing to small businesses for a variety of purposes, including startup costs, working capital, purchasing a business, or purchasing equipment, inventory, or other eligible purposes.

 

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