Commonly Used M&A Terms

Welcome to NuVescor’s comprehensive list of common terms and definitions used during mergers & acquisitions transactions.

 

 

Abandonment Option
The right of a party in an M&A transaction to terminate the agreement without penalty under certain specified conditions, such as failure to obtain regulatory approvals or financing.

Acquirer
The company that initiates and completes the acquisition process.

Acquisition
One company buying another company, typically resulting in the acquired company becoming a subsidiary of the acquiring company.

Asset Backed Security (ABS)
A financial instrument backed by a pool of assets, such as loans or receivables, which may be securitized and sold to investors, potentially relevant in M&A financing.

Asset Purchase
An acquisition where the buyer purchases specific assets and liabilities of a company rather than its stock.

Board Resolution
A formal decision or action approved by a company’s board of directors, typically required in M&A transactions to authorize key decisions, agreements, or corporate actions.

Bolt-On Acquisition
A small-scale acquisition that complements or extends the operations or capabilities of the acquiring company, often aimed at achieving strategic growth or market expansion.

Break-Up Fee
A fee paid by one party to another if a proposed M&A transaction is terminated under certain circumstances, such as failure to obtain regulatory approvals or board support, which compensates for time and expenses incurred.

Bridge Financing
Short-term financing provided to facilitate an acquisition or other corporate transactions, often secured by the assets of the target company or based on future cash flows.

Business Model Innovation
The process of creating new or modifying existing business models to deliver value to customers and capture market opportunities, which may drive M&A strategies in disruptive industries.

Capital Gain
The profit earned from the sale of a capital asset, such as shares or property, which is subject to taxation and may be a consideration in structuring M&A transactions to optimize tax efficiency.

Carve-Out
A partial divestiture where a company sells off a portion of its business while retaining ownership of the remaining operations, which may be considered to focus on core competencies or raise funds post-acquisition.

Cash Flow Analysis
The evaluation of a company’s cash inflows and outflows over a specific period, used in M&A transactions to assess financial health, liquidity, and performance.

Cash Flow Statement
A financial statement that shows the inflows and outflows of cash during a specific period, important for assessing a target company’s financial health.

Caveat Emptor
A Latin phrase meaning “buyer beware,” emphasizing the responsibility of buyers to conduct due diligence and assess risks before entering into M&A transactions.

Collaborative Integration
An approach to post-M&A integration focused on joint planning, communication, and teamwork between acquiring and target companies to achieve synergies and minimize disruptions.

Collateral Agreement
An agreement where assets are pledged as security for a loan or obligation, which may be considered in M&A transactions involving financing arrangements or debt restructuring.

Competitive Advantage
A set of unique strengths or capabilities that differentiate a company from its competitors, often sought in M&A transactions to enhance market position or profitability.

Confidentiality Agreement
A legal contract between parties in M&A transactions outlining obligations to protect confidential information, preventing unauthorized disclosure or use.

Consortium
A group of companies or investors that collaborate to make a joint bid for the acquisition of another company, pooling their resources and expertise.

Consolidation
The combining of assets, operations, or entities in M&A transactions or financial reporting, often aimed at achieving economies of scale or market consolidation.

Confidential Information Memorandum (CIM)
For companies selling their business and involved in a sell-side process, a confidential information memorandum (CIM) is a lengthy (typically 50–150 pages) marketing document that provides potential buyers with a detailed first impression of your business before they would meet the selling company in person.

Conforming Agreement
A legal document that modifies or amends an existing contract to ensure consistency with terms and conditions agreed upon in an M&A transaction, which may involve adjustments to rights and obligations.

Contingent Consideration
Additional payment or adjustments to the purchase price in an acquisition, contingent upon the target company achieving specific future performance milestones.

Cross-Condition
A condition in an M&A agreement where the completion of one party’s obligation is contingent upon the completion of another party’s obligation, ensuring mutual commitment to the transaction.

Debt-to-Equity Ratio
A financial metric used to assess a company’s financial leverage, calculated by dividing total debt by shareholders’ equity, influencing risk assessment and financing decisions in M&A transactions.

Deal Breaker
A significant issue or obstacle that jeopardizes the completion of an M&A transaction, potentially leading to termination or renegotiation of terms.

Deal Structure
The arrangement or framework governing the terms, financing, and legal aspects of an M&A transaction, including considerations such as payment method, tax implications, and regulatory compliance.

Definitive Agreement
A legally binding contract that formalizes the terms and conditions of an M&A transaction, superseding earlier agreements such as letters of intent or term sheets, and establishing obligations for both parties.

Dilution
A reduction in the ownership percentage or earnings per share of existing shareholders due to the issuance of additional shares or securities in M&A transactions or capital raising activities.

Divestiture
The sale or disposal of a subsidiary, business unit, or asset by a company, often undertaken to streamline operations or raise capital, which may occur as part of post-merger integration.

Due Diligence
The process by which a potential acquirer investigates the financial, legal, and operational aspects of the target company to evaluate its suitability for acquisition.

Earn-Out Agreement
An agreement in M&A transactions where part of the purchase price is contingent on achieving future performance goals or milestones, aligning incentives and sharing risk between buyer and seller.

Earn-Out Period
The specified timeframe during which the performance of a company or business unit is evaluated to determine additional payments or adjustments to the purchase price in an earn-out agreement.

Earned Income
The part of the profit allocated to employees as wages or salaries.

Earnest Money Deposit
A financial deposit made by a buyer to demonstrate serious intent and commitment in M&A transactions, which may be forfeited if the buyer fails to proceed with the purchase.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
A measure of a company’s operating performance, often used in M&A transactions to assess profitability.

Employee Retention Agreement
An agreement between the acquiring company and key employees of the target company, offering incentives to stay post-acquisition.

Encumbrance
A legal claim, lien, or restriction on a property or asset, which may affect its transferability or valuation in M&A transactions involving real estate or secured assets.

Engagement Agreement
An engagement letter is a contract that sets out the terms of the relationship between a buyer or seller in an M&A transaction and its M&A advisor.

Equity Financing
The raising of capital by issuing shares or ownership interests in a company, used in M&A transactions to fund acquisitions or provide liquidity to shareholders.

Equity Value
The total value of a company’s equity, often used in M&A to determine the purchase price or valuation.

Escrow
A financial arrangement where a third party holds and regulates payments between the parties involved in an M&A transaction, typically to ensure that conditions of the agreement are met.

Exclusivity Agreement
A contractual arrangement granting a buyer exclusive rights to negotiate and finalize an M&A transaction with a target company for a specified period, facilitating focused negotiations.

Exit Strategy
A plan by which an investor or business owner intends to leave a business, often through a sale or merger.

External Growth
A strategy for expanding a company’s operations, market presence, or capabilities through M&A transactions or partnerships, rather than through internal organic growth.

Fair Market Value
The price at which an asset or business would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts, used in M&A transactions for pricing and valuation.

Financial Advisor
A professional or firm hired to provide financial advice and guidance to companies involved in mergers, acquisitions, and other corporate transactions.

Financial Buyer
A buyer that acquires another company primarily as an investment opportunity, often with the intention to improve financial performance and sell it at a higher price in the future.

Financial Due Diligence
The examination and analysis of a company’s financial records, statements, and performance metrics during M&A transactions to verify accuracy, assess risks, and support decision-making.

Financial Modeling
The process of creating mathematical representations of financial situations or forecasts, used in M&A transactions for scenario analysis, valuation, and strategic planning.

Financial Sponsor
An investor, such as a private equity firm or venture capital firm, that provides capital for acquisitions, often seeking to generate returns through operational improvements or growth strategies.

First Refusal Rights
Rights granted to existing shareholders allowing them to purchase additional shares or equity interests before they are offered to outside investors or third parties, which may be relevant in corporate governance and M&A transactions.

Fundamental Analysis
A method of evaluating securities or companies based on intrinsic value and economic factors, used in M&A transactions for assessing investment opportunities and strategic fit.

Golden Parachute
A financial compensation package offered to executives of a target company in the event of a change in control following an acquisition.

Goodwill
The intangible value of a business that exceeds its tangible assets, often arising from factors such as brand reputation, customer relationships, and intellectual property.

Gating Item
A critical issue or condition that must be resolved or satisfied before progressing to the next stage of an M&A transaction or closing, ensuring that key risks and uncertainties are addressed.

Hardship Clause
A provision in a contract, including M&A agreements, that allows for renegotiation or modification of terms in case of unforeseen circumstances or significant financial difficulties impacting one or both parties.

Holdback
A portion of the purchase price in an M&A transaction withheld by the buyer for a specified period, typically to cover potential indemnification claims or uncertainties.

Immaterial
Insignificant or negligible in terms of financial impact or relevance, often used in M&A transactions to describe minor adjustments or deviations that do not materially affect the transaction.

Implied Covenant of Good Faith
A legal principle requiring parties in an M&A transaction to act honestly, fairly, and in good faith in performing contractual obligations and exercising rights.

Implied Valuation
The value of a company implied by the purchase price paid by the acquirer, based on financial metrics and market conditions.

Indication of Interest (IOI)
An informal notice of an investor’s interest in purchasing or acquiring an asset.

Integration
The process of combining the operations, systems, and cultures of two merged or acquired companies.

Integration Costs
Expenses incurred during the process of integrating two companies following an acquisition, including costs related to rebranding, IT systems integration, and employee restructuring.

Integration Planning
The process of preparing for and managing the combination of two companies after a merger or acquisition, focusing on aligning operations, systems, and corporate cultures to realize synergies.

Integration Plan
A detailed strategy outlining how the merging or acquired companies will combine their operations, systems, and cultures, specifying key milestones and responsibilities to achieve the desired synergies.

Integrator
A person or team responsible for overseeing and managing the integration process during a merger or acquisition, ensuring that all aspects of the integration plan are executed effectively.

Interim Financial Statements
Financial reports covering a period shorter than a full fiscal year, often used to provide updated financial information during the M&A process.

Interim Financing
Short-term funding used to cover immediate financial needs during the period leading up to the completion of a merger or acquisition.

Intrinsic Value
The true or inherent value of a company or an asset, based on fundamental analysis without considering current market conditions.

Investment Banker
A financial advisor or institution that assists companies in raising capital, providing mergers and acquisitions advisory services, and executing corporate finance transactions.

Joint Venture (JV)
A business arrangement where two or more parties agree to pool their resources for a specific project or business activity, sharing both risks and rewards.

Knowledge Transfer
The process of sharing or disseminating knowledge, expertise, and skills between companies or within different departments of an organization, often critical during post-merger integration.

Leverage Buyout (LBO)
A transaction in which a company is acquired using a significant amount of borrowed funds, with the target company’s assets often serving as collateral.

Leverage Ratio
A financial metric used to evaluate the level of a company’s debt relative to its equity or assets, important in assessing the financial risk associated with leveraged transactions.

Letter of Credit (LOC)
A financial document issued by a bank guaranteeing a buyer’s payment to a seller will be received on time and for the correct amount, used to mitigate risk in transactions.

Letter of Intent (LOI)
A preliminary agreement outlining the proposed terms and conditions of an acquisition, indicating the intent of the acquirer to proceed with due diligence and negotiations.

Management Buyout (MBO)
An acquisition where the existing management team of a company purchases a controlling stake from the current owners, often with the support of external financing.

Market Check
The process of soliciting potential higher offers from other bidders before finalizing an M&A deal to ensure that shareholders receive the best possible value.

Market Positioning
The strategic process of establishing the image or identity of a company’s products or services in the market to appeal to its target audience.

Material Adverse Effect (MAE)
A significant negative change in the business, financial condition, or operations of a company, which may allow the buyer to terminate an M&A transaction or renegotiate terms.

Material Change
Any significant change that could impact a company’s ability to meet its obligations or affect its financial performance, often required to be disclosed to stakeholders.

Material Contract
A contract that is considered crucial to a company’s operations or financial health, typically reviewed during due diligence in M&A transactions.

Mezzanine Financing
A hybrid of debt and equity financing, often used in acquisitions, that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back on time.

Merger
The combination of two or more companies into a single entity, typically with a new name.

Net Operating Loss (NOL)
A tax credit that can be used to reduce a company’s future taxable income, often considered in M&A transactions for its potential tax benefits.

No-Poach Agreement
An agreement between companies not to hire or solicit each other’s employees, often scrutinized in M&A transactions for antitrust implications.

No-Shop Clause
A provision in a merger agreement that restricts the target company from soliciting other acquisition offers from third parties for a specified period, to give the initial bidder exclusivity in negotiations.

Non-binding Offer
A preliminary proposal made by a potential buyer to acquire a target company, which outlines proposed terms and conditions but is not legally binding until accepted.

Non-Compete Agreement
A contract where one party agrees not to compete with another party in a specified market or industry for a certain period after leaving employment or selling a business.

Non-Disclosure Agreement (NDA)
A legal contract that prohibits the sharing of confidential information between parties involved in discussions regarding a potential merger or acquisition.

Operating Lease
A lease agreement where the lessor retains ownership of the leased asset and the lessee uses it for a specified period, which may involve considerations in M&A due diligence regarding lease liabilities.

Post-Closing Adjustment
An adjustment made to the purchase price after the closing of an acquisition, based on the target company’s financial performance or other agreed-upon metrics.

Pre-Closing Operations
The business activities and operations conducted by the target company before the official closing of an M&A transaction.

Private Equity (PE)
Investment capital provided by investors to privately-held companies or those undergoing restructuring, often involving the acquisition of controlling stakes in target companies to drive growth or operational improvements.

Proxy Statement
A document filed with the Securities and Exchange Commission (SEC) that provides information to shareholders about matters to be voted on at a company’s annual meeting, including proposed mergers or acquisitions.

Purchase Agreement
A legal contract that outlines the terms and conditions under which the buyer agrees to purchase and the seller agrees to sell a company or assets.

Purchase Price Allocation (PPA)
The process of assigning the purchase price of an acquired company to its assets and liabilities based on their fair market values.

Recapitalization
A corporate restructuring of a company’s capital structure, often involving changing the mix of equity and debt financing.

Reciprocal Due Diligence
The process where both the buyer and the seller conduct due diligence on each other to identify potential risks and benefits before finalizing an M&A transaction.

Related Party Transaction
Financial transactions that occur between two parties who are joined by a special relationship prior to the transaction, which require disclosure and scrutiny during due diligence.

Rep and Warranty Insurance
Insurance purchased by either the buyer or the seller to protect against financial losses arising from breaches of representations and warranties made during an M&A transaction.

Restructuring
The process of reorganizing a company’s business, often involving divestitures, layoffs, or other cost-cutting measures, which can occur before or after an acquisition.

Reverse Breakup Fee
A fee paid by the target company to the acquirer if the deal fails to close due to reasons specified in the merger agreement, such as regulatory rejection.

Rollover Equity
Equity in the target company that is rolled over into the new ownership structure following an acquisition, typically held by key management or shareholders.

Rolling Forecast
A financial planning tool used by companies to continuously update their financial projections based on current information and market conditions, which aids in post-acquisition integration planning.

Securities Regulations
Laws and rules governing the issuance, trading, and disclosure of securities, ensuring transparency and fairness in the financial markets.

Seller Financing
When the seller of a business provides a loan to the buyer to help facilitate the sale, often used to bridge gaps in financing.

Seller Note
A promissory note issued by the buyer to the seller for a portion of the purchase price, commonly used in seller-financed transactions.

Seller’s Discretionary Earnings (SDE)
A measure of a business’s cash flow used to estimate the potential earnings for an owner-operator, often relevant in small business acquisitions.

Stakeholder
Any individual or group with an interest in the outcome of an M&A transaction, including shareholders, employees, customers, and the broader community.

Stay Bonus
A financial incentive offered to key employees of the target company to remain with the company through the transition period following an acquisition.

Stock Purchase Agreement (SPA)
A legal contract outlining the terms and conditions of the purchase and sale of company stock, relevant in M&A transactions.

Stock Purchase
An acquisition where the buyer purchases a majority or all of the target company’s shares outstanding.

Strategic Alliance
An agreement between two or more companies to pursue specific objectives while remaining independent, often to leverage their combined strengths.

Strategic Buyer
A buyer that acquires another company with the intention of integrating its operations into its own business strategy, often seeking synergies or market expansion.

Strategic Fit
The degree to which an acquisition aligns with the acquiring company’s strategic goals, market position, and capabilities.

Succession Planning
The process of identifying and developing new leaders who can replace old leaders when they leave, retire, or die, ensuring leadership continuity in an organization.

Synergy
The potential additional value generated from combining two firms, often measured by the increased revenue or reduced costs that are expected to result from the merger or acquisition.

Third-Party Consent
Authorization required from an external party (that is not a direct party to the original contract) to proceed with a transaction or agreement.

Tombstone Announcement
A public announcement of a securities offering or transaction, typically in an advertisement style, providing key details without a sales pitch.

Valuation
The process of determining the current worth of an asset or company, based on various metrics, financial performance, and market conditions.

Valuation Multiple
A financial measurement used to compare the value of one business to another, often expressed as a ratio like price-to-earnings (P/E) or enterprise value-to-EBITDA.

Virtual Data Room (VDR)
An online repository used for storing and sharing documents, typically employed during due diligence processes in mergers and acquisitions to ensure secure access to sensitive information.

Weighted Average Cost of Capital (WACC)
A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted; used in financial modeling to determine a company’s cost of financing and its investment decisions.

Working Capital Adjustment
A provision in a transaction agreement that adjusts the purchase price based on the difference between estimated and actual working capital, ensuring a fair deal.

Working Capital
The difference between a company’s current assets and current liabilities, indicating the liquidity available to run day-to-day operations.

Additional Resources

• The Exit Checklist: Your Five-Step Plan to a Successful Business Exit
• A Guide to Choosing the Right M&A Partner for Your Mid-Sized Business
• Understanding Buyer Motivations and Strategies in M&A
• Navigating Family Business Succession: Expert Tips for Family-Run Manufacturing Businesses

 

To see all NuVescor M&A resources, click here.