M&A glossary

87 terms that appear in letters of intent, purchase agreements and diligence requests, defined in plain English.

A

Add-back: An adjustment that adds an expense back to reported earnings because it is non-recurring, discretionary or unrelated to the business a buyer will own, such as one-time legal costs or above-market owner compensation. Add-backs are only as credible as the documentation behind them and are tested closely in quality-of-earnings work.
Adjusted EBITDA: EBITDA restated for add-backs and other normalizing adjustments to reflect the sustainable earning power of the business under new ownership. It is the figure most lower-middle-market valuations are built on, and the one buyers scrutinize most closely.
Asset sale: A transaction in which the buyer acquires selected assets and assumes specified liabilities rather than purchasing the owners’ shares. Buyers generally prefer it for the step-up in tax basis and the ability to leave unwanted liabilities behind; sellers of C corporations can face two levels of tax, and many contracts require consent to assign.
Auction: A sale process in which an advisor approaches multiple qualified buyers at once and runs them on a common timetable toward competing bids. A broad auction maximizes competitive tension; a targeted auction limits outreach to a short list to protect confidentiality.

B

Basket: The threshold of indemnifiable losses that must be reached before a buyer can recover from the seller for breaches of representations. A deductible basket allows recovery only of losses above the threshold; a tipping, or first-dollar, basket allows recovery of all losses once the threshold is crossed.
Bolt-on acquisition: The acquisition of a smaller company that is integrated into an existing platform business, typically to add geography, capabilities or customers. Also called an add-on or tuck-in acquisition.
Bring-down: The requirement that the seller’s representations and warranties remain true as of closing, not just as of signing. It is usually satisfied through an officer’s certificate delivered at closing.
Buy-side advisory: An engagement in which an advisor represents an acquirer: defining criteria, identifying and approaching targets, valuing them and supporting negotiation through closing. In the lower middle market, much of the work is originating conversations with owners who are not running a formal sale.
Buyer universe: The full set of strategic and financial parties that could plausibly acquire a given company, before any filtering. Defining it carefully and segmenting it into tiers determines who is approached, in what order and with what message.

C

Cap: The maximum amount a seller can be required to pay under its indemnification obligations, usually expressed as a percentage of the purchase price. Breaches of fundamental representations and fraud are commonly subject to a higher cap or none at all.
Capital expenditures: Spending on long-lived assets such as equipment, facilities or capitalized software. Buyers separate maintenance capital expenditures, needed to sustain current operations, from growth capital expenditures, because the former reduce the cash flow they are paying for.
Carve-out: The sale of a division, product line or subsidiary out of a larger company. Carve-outs require standalone financial statements, a clearly defined perimeter of assets and people, and usually a transition services agreement.
Cash-free, debt-free: The customary pricing convention under which the seller keeps excess cash and repays funded debt at closing, so the headline price is an enterprise value delivered with a normal level of working capital. What counts as debt, including debt-like items, is negotiated in the purchase agreement.
Change-of-control provision: A contract clause that gives a counterparty rights, such as consent or termination, if ownership of the company changes. Customer, supplier, lease and loan agreements should be reviewed early, because required consents can affect structure and timing.
Closing: The point at which ownership transfers, the purchase price is paid and the transaction becomes effective. Closing can occur simultaneously with signing or follow it once regulatory approvals, third-party consents or financing are in place.
Closing conditions: The requirements that must be satisfied or waived before either party is obligated to close, such as third-party consents, regulatory clearance, the bring-down of representations and the absence of a material adverse change.
Comparable transactions: A valuation method that benchmarks a company against prices paid in acquisitions of similar businesses, usually expressed as multiples of revenue or EBITDA. Private-company deal data is sparse and inconsistently reported, so the method is used alongside others rather than in isolation.
Confidential information memorandum (CIM): The detailed marketing document provided to buyers after they sign a non-disclosure agreement. It covers the company’s history, operations, customers, management, financial performance and outlook, and is the basis on which buyers submit indications of interest.
Confidentiality agreement: Another name for a non-disclosure agreement. In a sale process it is signed before a prospective buyer receives the company’s name or any non-public information.
Customer concentration: The share of revenue derived from the largest customers. High concentration increases perceived risk and often leads buyers to reduce valuation, propose an earn-out or require customer conversations during diligence.

D

Data room: A secure online repository, usually a virtual data room (VDR), in which the seller’s documents are organized for buyer diligence. Access is permissioned by party and by folder, activity is logged, and sensitive material is often released in stages.
Deferred consideration: Any portion of the purchase price paid after closing, including seller notes, earn-outs, holdbacks and installment payments. Its value to the seller depends on the buyer’s credit and the conditions attached to payment.
Definitive agreement: The binding contract that governs the transaction, whether a stock purchase agreement, asset purchase agreement or merger agreement, together with its schedules and ancillary documents. It supersedes the largely non-binding letter of intent.
Disclosure schedules: Attachments to the purchase agreement in which the seller lists exceptions to its representations and warranties, such as pending claims, material contracts or known compliance matters. Complete and accurate schedules are the seller’s primary protection against later indemnification claims.
Discounted cash flow (DCF): A valuation method that estimates the present value of a company’s projected free cash flows using a discount rate that reflects their risk. It is sensitive to assumptions about growth, margins and terminal value, and is generally used to cross-check market-based methods.
Due diligence: The buyer’s investigation of the target’s financial, commercial, legal, tax, operational, technology and human-resources position before committing to close. Findings shape the final price, the protections in the purchase agreement and the integration plan.

E

Earn-out: Contingent consideration paid after closing if the business meets specified targets, typically revenue or EBITDA over one to three years. Earn-outs can bridge a valuation gap but are a frequent source of disputes, so definitions, accounting policies and operating covenants must be drafted with care.
EBITDA: Earnings before interest, taxes, depreciation and amortization, a proxy for operating cash flow that is independent of capital structure and tax position. It does not reflect capital expenditures or working-capital needs.
Engagement letter: The contract between a company and its M&A advisor setting out the scope of work, exclusivity, fees, expense reimbursement, term, tail provision and indemnification of the advisor.
Enterprise value: The value of a company’s operations to all providers of capital, before subtracting debt and adding cash. Headline deal prices in private-company M&A are typically quoted as enterprise value.
Equity value: The value attributable to shareholders: enterprise value less net debt and debt-like items, adjusted for any working-capital shortfall or excess. It is what the owners receive before taxes and transaction costs.
Escrow: A portion of the purchase price deposited with a third-party agent at closing to secure the seller’s indemnification or purchase-price-adjustment obligations. Funds are released to the seller on a set schedule, net of any valid claims.
Exclusivity: A commitment, usually in the letter of intent, that the seller will not solicit or negotiate with other buyers for a set period while the chosen buyer completes diligence and documentation. Also called a no-shop; its length and the events that end it are negotiated points.
Exit planning: Preparation, often over one to three years, to position a business and its owners for an eventual transfer of ownership. It typically involves improving financial reporting, reducing dependence on the owner, addressing tax and estate structure and clarifying the owners’ personal objectives.

F

F reorganization: A tax-free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code, commonly used before the sale of an S corporation. The shareholders form a new holding company, the operating company converts to a limited liability company, and the buyer purchases the LLC interests, obtaining a step-up in asset basis while generally avoiding the contract assignments an asset sale would require.
Fairness opinion: A letter from a financial advisor to a board or other fiduciary stating whether the consideration in a transaction is fair, from a financial point of view, to a specified party. It addresses financial fairness only, not whether the transaction is the best available or advisable, and is supported by valuation analysis and an internal review process.
Family office: A private firm that manages the wealth of a single family or a small group of families. Family offices that invest directly in operating businesses often have longer holding periods and more flexible return requirements than traditional private equity funds.
Financial buyer: An acquirer, such as a private equity fund, family office or independent sponsor, that buys companies as investments and typically finances part of the price with debt. Financial buyers usually rely on existing management and plan an eventual exit.
Fundamental representations: Representations on matters basic to the transaction, such as organization, authority, capitalization, title to shares and often taxes. They typically survive longer and are subject to higher caps than general business representations.

H

Holdback: A portion of the purchase price retained by the buyer, rather than placed with an escrow agent, to secure indemnification or adjustment claims. It gives the buyer more control over the funds and leaves the seller with more credit risk than an escrow.

I

Indemnification: The contractual obligation of one party, usually the seller, to compensate the other for losses arising from breaches of representations, warranties or covenants and from specified liabilities. Baskets, caps, survival periods and escrow terms determine how much protection it provides in practice.
Independent sponsor: An investor who sources and negotiates acquisitions without a committed fund, raising equity deal by deal. Independent sponsors are active in the lower middle market, and certainty of funding is the key point to assess.
Indication of interest (IOI): A non-binding first-round letter in which a prospective buyer states a preliminary valuation range, proposed structure, financing sources and diligence requirements. IOIs are used to select the parties invited to management meetings.

L

Lehman formula: A traditional advisory fee schedule that applies declining percentages to successive tranches of transaction value, originally 5 percent of the first $1 million, 4 percent of the second, and so on down to 1 percent. Modern variants, such as the double Lehman, scale the percentages or tranches to current deal sizes.
Letter of intent (LOI): A document setting out the price, structure, key terms and timetable of a proposed acquisition, non-binding except for provisions such as exclusivity and confidentiality. The more specific the LOI, the less remains to be negotiated after the seller has granted exclusivity and given up competitive leverage.
Leveraged buyout (LBO): An acquisition financed with a significant portion of debt secured by the target’s assets and cash flows. The capacity of the business to service that debt is a principal constraint on what a financial buyer can pay.
Lower middle market: The segment of private companies generally considered to have annual revenue of roughly $5 million to $150 million. Definitions vary; companies in this range are typically owner-managed and often fall below the size thresholds of large investment banks.

M

Management buyout (MBO): The acquisition of a company by its existing management team, usually backed by a private equity firm, a lender or the seller through a seller note. MBOs offer continuity but require careful handling of conflicts, since management is both buyer and steward of the business being sold.
Management presentation: A meeting, usually held after indications of interest, in which the owner and senior team present the business to shortlisted buyers and answer their questions. It is often where buyers form their view of management and refine their valuation.
Material adverse change (MAC): A significant deterioration in a business, as defined in the purchase agreement, that may allow the buyer to decline to close. Definitions usually exclude general economic and industry conditions unless they affect the target disproportionately; also called a material adverse effect (MAE).
Mezzanine financing: Subordinated debt, often with warrants or other equity features, that sits between senior debt and equity in a capital structure. It increases available leverage at a higher cost than senior debt.
Minority recapitalization: A transaction in which an investor acquires a non-controlling stake, providing liquidity to owners or growth capital to the company while the founders retain control. Governance rights, investor protections and the path to an eventual exit are the central terms.
Multiple: A valuation expressed as a ratio of price to a financial metric, most often enterprise value to adjusted EBITDA or to revenue. Multiples reflect growth, margins, scale, customer quality, risk and the competitive dynamics of the sale process.

N

Net debt: Funded debt plus debt-like items, less cash and cash equivalents. In a cash-free, debt-free transaction it bridges enterprise value to equity value; deferred revenue, unpaid taxes and accrued bonuses are frequently negotiated items.
Net working capital (NWC) peg: The target level of net working capital, usually based on a trailing twelve-month average, that the business is expected to deliver at closing. If actual working capital at closing is above or below the peg, the purchase price is adjusted dollar for dollar.
Non-compete: A covenant restricting the seller from competing with the business for a defined period and geography after closing. Enforceability depends on state law, and non-competes given in connection with a sale of a business are generally enforced more readily than those in employment agreements.
Non-disclosure agreement (NDA): An agreement in which a prospective buyer commits to keep information about the target confidential and to use it only to evaluate the transaction. It typically also prohibits soliciting employees and contacting customers, suppliers or staff without permission.

P

Platform acquisition: An investor’s initial acquisition in a sector, intended to serve as the base for further acquisitions. A platform company needs the management depth, systems and scale to absorb add-ons.
Pre-emptive bid: An offer made before the scheduled bid date, usually at an attractive price and on the condition that the process ends early. Whether to accept depends on how the offer compares with the likely outcome of completing the process.
Private equity: Capital invested in private companies by professionally managed funds, typically through control acquisitions held for several years. Private equity firms are among the most active buyers in the lower middle market.
Process letter: Instructions sent to prospective buyers setting out the timing, format and required content of bids, such as valuation, structure, financing sources and remaining diligence. Also called a bid procedures letter.
Purchase price adjustment: A post-closing true-up of the price based on actual closing figures for working capital, cash, debt and transaction expenses, compared with the estimates used at closing. The mechanics, dispute process and use of an independent accountant are set out in the purchase agreement.

Q

Quality of earnings (QoE): An accounting review, performed by an independent firm, that tests the accuracy and sustainability of reported earnings and the validity of proposed adjustments. A sell-side QoE commissioned before going to market reduces surprises in buyer diligence.

R

Recapitalization: A change to a company’s capital structure, often to provide owners with partial liquidity. In a private equity recapitalization, an investor acquires a majority or minority stake while the founders retain equity and participate in future value creation.
Representations and warranties: Statements of fact made by each party in the purchase agreement about matters such as financial statements, contracts, compliance, litigation and taxes. If a representation proves untrue, it can give rise to an indemnification claim or a right not to close.
Representations and warranties insurance (R&W insurance): An insurance policy, usually purchased by the buyer, that covers losses from breaches of the seller’s representations and warranties. It can substantially reduce the seller’s escrow and indemnification exposure, but it excludes known issues and certain categories of risk.
Retainer: A fixed fee paid to an advisor at engagement or monthly during a process to fund preparation and confirm both parties’ commitment. Retainers are commonly credited against the success fee at closing.
Rollover equity: The portion of a seller’s proceeds reinvested in the acquiring entity rather than received in cash. It aligns the seller with the buyer, can often be structured on a tax-deferred basis and offers a second opportunity for value at the buyer’s eventual exit.
Run-rate: A figure annualized from a recent period, such as the latest quarter, to reflect current performance. Buyers give credit for run-rate results only when the underlying change is recent, documented and durable.

S

Sandbagging: A buyer’s ability to bring an indemnification claim for a breach it knew about before closing. Purchase agreements may permit it (pro-sandbagging), prohibit it (anti-sandbagging) or remain silent, in which case the governing state’s law applies.
Section 338(h)(10) election: A joint election by buyer and seller that treats the purchase of stock of an S corporation, or of a subsidiary in a consolidated group, as a purchase of assets for federal income tax purposes. The buyer receives a stepped-up basis while the legal transfer remains a stock sale; the buyer must be a corporation, and Section 336(e) provides a comparable election in some other situations.
Sell-side advisory: An engagement in which an advisor represents the owners of a company in its sale: preparing materials, identifying and approaching buyers, managing the process and negotiating terms through closing.
Seller note: A portion of the purchase price financed by the seller and repaid by the buyer over time with interest. It is usually subordinated to senior lenders and signals the seller’s confidence in the business.
Senior debt: Debt with first priority on a company’s assets and cash flows, usually provided by banks or direct lenders. It is typically sized as a multiple of EBITDA and protected by financial covenants.
Signing: The execution of the definitive agreement, at which point the parties are bound subject to the closing conditions. Signing and closing may occur on the same day or be separated by weeks or months.
Special indemnity: An indemnity for a specific, identified risk, such as pending litigation or a known tax exposure, that is usually not subject to the general basket or cap. It addresses matters that R&W insurance excludes because they are already known.
Stock sale: A transaction in which the buyer acquires the owners’ shares and, with them, the entire legal entity and all of its liabilities. Sellers generally prefer it for capital gains treatment and a cleaner exit; contracts usually remain in place, subject to change-of-control provisions.
Strategic buyer: An operating company that acquires businesses in its own or an adjacent industry. Strategic buyers may pay for expected synergies, but they often move more slowly and integrate the acquired business more fully than financial buyers.
Success fee: The advisor’s fee payable at closing, usually calculated as a percentage of transaction value. It ties the advisor’s compensation to a completed transaction and, depending on its structure, to the value achieved.
Survival period: The period after closing during which claims may be made for breaches of representations and warranties. General representations commonly survive for twelve to twenty-four months, while fundamental and tax representations survive longer.
Synergies: Cost savings or revenue gains expected from combining two businesses. Buyers rarely pay sellers for all of them; how much is shared depends largely on the degree of competition among buyers.

T

Tail provision: A clause in an engagement letter that entitles the advisor to its fee if the company completes a transaction, within a set period after the engagement ends, with a party introduced or contacted during the engagement.
Teaser: A short, usually anonymous profile of the company sent to prospective buyers to gauge interest before they sign a non-disclosure agreement. It describes the business, its market position and headline financials without identifying the company.
Trailing twelve months (TTM): Financial results for the most recent twelve-month period, regardless of fiscal year-end. Buyers typically value a company on TTM adjusted EBITDA, updated as the process progresses.
Transition services agreement (TSA): An agreement under which the seller continues to provide services, such as IT, payroll or accounting, to the business for a limited period after closing. It is common in carve-outs and in sales where the business relies on systems or people the seller retains.

V

Valuation advisory: Independent analysis of what a business is worth and why, using market, transaction and income-based methods. Owners commission it to inform exit timing, shareholder transactions, estate planning or negotiations with a single interested buyer.

W

Working capital: Current operating assets, principally receivables, inventory and prepaid expenses, less current operating liabilities such as payables and accrued expenses. In M&A it usually excludes cash and debt and is measured against a negotiated peg.

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