M&A Glossary

Add-backs are expenses subtracted from historical earnings to show "normalized" profit. Common examples: one-time costs (relocation, litigation), owner-specific expenses (excessive salary, personal car), or non-recurring charges. Showing add-backs to a buyer helps you demonstrate the true earning power of your business as they will operate it.

Adjusted EBITDA removes one-time items and owner-specific expenses from standard EBITDA to reflect sustainable, normalized earnings. Buyers use this metric to value your business fairly, since many of your historical costs won't repeat after a sale.

In an asset sale, the buyer acquires specific assets and liabilities you choose to sell; you retain the company entity and any excluded liabilities. In a share sale, the buyer acquires ownership of the company itself, including all assets and liabilities. Asset sales often provide tax efficiency but expose the buyer to hidden liabilities; share sales transfer the entire business but may trigger higher taxes for you.

Buy-side advisors represent buyers seeking to acquire companies. Their role is to identify targets, conduct due diligence, and negotiate favorable terms. If you're planning acquisitions, buy-side advisors help you find and evaluate strategic targets.

The CIM is a detailed marketing document about your company—typically 50–100 pages—sent to interested buyers under strict confidentiality agreements. It includes your financials, operational details, market position, and growth strategy. A compelling CIM is central to attracting serious buyers and establishing a strong negotiating position.

Closing is the final step where ownership officially transfers, funds change hands, and all conditions of the sale are satisfied. After closing, you're no longer the owner, and post-closing obligations (earn-outs, representations, holdbacks) begin.

A cross-border transaction involves buyer and seller in different countries. These deals add complexity: currency fluctuations, tax treaties, regulatory approval, and cultural due diligence all become factors. Learn more about cross-border strategies.

A data room is a secure digital repository where you upload financial statements, contracts, cap tables, HR records, and other sensitive business documents for buyer review during due diligence. Organized data rooms speed diligence and signal transparency.

Deal structure describes how the transaction is organized: asset vs. share sale, cash vs. stock consideration, earn-outs, seller financing, and tax treatment. The right structure balances your goals, tax efficiency, and buyer comfort.

The definitive agreement (or purchase agreement) is the binding legal contract that governs the sale. It includes purchase price, closing conditions, representations and warranties, indemnification, and post-closing adjustments. This document is negotiated for weeks and represents the full terms you've agreed to.

Drag-along and tag-along rights are shareholder-agreement clauses that govern what happens when some owners sell. A drag-along right lets majority owners require minority owners to join a sale on the same terms; a tag-along right lets minority owners join a sale that the majority negotiates. For family businesses with several shareholders, these clauses decide in advance how a future sale is handled.

Due diligence is the buyer's investigation of your business—financial, legal, operational, tax, and cultural. Buyers examine your books, contracts, tax returns, litigation history, customer concentration, and employee agreements. Thorough preparation beforehand reduces friction and speeds the process.

An earn-out is a portion of the purchase price paid only if the business meets specified targets (revenue, EBITDA, customer retention) after closing. Earn-outs reduce upfront cash at risk to the buyer but create uncertainty for you about receiving full payment. They're common when future performance is hard to predict.

EBITDA is earnings before interest, taxes, depreciation, and amortization—a measure of operational profit. Buyers use EBITDA multiples (e.g., 6x EBITDA) as a shorthand valuation tool because it approximates the cash your business generates before financing and accounting adjustments.

Enterprise value is the total value of your business, calculated as equity value plus net debt. It reflects what a buyer effectively pays for the operating business, separate from financial structure. Enterprise value helps compare businesses of different sizes and leverage profiles.

Equity value is what remains for shareholders after subtracting net debt from enterprise value. It's the cash you receive if the buyer pays you in full at closing, assuming no other liabilities.

Escrow is cash or stock held by a neutral third party (typically a bank or attorney) and released on a scheduled basis after closing. It serves as security for seller reps and warranties—if you breach a commitment, the buyer can draw from escrow rather than sue.

An exclusivity agreement commits you to negotiate exclusively with one buyer for a set period (often 60–90 days). It protects the buyer's investment in diligence but locks you out of other offers during that window. Negotiate exclusivity carefully: it gives one party leverage over you.

A family office is a private investment firm managing wealth for a single wealthy family or group of related families. Family offices invest in operating businesses, real estate, and securities. If you're exploring partnerships or sales to sophisticated investors, understanding family office structures matters.

A financial buyer, such as a private equity fund or family office, acquires a company mainly as an investment and expects a return through growth, improved operations and a later sale. Unlike a strategic buyer, it usually relies on existing management and may ask the owner to stay involved or keep a stake (see rollover equity). Financial buyers pay close attention to the quality of earnings and to how independent the business is from its founder.

A holdback is cash withheld at closing and released later if you meet post-closing obligations. Unlike escrow (held by a third party), holdbacks are often held by the buyer directly. They're security against breach of your reps and warranties.

An IOI is a preliminary, non-binding signal from a buyer expressing interest in your company and willingness to proceed to full diligence. IOIs typically include a valuation range and basic deal terms. They're not commitments but warm signals that encourage serious negotiation.

The LOI is a non-binding agreement outlining principal terms: purchase price, structure, earnest money, due diligence timeline, and conditions to closing. Signing an LOI signals mutual intent and typically triggers exclusivity. It's a framework before the final purchase agreement is drafted.

An MBO occurs when incumbent management (your team) acquires the company, often with equity investor backing. MBOs allow managers to become owners and often include founder-seller carveouts or management retention packages. They can be attractive if you want continuity with trusted leaders.

A minority investment occurs when a buyer acquires less than 50% of your company, with you retaining majority control and decision-making authority. Minority investments are useful for access to capital without full exit, though they complicate governance and future liquidity.

An NDA is a binding agreement preventing disclosure of confidential information about your business. Buyers and their advisors sign NDAs before seeing your CIM or data room. NDAs protect you but must be carefully drafted to allow necessary business discussions.

Net debt is total debt minus cash and cash equivalents. A buyer may reduce purchase price by net debt (buyer assumes it) or measure enterprise value net of debt. If your balance sheet is debt-free, net debt is zero or negative if you have excess cash.

Working capital is current assets minus current liabilities; "normalized" working capital is the sustainable level needed to run the business. A working capital peg in the purchase agreement sets a target at closing. If actual working capital differs, the purchase price adjusts—protecting the buyer from inheriting excessive or insufficient working capital.

Post-merger integration is the process of merging two businesses after closing—combining systems, cultures, teams, and operations. Planning integration beforehand (and including founder involvement if desired) smooths the transition and maximizes value realization.

Private equity firms raise capital from investors and acquire majority stakes in companies to improve operations, grow the business, and eventually sell at a profit. PE buyers bring capital, operational expertise, and industry networks. Understanding a PE buyer's track record and value-creation strategy is essential.

Purchase price adjustments (or "true-ups") are changes to the final purchase price based on working capital, debt, or other items measured at closing. The purchase agreement specifies how these are calculated—common examples: adjustments if debt is higher than expected or if working capital falls short of the peg.

QoE is a deep dive into whether reported earnings are sustainable and recurring. QoE reviews typically focus on customer concentration, revenue quality, one-time items, and forecast reliability. A strong QoE supports your valuation and reduces buyer concerns about earnings sustainability.

A recapitalization changes the mix of debt and equity in your company, often by bringing in a private equity or other financial investor who buys a majority or significant minority stake while you retain a meaningful share. Unlike a full sale, you take some liquidity today and keep a stake in future growth. Owners use recaps to diversify family wealth, fund succession, or bring in a partner to support expansion while staying involved.

Reps and warranties are seller commitments about the accuracy of information provided—e.g., "all financial statements are accurate," "there is no pending litigation." If a rep is false, the buyer can claim breach and draw from escrow or holdback. Limiting reps and warranties reduces your post-closing liability risk.

Rollover equity means you retain ownership of a portion of the company post-closing, typically with a financial buyer. Rolling over some equity aligns your incentives with the buyer, qualifies for favorable tax treatment, and gives you continued upside if the business performs well.

Sell-side advisors represent you as the seller. They help position your company, market it to buyers, manage the sale process, and negotiate terms on your behalf. Engaging strong sell-side advisors typically improves outcomes and speeds the process.

Seller financing is when you extend credit to the buyer for part of the purchase price, payable over time. A vendor note reduces the buyer's cash requirement at closing but exposes you to buyer default. Structure these carefully: include security interests, covenants, and prepayment terms.

A strategic buyer is another company (often larger, in a similar or adjacent industry) seeking to acquire yours for synergies—cost savings, customer overlap, or technology. Strategic buyers can sometimes pay more because they expect cost savings or cross-selling opportunities after closing.

Succession planning is preparing your business for leadership transition, whether to family members, management, or an external buyer. Strong succession plans increase business value, reduce risk of founder-dependent operations, and create a clear path to owner liquidity.

A teaser is a preliminary one-page marketing document sent to potential buyers before the full CIM. Teasers describe the business in broad terms and gauge buyer interest without revealing sensitive details. They generate interest and protect confidentiality during the early sourcing phase.

A term sheet outlines the principal terms of a transaction before full documentation: valuation, payment structure, conditions, timeline, and key reps. Unlike an LOI, a term sheet is often binding on key terms. Negotiating a clear term sheet prevents later surprises.

A valuation multiple expresses purchase price as a factor of a financial metric—typically EBITDA. For example, 6x EBITDA means the buyer pays six times annual EBITDA. Multiples vary by industry, growth rate, and market conditions. Understanding historical multiples in your sector helps you benchmark fair value.

WACC is the blended cost of the money a company uses, weighting the cost of its debt and the return expected on its equity by how much of each it carries. It is the hurdle an investment has to clear to create value, and the discount rate most buyers apply to your future cash flows. Lowering it — through cheaper debt, a better-matched structure or lower perceived risk — raises what the same business is worth.