M+A Glossary

There are a number of terms used in the M+A field and it is helpful to understand them if you decide to pursue a transaction.

Advisor: An intermediary who contracts with sellers and/or buyers to provide specified, transaction-related services.

Allocation: An agreed breakdown of the purchase price within the final Definitive Agreement for the purpose of meeting IRS/state tax filing requirements.

Amortization: A reduction in debt or writing off of expenses for tangible and/or intangible assets of the business.

Arbitration: Submission of a dispute for resolution outside of the typical court system.  An arbitration clause is often included as an initial step in dispute resolution

Asking Price: The advertised price of the defined business opportunity.

Asset Sale: A business sale of tangible and intangible assets, excluding the sale of securities or corporate stock.

Blue Sky: That aspect of an asking price that may not be based on contemporary valuation approaches.

Breach of Contract: Failure of a party to a contract to perform on any or all obligations specified in the agreement.

Broker: An intermediary who contracts with sellers and/or buyers to provide specified, transaction-related services.

Buyer (Financial): Investors (e.g. private equity funds) that are primarily interested in the financial return they can generate in a period of time by buying the business.

Buyer (Strategic): Business executives or principles that are primarily focused on how a seller’s business fits into their long-term business plans.

Cancellation ClauseA contract clause stating the conditions under which all or part of the agreement may be cancelled, including any financial requirements.

Client/Customer:    The party with whom a consultant, advisor, broker, or intermediary has a relationship specified by a contract.

Closing: The point at which the purchase is completed and funds distributed as specified in the Definitive Agreement and Closing Statement.

Co-Brokering: A financial agreement between two or more advisors, brokers, or intermediaries to serve the interests of a specific client.

Confidentiality Agreement (CA): A contract that binds the signing parties to maintain confidentiality regarding specific proprietary information, including compensatory damages. The CA is also referred to as a Non-Disclosure Agreement (NDA).

Consideration: The specific contractual promise to do or provide something in exchange for something else of value.

Contract: An enforceable, voluntary agreement between two or more parties to act or not act, in a specified manner.

Conveyance: The transfer of title/ownership to another party.

Corporation: Individuals or entities united under a company name in a legal structure that conforms to applicable regulatory and legal standards.  Common examples are “C” Corporation (taxed at the corporate level), “S” Corporation (taxes flow through to the individual shareholder level), and Limited Liability Corporation (LLCs) (taxed at partner level).

Covenant: A specific stipulation in a contract or agreement (e.g. Covenant Not To Compete)

Covenant Not To Compete: A provision within the Definitive Agreement in which the seller agrees not to compete with the buyer for specified services or products, within a specific geographic area and time frame.  Also referred to as a Non-Compete Provision.

DBA: An identification of the “doing business as” (DBA) name of the entity, which typically differs from the legal name of the entity.  In some cases, one legal entity may have multiple DBAs.

Definitive Agreement: One of several names for the final agreement between parties in a transaction.  Other terms used include Stock or Asset Purchase Agreement, Sales Agreement, and Purchase Agreement.

Disclaimer: A written statement that attempts to limit any liability associated with potentially inaccurate or misleading information, whether verbal or in writing.

Discretionary Earnings: A term used to describe cash flow, typically in addition to stated Net Income.  It is typically used interchangeably with EBITDA (see below).

Divestiture: The process of selling a specific asset, typically one division or entity, within a larger company to buyer.

Due Diligence: The review of any or all operational, legal, and financial documents of a company by a potential buyer prior to signing a Definitive Agreement.  The process often includes detailed checklists and the opportunity for the potential seller to verify the buyer’s qualifications to complete the purchase.

Earnest Money: A sum of money advanced prior to a closing to bind one or more parties in the agreement.

Earn Out: An incentivized agreement within the sales process that allows the seller to recognize additional payments beyond the specified purchase price while working for the new owner.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a commonly used term to refer to business cash flow.  EBITDA adjustments to the net income of the business are often used initially with market multiples to estimate business value.

Enterprise Value: Theoretical value of a company including anticipated proceeds after retiring associated debts and other obligations.

Escrow: Money, deeds, bonds, or equivalent delivered to a third party to be delivered to a specified party upon the fulfillment of a contract condition.

Exclusive/Non-Exclusive Agreement: The nature of the agreement between intermediary and client may be an exclusive listing for one intermediary who receives the commission in any transaction, or non-exclusive, which allows the seller to explore various commission options with other representatives or intermediaries.

Fiduciary: An individual and/or entity acting as an agent in a position of trust and representing the financial interest of a party.

Finder/Finder’s Fee: An unlicensed intermediary engaged for the purpose of introduction to another party (e.g. seller to potential buyer).  A fee is often negotiated on the basis of the introduction and associated transaction.

G&A: An abbreviation for general and administrative expenses not associated with the direct cost of goods and services provided.

Gross Profit: The profit realized prior to accounting of certain G&A expenses, officer salaries, and other discretionary expenses.

Holdback Provision: This Definitive Agreement provision identifies a percentage/total of Purchase Price proceeds that are “held back” in escrow for a period of time as risk mitigation for the buyer.

Horizontal Integration: A buyer strategy that focuses on acquiring businesses that are in similar healthcare verticals, often in the same or adjacent geographical market

Indemnity Provision: A provision in a contract that specifies potential payments for potential loss or damage.

Indication of Interest (IOI): The IOI is typically a simplified, bullet point version of the LOI (see below) that is used as a starting point for entering a contractual relationship between a seller and potential buyer.  Also known as the Memorandum of Understanding.

Joint Venture: A formal or informal agreement between two or more parties to undertake a specific project for perceived mutual benefit.

Letter of Interest (LOI): A written non-binding, offer from a potential buyer, based on seller representations, to purchase a business.  The LOI typically identifies key areas for the Definitive Agreement and includes confidentiality and “no shop” provisions.

Merger: The legal, financial, and operational combination of two or more entities that typically results in one legal entity, whether newly created or within the structure of one of the merged companies.

Net Income: The operating “bottom line” of the business after accounting for all normal business expenses including recurring and non-recurring expenses.

Non-Recurring Expenses: One-time expenses that are typically added to the Net Income as part  of an adjusted EBITDA calculation.

Offset: The deduction of one claim or obligation against another which are specifically addressed in the Definitive Agreement and/or Closing Statement.

Owner’s Total Compensation: The total compensation received by an owner of a business, including unique and/or non-recurring expenses that may be considered EBITDA adjustments.

Power of Attorney: The legal authorization of another person to act as the general representative (general POA) or for a specific act (special POA) for another party.

Pricing: Establishing a potential asking price for the business, typically based on a number of factors including market trends and seller objectives.

Principal: One of the owners/shareholders in a business or the sum of funds owed (e.g. loan) excluding interest and penalties.

Promissory Note: A written agreement which acknowledges a debt and the terms for payment.

Purchase Price: The price stated in the LOI and Definitive Agreement for the purchase of the business assets and/or stock.

Recast/Restated Financials: Typically the sellers financial documents represented in a manner consistent with acceptable accounting principles.  This is done in some circumstances to facilitate an objective review of business performance for prospective buyers.

Representations/Warranties: Written statements by a party that another party may rely on as factual in the process of a transaction.

Security Agreement: The agreement that provides a creditor with a debt collection option should a debtor fail to satisfy a financial obligation.

Subordination: The process of relegating an obligation (e.g. loan) to a junior or secondary position relative to another obligation.

Success Fee: A fee that is contingent upon the successful closing of a transaction.

Total Consideration: Whatever the buyer conveys to the seller in exchange for the acquired business assets and/or stock.

TTM: The most recent, trailing 12 months of financial results for the seller’s company, often used as an initial step in valuing a company.

Valuation: The act of calculating the value of business for any variety of purposes, ranging from preparing for a sale to estimating value for a legal proceeding (e.g. divorce).  There are multiple approaches to valuation with multiple, sometimes divergent assumptions.