Navigating the complex world of mergers and acquisitions (M&A) can be daunting. Understanding the technical jargon and acronyms used in M&A transactions is crucial for buyers and sellers to make informed decisions. Whether you are on your way to selling, buying or advising companies, this glossary will provide helpful insight into demystifying the process. It may prove especially helpful when engaging in conversation with other professionals in M&A as most of these terms are regularly used.

To help you get started, we've compiled a glossary of 50 essential M&A terms to enhance your knowledge and confidence in your next deal. After you have finished, be sure to check out the other free resources available.

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Glossary of M&A Terms

1. LOI (Letter of Intent)

Definition: A preliminary, non-binding document outlining the basic terms of a potential agreement between two parties. Here is an example of a template.

Example: A company interested in acquiring another might issue an LOI to outline the purchase price and key terms before conducting due diligence.

2. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation)

Definition: A measure of a company's operating performance that excludes interest, taxes, depreciation, and amortisation.

Example: A company with a net income of £1 million, interest expenses of £200,000, taxes of £300,000, depreciation of £100,000, and amortisation of £50,000 would have an EBITDA of £1.65 million.

3. Due Diligence (DD)

Definition: The comprehensive appraisal of a business by a prospective buyer to establish its assets, liabilities, and commercial potential.

Example: Before acquiring a company, the buyer conducts due diligence to review financial records, legal matters, and operational aspects.

4. SPA (Sale and Purchase Agreement)

Definition: A legal contract that finalizes the terms and conditions of the sale of a company.

Example: After agreeing on the terms, the buyer and seller sign a SPA to legally transfer ownership of the business.

You can access a detailed template for a SPA alongside many other expert templates after joining Foundy's portal. These documents cost between £15k to £50k to prepare.

5. VDR (Virtual Data Room)

Definition: An online repository for storing and distributing documents during the M&A process.

Example: The seller uploads financial statements and legal documents to the VDR for the buyer to review during due diligence.

Foundy has an advanced data room tool embedded into our portal. It has a customisable template with folders laid out for you. It goes far beyond data storage, though. It offers users advanced analytics so that you can see who is most active, which can help you engage with prospects.

6. PE (Private Equity)

Definition: Capital investment made into companies that are not publicly traded.

Example: A private equity firm acquires a controlling stake in a manufacturing company to improve its operations and profitability.

7. VC (Venture Capital)

Definition: Financing provided by investors to startup companies and small businesses with perceived long-term growth potential.

Example: A tech startup receives VC funding to develop its new software product and expand its market presence.

Inside a Foundy portal, there is a list of tens of thousands of active VC investors and angel investors that you can filter based on specific criteria so that you can build a tailored list for your business.

8. NDA (Non-Disclosure Agreement)

Definition: A legal contract establishing a confidential relationship between parties to protect proprietary information.

Example: The buyer and seller sign an NDA before sharing detailed financial and operational information.

9. Earn-out

Definition: A provision in an acquisition agreement that allows the seller to receive additional compensation based on the future performance of the business.

Example: The seller receives an additional £500,000 if the business meets certain revenue milestones within two years.

10. Term Sheet

Definition: A non-binding agreement setting forth the basic terms and conditions under which an investment will be made.

Example: The term sheet specifies the investment amount, valuation, and ownership percentage for a venture capital deal.

11. Acqui-hiring

Definition: Acquiring a company primarily to recruit its employees rather than to gain control of its products or services.

Example: A tech giant acquires a small startup to bring its skilled engineers into the company.

12. Basket

Definition: A threshold amount in an acquisition agreement that must be exceeded before indemnification claims can be made.

Example: The basket amount is set at £100,000, meaning claims below this amount are not actionable.

13. Churn Rate

Definition: The rate at which customers stop doing business with an entity over a given period.

Example: A SaaS company has a monthly churn rate of 5%, indicating that 5% of its customers cancel their subscriptions each month.

14. Cliff Vesting

Definition: A vesting schedule where employees gain access to their full benefits or stock options all at once after a specified period.

Example: Employees receive 100% of their stock options after three years of service.

15. Synergies

Definition: The potential financial benefit achieved through the combining of companies.

Example: The merger of two companies leads to synergies by reducing overlapping administrative costs.

16. Adjusted EBITDA

Definition: EBITDA with adjustments for non-recurring, irregular, or one-time items.

Example: Adjusted EBITDA excludes one-time legal settlements and restructuring costs to reflect normal operations.

17. Target

Definition: The company identified for acquisition.

Example: The target company is a profitable e-commerce platform with a strong customer base.

18. Accretion

Definition: The increase in the value of an asset over time.

Example: The acquisition is expected to be accretive, increasing the buyer's earnings per share.

19. Amalgamation

Definition: The combination of one or more companies into a new entity.

Example: Two regional banks amalgamate to create a larger, more competitive financial institution.

20. Backward Integration

Definition: A form of vertical integration where a company acquires another company that produces the raw materials or inputs required for its products.

Example: A car manufacturer acquires a steel plant to ensure a steady supply of raw materials.

21. Bootstrap Effect

Definition: An increase in earnings per share as a result of a merger or acquisition, without any real increase in earnings.

Example: The merger boosts the combined company's EPS due to the reduction in outstanding shares.

22. Cash Consideration

Definition: The portion of the purchase price given to the target in the form of cash.

Example: The buyer offers £10 million in cash consideration for the acquisition.

23. Drag-Along Rights

Definition: Rights that enable a majority shareholder to force minority shareholders to join in the sale of a company.

Example: The majority shareholder exercises drag-along rights to sell the entire company to a new buyer.

24. Tag-Along Rights

Definition: Rights that allow minority shareholders to sell their shares on the same terms as the majority shareholder.

Example: Minority shareholders use tag-along rights to sell their shares when the majority shareholder sells theirs.

25. Indemnification

Definition: A provision in a purchase agreement that provides protection to the buyer if certain representations and warranties are not true.

Example: The seller agrees to indemnify the buyer for any undisclosed liabilities discovered post-acquisition.

26. Working Capital

Definition: The difference between a company's current assets and current liabilities.

Example: A company with £500,000 in current assets and £300,000 in current liabilities has a working capital of £200,000.

27. UCC Filing (Uniform Commercial Code Filing)

Definition: A legal form that a creditor files to give notice that it has an interest in the personal property of a debtor.

Example: A lender files a UCC-1 statement to secure its interest in the borrower's inventory and equipment.

28. Survival Period

Definition: The length of time after the closing during which the representations and warranties must be true.

Example: The survival period for representations and warranties is set at 18 months post-closing.

29. Term Loan

Definition: A loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate.

Example: The company secures a £2 million term loan with a five-year repayment schedule.

30. WACC (Weighted Average Cost of Capital)

Definition: The average rate of return a company is expected to pay its security holders to finance its assets.

Example: A company with a WACC of 8% needs to generate returns above this rate to create value for its investors.

31. MOU (Memorandum of Understanding)

Definition: A document outlining the agreement between multiple parties before a formal contract is finalised.

Example: Two companies sign an MOU to collaborate on a joint venture.

32. TTM (Trailing Twelve Months)

Definition: A measure of a company's financial performance over the most recent 12-month period.

Example: The company's TTM revenue is calculated by summing the revenue from the last four quarters.

33. HB (Hold Back)

Definition: Cash kept in escrow to cover any unaccrued or unanticipated liabilities post-sale.

Example: £100,000 is held back in escrow to cover potential warranty claims.

34. YOY (Year Over Year)

Definition: A method of comparing financial performance metrics from one year to the next.

Example: The company's YOY revenue growth is 10%, indicating a 10% increase compared to the previous year.

35. MRR/ARR (Monthly Recurring Revenue/Annual Recurring Revenue)

Definition: Revenue metrics used primarily in SaaS and subscription-based businesses.

Example: The SaaS company has an MRR of £50,000, translating to an ARR of £600,000.

36. EV (Enterprise Value)

Definition: The total value of a company, including debt and excluding cash.

Example: A company with a market capitalization of £5 million, debt of £2 million, and cash of £1 million has an EV of £6 million.

37. Equity Value

Definition: The value of a company available to shareholders, calculated as enterprise value minus debt plus cash.

Example: The company's equity value is calculated by subtracting its debt from its enterprise value and adding cash.

38. Cash Free, Debt Free

Definition: A valuation method where the buyer does not acquire the company's cash or assume its debt.

Example: The buyer agrees to a cash-free, debt-free purchase price of £10 million.

39. GAAP (Generally Accepted Accounting Principles)

Definition: Standard accounting principles used to prepare financial statements.

Example: The company's financial statements are prepared in accordance with GAAP.

40. Q of E (Quality of Earnings)

Definition: A report that assesses the sustainability and accuracy of a company's earnings.

Example: The Q of E report highlights that a significant portion of earnings is derived from non-recurring sources.

41. IOI (Indication of Interest)

Definition: A preliminary, non-binding offer to acquire a company.

Example: The buyer submits an IOI outlining the proposed purchase price and key terms.

42. APA (Asset Purchase Agreement)

Definition: A legal document outlining the terms and conditions of the sale of a company's assets.

Example: The APA details the transfer of the company's equipment, inventory, and intellectual property.

43. UPA (Unit Purchase Agreement)

Definition: A legal document outlining the terms and conditions of the sale of units in a company.

Example: The UPA specifies the number of units being sold and the purchase price per unit.

44. Exclusivity Agreement

Definition: A contract where the seller agrees not to negotiate with other potential buyers for a specified period.

Example: The seller signs an exclusivity agreement, committing to negotiate only with the buyer for 60 days.

45. De Minimis

Definition: A provision that sets a minimum threshold for claims in a sale and purchase agreement.

Example: The de minimis threshold is set at £10,000, meaning claims below this amount are not pursued.

46. Depreciation

Definition: The reduction in the value of tangible fixed assets over time.

Example: The company's machinery depreciates by £50,000 annually.

47. Amortisation

Definition: The reduction in the value of intangible assets over time.

Example: The company's patent is amortized over 10 years.

48. Dilution

Definition: The reduction in the ownership percentage of existing shareholders due to the issuance of new shares.

Example: The issuance of new shares for a capital raise results in a 10% dilution for existing shareholders.

49. Disclosure Letter

Definition: A document listing exceptions to the warranties provided by the seller in a sale agreement.

Example: The disclosure letter notes an ongoing legal dispute that could affect the company's liabilities.

50. Goodwill

Definition: The excess purchase price over the fair value of the net identifiable assets of the acquired company.

Example: The buyer pays £2 million in goodwill for the strong brand and customer loyalty of the target company.

Understanding these key M&A terms can significantly enhance your ability to navigate the complexities of business acquisitions. Whether you're a buyer or a seller, having a solid grasp of this terminology will empower you to make more informed decisions and negotiate better deals.

Foundy can assist you with the acquisition process on either the buy or sell sides

How Does Foundy Deliver Value To Our Buy-Side Clients From Start To Finish?

Looking to acquire businesses that can generate six to eight figures? Foundy’s buy-side services provide comprehensive support from start to finish, ensuring a seamless acquisition process. As an M&A advisory firm, Foundy combines cutting-edge data-driven insights with step-by-step expert support to guide you through every phase of your acquisition journey.

Your dedicated buy-side team, equipped with expert advisors, uses advanced AI trained on over 1.1 million transactionsto identify the best opportunities. Whether you're working with a traditional business broker or a business transfer agent, we ensure you have the data and guidance necessary to make informed decisions. From sourcing deals and conducting due diligence to structuring offers and planning for post-acquisition growth, we provide full-service support, ensuring you avoid joining the significant percentage of acquisitions that fail to meet ROI expectations.

How Does Foundy Deliver Value To Our Sell-Side Clients From End To End?

When it comes to the complex process of selling your business, Foundy offers unmatched expertise and resources. Whether you're considering working with an M&A broker, investment bank, or business broker, Foundy’s comprehensive M&A advisory services ensure you're fully prepared to sell your business and maximise its value.

Our transaction planning service begins with a thorough business valuation, leveraging our proven Triangular Model. This model combines advanced AI—trained on over 1.1 million transactions—with expert advisors from your specific industry niche. With this combination of data-driven insights and industry knowledge, we provide a tailored growth roadmap to help you position your business for sale.

Once you're ready, our deal execution service ensures that everything is in place to achieve the best results. We prepare your business for sale by crafting detailed presentation materials for your data room, building a comprehensive list of relevant acquirers, and conducting methodical outreach and negotiations to secure the best terms. Foundy’s AI-driven platform ensures deals are completed significantly faster than those managed by traditional M&A brokers or investment banks, while also saving you on advisory fees.

Foundy’s average deal timeline is just over four months, compared to the industry median of nine months for M&A transactions. By choosing Foundy, you’ll also benefit from substantial savings on advisory costs. Learn more or enquire about deal execution at Foundy.com/sellers.

Looking for Funding Options?

If you’re interested in raising capital through debt, equity, or grant funding, Foundy’s platform is your solution. We currently offer access to over 1,000 lenders and 450 equity investors across the UK and USA. By completing a quick 4-minute application, you'll be presented with funding options tailored to your specific needs via a personalised dashboard.

Foundy’s fundraising services provide access to the best capital solutions, whether you're looking for seed to Series B funding. Our expert advisors will guide you through the entire process, connecting you with relevant investors and ensuring you're prepared for debt or equity investment. No matter where you are on your business journey—whether buying, selling, or seeking capital—Foundy offers the resources and step-by-step expert support to help you succeed.

For more information on how Foundy can assist with your acquisition, sell my business, or funding needs, connect with us today at Foundy.com.

No matter where you are on your business journey, connect with Foundy to access the resources needed for a more successful acquisition, exit or fundraising process.