Whether a transaction is defined as a merger or an acquisition is determined by a number of accounting tests. Simply put, both parties in a merger need to meet a number of equality tests and, when met, transactions classified this way can be more tax efficient. Because of the strict rules that apply here, most transactions are actually classified as acquisitions.
The following are common Merger & Acquisition (M&A) acronyms, abbreviations and definitions used in the M&A process.
The Merger & Acquisition Process
One of the first documents used in the M&A process is a one to three page no-names summary description of the opportunity typically called a teaser. If the teaser is of interest then parties will sign an NDA or CA (Non-Disclosure Agreement or Confidentiality Agreement) to receive more detailed information about the company. The comprehensive information document is called a CIM or just IM or sometimes OM (Confidential Information Memorandum or Information Memorandum or Offering Memorandum).
In order to assess whether parties reviewing the CIM are worthy of moving forward they are typically asked to issue a non-binding EOI or IOI (Expression of Interest or Indication of Interest) which will identify a valuation range, rationale for their interest and transaction structure parameters.
If the EOI is acceptable, potential purchasers are provided with more information typically in the form of monthly income statements, revenue and customer analyses and whatever else is important to the potential purchaser under the circumstances. At this stage the potential purchaser and seller will meet in person and a Data Room is set up that will contain the actual contracts to allow the purchaser to verify that everything that has been represented to date is actually true (these days data rooms are typically virtual data rooms online).
Subsequent to this an LOI (Letter of Intent) is sought and upon signing the LOI, a period of exclusive due diligence is awarded to the single final successful party. Once the potential purchaser is sufficiently comfortable, work will begin on the PSA (Purchase and Sale Agreement) and signature on this document and its many companions will consist of the closing.
Merger & Acquisition Transaction Structure Terms
The PSA can be in the form of a Share Purchase Agreement (SPA) or an Asset Purchase Agreement (APA) and will define the deal structure including the level of working capital and may contain a hold-back and/or a VTB (Vendor Take Back). A hold-back is cask kept in escrow typically for a period of less than one year and contingent on such things as receivables being paid, customers being retained or any indemnity claims the purchaser may have a right to as defined in the PSA. A VTB or vendor note is a purchase loan from the seller to the buyer. This is typically subordinated to a senior lender (i.e. a bank) and is usually of a term longer than one year.
There can also be earn-outs or earn-ins. An earn-out is a component of the purchase price that is contingent on future performance of the business and and earn-in provides the buyer with a greater amount of equity over time based on performance. An earn-in is often used in MBOs where the buying management team partners with Private Equity to complete the deal.
Merger & Acquisition Finance and Valuation Terms
On the financial/valuation side, there are acronyms such as EBT, EBIT and EBITDA (Earnings Before Tax, Earnings Before Interest and Tax, Earnings Before Interest, Taxes and Depreciation and Amortization (i.e. non-cash items)), EV and TEV (Enterprise Value and Total Enterprise Value, which equals equity plus funded debt), FYE (Fiscal Year End), LTM (Last Twelve Months), and YOY (Year Over Year).
When it comes to business plans, you will see the term TAM (Total Addressable Market or Total Available Market) and also SAM or Serviceable Available Market, which is the segment of the TAM targeted by your products and services which is within your geographical reach. With respect to revenues, when speaking of hosted solutions or Software as a Service (SaaS) businesses, they will be characterized by revenue type and quality, you will see MRR and ARR (Monthly Recurring Revenue and Annual Recurring Revenue).
There are also various valuation concepts that are good to know when considering M&A. The first is “notional value“, a notional value determination is one in absence of an open market transaction which is, in other words, the intrinsic or stand-alone value. The second is “value to the buyer“, this represents the value the buyer can create by leveraging its assets such as distribution and customer relationships. An M&A transaction typically occurs somewhere between the notional value and the value to the buyer.
New acronyms pop up every day so check back here we will try to keep this updated.
Recommended Further Reading
For more on how long an acquisition takes, see: How Long Does it Take to Sell a Business?
For more on how to optimize net proceeds, see: Share Sale or Asset Sale: It is Mostly About Minimizing Taxes