If you have read the post: Merger & Acquisition (M&A) Acronyms, Abbreviations and Definitions then you will be familiar with the various terms used throughout the M&A process. Here we list them alphabetically and try to add a little color about their significance.
Deal Fatigue: Deal fatigue refers to a condition, typically during Purchase and Sale agreement (“PSA”) negotiations, where parties on either side of the negotiation begin to feel frustrated by the time and level of detail that needs to be addressed. Deal fatigue can be managed by starting with a thorough LOI and then planning for a limited number of page turns on the PSA, each one addressing items that can be agreed upon or deferred where, between sessions, teams can review importance of issues and options.
Due Diligence: Due diligence is a detailed investigation of a business prior to signing the PSA. Due diligence is often outsourced to accounting, legal and technology audit firms, For a full post on due diligence, see: What is the Due Diligence Process and What Does it Entail?
Earn-in: An earn-in occurs as part of an MBO where management is provided with an opportunity to earn more shares in a business than they can afford to buy at the closing of a transaction. For example, management may only have enough cash to acquire 10% of the business but if they reach certain performance targets can earn additional ownership in the company.
Earn-out: An earn-out is part of a sale transaction where the price to be paid is conditional on future performance. For example, the purchase price may be $10 million consisting of $8 million in cash and $2 million payable if revenues grow 20% in each of the next two years.
EBITDA (multiple): EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is a measure of cash-flow that excludes the capital structure of a business, thereby improving comparability. A multiple of EBITDA is the most common used valuation metric for private companies.
Enterprise Value (EV): Enterprise value is the value of a business independent of how it is financed. This includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet.
Hold-back: A hold-back is always part of a purchase and sale agreement and ensures the buyer can collect on rep and warranty breaches. The shortest amount and period would be in the 5% and 6 months range, whereas more typical is 10% and 1 year.
Horizontal Merger: A horizontal merger occurs when a business acquires a competitor. Competition tends to be higher among companies operating in the same space, meaning synergies and potential gains in market share are much greater for merging firms.
Letter of Intent (LOI): A letter of intent is used to summarize an understanding of a deal. This, typically 3 to 10 page summary forms the basis a full legal agreement. In the context of a sale process, it marks the critical point where power shifts from the seller to the buyer because LOIs typically require exclusivity. For a full post on the letter of intent, see: Why is the Letter of Intent (LOI) so Important?
M&A: M&A describes the activity of buying and selling businesses. The rationale for doing so will be based on either accelerating growth, improving profitability or reducing risk. Specific drivers are outlined here: How to Select the Best Possible Buyer for your Business.
Multiple of Revenues: A multiple of revenues is used as a measure of value, typically for hosted solution software (i.e. SaaS or Software as a Service) companies that are growing quickly but are not yet profitable.
Non Disclosure Agreement (NDA): Non Disclosure Agreements (NDAs, also called CA for Confidentiality Agreement and MNDA for Mutual Non Disclosure Agreement) are contracts that stipulate that information received from a counter-party will only be used for the purpose as defined in the NDA . For a full post on NDAs, see: NDA Agreement: Meaning and Sample Clauses
Non Solicit Agreement: A Non Solicit Agreement prevents the buyer from hiring the targets employees. It is generally part of an NDA.
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.
Purchase and Sale Agreement: PSA or SPA in the case of a Share Purchase Agreement, is one document in a set of final documents that completes a company sale transaction. For a full post on the purchase and sale agreement, see: The Purchase and Sale Agreement Explained.
Stand Still Agreement: A stand still agreement is used by public companies to stop prospective acquirers from acquiring more share during the negotiation process.
Value to the Buyer: This represents the value a 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.
Vertical Merger: A vertical merger is a merger between two companies where the combined company extends the value chain and results in cost savings as a result of vertical integration. For example, a car manufacturer buys an engine manufacturer.
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