M&A Terminology Demystified

By Generational Equity


The mergers and acquisitions industry, like many other industries, has developed a jargon and lexicon that is unique to itself and can be confusing to the general public and even small business owners.

Because we realize the process of selling a business can be complicated and detailed, we have created an M&A glossary of terms that may provide you with some guidance as you work your way through the course of selling your company. You can download a complimentary copy by following this link:

Generational Equity’s Glossary of Key M&A Terms

As you will see, we have taken 160 terms and phrases, all of which are critical at some point in the M&A process, and distilled their meaning down to something that a business owner can actually use to his or her benefit. Some of the terms that we get asked the most about are included, such as:

Add-on Company – A business that a private equity firm acquires to enhance a larger platform company. The new acquisition is “added on” to the platform company to create an even larger entity in whole. 

Asset Sale – A form of acquisition whereby the seller of a corporation agrees to sell all or certain assets and, in some cases, liabilities of a company to a purchaser. The corporate entity is not transferred.

Business Valuation – The act or process of arriving at an opinion or determination of the economic value of a business or enterprise or an interest therein. A business valuation can be conducted for a variety of purposes, including, but not limited to, a merger or acquisition; gift, estate, or inheritance tax planning; ESOPs and other employee benefit plans; going public; buysell agreements; marital, partnership, and corporate dissolutions; and bankruptcy reorganizations.

Confidential Business Review (CBR) – A book containing a detailed description of a business and its growth opportunities. The CBR includes information on products and services, markets, competitors, promotional activities, organization, facilities, and historical and projected financial information. The CBR is sent to potential buyers who have signed a confidentiality agreement. Also referred to as Offering Memorandum.

Deal Structure – The allocation of the consideration paid for a business. The components could include cash, notes, stock, consulting agreements, earnout provisions, and covenants not to compete. Many non-cash deal structure components have tax benefits to the seller.

Due Diligence – The assessment of the benefits and the liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased. Due diligence occurs subsequent to the Letter of Intent.

Earnout – The portion of the purchase price that is contingent on future performance. It is payable to the sellers only when certain predefined levels of sales or income are achieved.

Intangible (Hidden) Assets – The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce. Also referred to as Off Balance Sheet items.

Limited Auction – A situation where you have at least two buyers interested in purchasing your company. By creating a competitive bidding space, the interested parties will likely bid against one another, which increases the business’ value.

Optimal Time To Sell – When certain market conditions are present such as low capital gains tax rates, low interest rates and high buyer activity. An increase in buyer activity can be caused by a variety of factors, including slow organic growth, and private equity firms or corporate buyers with a large amount of capital to invest. This market situation is also referred to as a seller’s market.

Private Equity Firm – Entities that raise capital with the goal of acquiring businesses and maximizing the value of the initial investment. Also referred to as PE firms. PE firms typically buy part or all of a company, provide the missing resources that’s preventing the company from growing at an accelerated rate, help the company grow extensively for a few years, and then sell it for a solid return on their investment. 

Pro Forma Statements – Financial statements with one or more assumptions or hypothetical situations built into the data. Pro forma statements are generally supported by a documented, reasonable future of the business enterprise.

Recasting – Recasting, or financial statement adjusting, eliminates from the historical financial presentation, items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses, and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability and allows meaningful comparisons with other investment opportunities.

Stock Sale – A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

Succession Planning – Process of  identifying and training certain employees to fill key management positions within a business as they become available. This needs to be done prior to selling a company, since businesses that can operate smoothly in the absence of the current owner are more attractive to professional buyers.

If you have ever wondered what an M&A term means, our glossary is a great tool to get you started. If you really want to get a mini-MBA on selling a company, I suggest attending a Generational Equity M&A seminar. An investment of a few hours of your time will most likely yield a tremendous benefit to you, especially if you are like most business owners and have no exit plan or strategy in place. Putting off the inevitable is not wise for you, your family, and your financial legacy.

We hold our seminars throughout North America so chances are good that we will be in your region sometime in the ensuing months. To find out more, please call us at 972-232-1121 or fill out a contact form through our website, provide us with your confidential contact information, and we will reach out to you.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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