Educational Resource
M&A Glossary
Understanding M&A terminology is essential to navigating a successful transaction. This glossary covers the key terms every business owner should know — whether you're preparing to sell, evaluating an acquisition, or planning your exit strategy.
Asset Sale vs. Stock Sale
In an asset sale, the buyer purchases specific assets and liabilities of the business (equipment, contracts, inventory, goodwill). In a stock sale, the buyer purchases the owner's shares, acquiring the entire entity including all assets, liabilities, contracts, and obligations.
Letter of Intent (LOI)
A Letter of Intent (LOI) is a document outlining the preliminary terms and conditions of a proposed acquisition. It typically includes the purchase price, deal structure, key contingencies, exclusivity period, and timeline. While most provisions are non-binding, certain clauses — like exclusivity and confidentiality — are typically binding.
Due Diligence Checklist
Due diligence is the comprehensive investigation a buyer conducts after signing a Letter of Intent. It covers financial records, legal matters, operations, customers, employees, contracts, intellectual property, and regulatory compliance. The goal is to verify the seller's representations and identify risks that could affect valuation or deal terms.
Quality of Earnings (QoE) Report
A Quality of Earnings (QoE) report is an independent financial analysis conducted by a third-party accounting firm during due diligence. It verifies the seller's reported earnings, adjusts for non-recurring items, analyzes revenue sustainability, and establishes a normalized EBITDA baseline that both parties use for valuation and deal pricing.
Working Capital Adjustment
A working capital adjustment is a mechanism in M&A transactions that ensures the buyer receives the business with a 'normal' level of working capital (current assets minus current liabilities) at closing. The parties agree on a target working capital amount (the 'peg'), and the purchase price is adjusted up or down based on the actual working capital delivered at closing versus the target.
Earnout
An earnout is a contractual provision in an M&A transaction where a portion of the purchase price is contingent on the business achieving specified performance targets after closing. Earnouts are used to bridge valuation gaps between buyer and seller expectations, often tied to revenue, EBITDA, or customer retention milestones over a 1-3 year period.
Purchase Agreement (Definitive Agreement)
The purchase agreement (also called the definitive agreement or acquisition agreement) is the comprehensive, legally binding contract that finalizes an M&A transaction. It supersedes the LOI and contains all deal terms including purchase price, representations and warranties, indemnification provisions, closing conditions, and post-closing obligations.
EBITDA Multiples
An EBITDA multiple is a valuation ratio used in M&A to determine a business's enterprise value. It's calculated as Enterprise Value ÷ EBITDA. For example, a business with $2M in EBITDA valued at a 5x multiple would have an enterprise value of $10M. Multiples vary significantly by industry, size, growth rate, and risk profile.
Confidential Information Memorandum (CIM)
A Confidential Information Memorandum (CIM), also called an Offering Memorandum or Information Memorandum, is a detailed document prepared by the seller's M&A advisor that presents the business to prospective buyers. It includes financial performance, operations overview, market position, growth opportunities, and management structure — everything a buyer needs to evaluate the opportunity and submit an initial offer.
Non-Compete Agreement
A non-compete agreement (also called a restrictive covenant) in M&A is a contractual provision that prevents the seller from starting, owning, or working in a competing business for a specified period and within a defined geographic area after the sale. It protects the buyer's investment by ensuring the seller doesn't recreate the business they just sold.
Need Expert M&A Guidance?
Every conversation is confidential. No obligation.
Schedule Advisory Consultation