You might feel like you should already know the lingo of business acquisitions.
But you’ve been heads-down building a great company! Cut yourself some slack.
Here are acronyms, jargon and specialized terms from the world of mergers and acquisitions.
- Angel Investor
- Deal Structure
- Due Diligence
- Earn Out
- Horizontal vs. Vertical Acquisition
- LOI (Letter of Intent)
- Mergers vs. Acquisitions
- Non-Compete Agreement
- Non-Disclosure Agreement (NDA)
- PE Firm
- Price-to-Earnings Ratio (P/E Ratio)
- Sales Multiple
- SDE (Seller’s Discretionary Earnings)
- Strategic Buyer
A type of acquisition in which the buyer takes on the seller’s employees. In other words, Company A brings in-house the people of Company B. Company A may or may not also bring in-house the product that Company B was building, depending on their needs and budget.
Acquihires are often used as a form of talent acquisition, and sometimes serve as a way for VC-backed startups that can’t raise more money to avoid shutting down. Here’s more on acquihires.
An individual who provides financial support, typically in the early stages of a startup or entrepreneurial venture, in exchange for equity or ownership in the company. Angel investors are often experienced entrepreneurs who offer capital, guidance, mentorship, and industry connections to help the startup succeed.
The payment or compensation the acquiring company provides to the target company’s owners or shareholders as part of the transaction. It can be in cash, stock, or a combination of both, representing the value attributed to the target company. Consideration is a crucial aspect of the deal structure and determines the financial terms and ownership distribution in the merged or acquired entity.
You can structure an M&A deal in various ways, including the type of purchase (stock purchase, asset purchase, or merger) and the consideration paid (cash, stock, debt, etc.).
This is a phase of your sale when the buyer looks closely at your business, including all your financials and processes, to determine whether they want to proceed with the sale at the price you agreed upon.
When you arrive at due diligence, you will have already signed an LOI and agreed on sale terms. The goal during due diligence is to show the buyer that your business operates as you promised.
Here’s our post on what to expect during due diligence. Many founders say the hardest part of the sale process is balancing due diligence with running the business, so we have a post with tips for that, too.
A provision in your sale contract that ties part of your sale payout to your business’s future performance, typically achieving certain financial targets. Including an earn out as part of your deal helps reduce the risk for the buyer.
But from the seller’s perspective, you want to decrease the percentage of your sale tied to an earn out, because unlike cash paid at closing, it’s not guaranteed. Here are some tips for negotiating an earn out.
Stands for earnings before interest, taxes, depreciation and amortization. EBITDA is a financial metric that’s often used to value a business; a seller might be willing to pay a multiple of EBITDA, for example.
Many founders don’t calculate this correctly on their own, so you’ll probably want to lean on your accountant or CFO. Here’s our full post on understanding EBITDA.
Horizontal vs. vertical acquisition
A horizontal acquisition is when a company acquires another company operating in the same industry or market, aiming to expand its market share or gain access to new products or customers.
On the other hand, a vertical acquisition is the purchase of a company involved in a different stage of the supply chain or distribution channel, allowing the acquiring company to control its supply chain, increase operational efficiency, or access new markets or distribution channels.
LOI (Letter of Intent)
Stands for Letter of Intent, or an intent to purchase your business. This is an agreement you and the buyer both sign that says you’re looking to move forward with an acquisition. The document typically outlines the sale price, terms of the deal, what’s included, a transition plan, and more.
Signing an LOI starts the purchase process and enables the buyer to learn all they can about your business through due diligence. Then they’ll make a final decision on whether to buy it.
Some sellers are surprised to learn that most of the negotiation happens before you sign an LOI, and any terms you outline there can be difficult to change later. That’s why you should have a lawyer review this document, and if you’re going to engage an advisor, do so before you sign. Here’s more about the Letter of Intent.
Stands for Mergers & Acquisitions. You might hear this in conversations as “I’m an M&A advisor,” which means they advise on the buying and selling of businesses.
If you’re pitching a big company on buying your business, they might have a person who leads up their M&A department.
Mergers vs. acquisitions
The main difference between a merger and an acquisition lies in the nature of the combination. A merger involves a voluntary collaboration between two or more companies to form a new entity, while an acquisition involves one company buying another, resulting in the acquiring company gaining control over the acquired company’s operations and assets.
Sometimes called a “non-compete,” this is a contractual agreement between an employer and an employee or between two parties involved in a business transaction. It prohibits one party from engaging in or starting a similar business, working for a competitor, or sharing proprietary information for a specified period of time and within a defined geographic area.
A non-compete agreement aims to protect a company’s trade secrets, intellectual property, customer relationships, and competitive advantage by limiting the activities of individuals or entities after the termination of a business relationship or employment. Non-competes are commonly included in acquisitions, which prevents the seller from immediately starting another business that might compete with the sold entity.
Pay close attention to the language in this agreement, as it might prevent the seller from pursuing certain activities post-sale. This is always negotiable.
Non-Disclosure Agreement (NDA)
A legally binding contract between two or more parties that establishes confidentiality obligations. It is commonly used to protect sensitive information, trade secrets, or proprietary knowledge shared between the parties involved.
An NDA outlines the obligations and restrictions on the disclosure, use, and protection of confidential information, prohibiting the recipient from sharing or disclosing it to third parties without proper authorization. The purpose of an NDA is to maintain the confidentiality of information and prevent unauthorized disclosure, ensuring that the parties involved can freely exchange sensitive information while safeguarding their proprietary interests.
Stands for Private Equity firm. These are investment firms that buy businesses, usually with the goal of running them for a while, increasing the business value, and selling the business.
Some focus on specific types of companies; for example, many PE firms focus on buying and selling SaaS businesses. This is one type of buyer that might be interested in your business.
Price-to-Earnings Ratio (P/E Ratio)
A financial metric that compares a company’s stock price to its earnings per share. It reflects market expectations and investor sentiment regarding the company’s future profitability and growth potential.
A sales multiple, also known as a revenue multiple, is a financial metric used to evaluate the value of a company based on its sales or revenue. You calculate it by dividing a company’s enterprise value (EV) or market capitalization by its total sales or revenue over a specific period.
The sales multiple measures how much investors will pay for each dollar of a company’s sales, and it’s often used in financial analysis.
A higher sales multiple indicates investors value the company’s revenue more highly, potentially reflecting strong growth prospects or market optimism. Conversely, a lower sales multiple suggests a lower valuation relative to sales, which may indicate undervaluation or subdued growth expectations. Multiples also relate heavily to the type of business; for example, a SaaS business, which brings recurring revenue, typically brings a higher sales multiple, while agencies, which tend to have lower profit margins than some other types of businesses, usually have lower sales multiples.
Multiples aren’t always based on revenue; in some cases, they’re based on SDE (seller’s discretionary earnings) or net income.
SDE (Seller’s Discretionary Earnings)
Stands for Seller’s Discretionary Earnings. SDE is a financial metric used to estimate the cash flow generated by a business that an owner can reasonably expect to receive. In other words, it’s the total amount of money a business owner makes from their company in a year.
This metric is important for selling your business because it’s often used in the valuation process; a buyer might be willing to pay a multiple of SDE, for example.
Most founders don’t know how to calculate this independently, so don’t worry if you don’t. An advisor will help you do it.
Strategic buyers are the gold standard because they are the type of buyer that tends to pay the most for a business. While a financial buyer uses capital and business savvy to grow a company to resell it at a higher value, a strategic buyer focuses on acquisition to create synergies with their existing business as a long-term play.
Here’s our explainer on strategic buyers.