Mergers and acquisitions (M&A) can be a complex process, full of industry-specific jargon. If you’re new to the world of M&A, understanding the key terms can be overwhelming. This glossary aims to simplify the complex, providing clear and concise explanations of common M&A key terms. Whether you’re a business owner, investor, or simply curious about the corporate world, this guide will help you navigate the M&A landscape with confidence.
So, let’s dive into those terms!
M&A marketing documents
- What is a teaser in M&A?
A Teaser is a brief introductory document prepared by the M&A advisor used to gauge initial interest from potential buyers. It is typically a 3-4 pages document providing a high-level overview of the target company – generally on a no-name basis –, highlighting key financial and operational metrics.
- What is an Information Memorandum?
An Information Memorandum (also called CIM or Info Memo) is a detailed document sent to selected potential buyers who have expressed preliminary interest in the target. It provides comprehensive information about the company, typically including a market overview and the target’s positioning, a detailed description of the target’s business, clients, organisation, KPIs, as well as the company’s historical financials and business plan. It is generally a fairly long presentation (40-80 pages), prepared by the M&A advisor.
M&A legal documents
- What is an LOI?
A Letter of Intent (LOI) is a non-binding agreement that outlines the basic terms of a potential deal, including purchase price, structure, and timeline. It is often a relatively short document of a few pages, used to initiate discussions and express mutual interest.
- What is an SPA ?
The SPA (Share Purchase Agreement) is the legal contract used to purchase the shares of a target company. It outlines the terms of the deal, including the purchase price, payment terms, representations and warranties of the seller, and conditions to complete the transaction.
- What is an APA ?
In certain cases, the purchaser and the seller may agree to transfer selected assets or liabilities of the company, without transferring the ownership of the shares. The APA (Asset Purchase Agreement) is the legal contract used to purchase the selected assets and liabilities of a target company. The critical aspect of the APA is the description of the assets and liabilities which are transferred to the buyer.
- What is Signing in M&A?
What is called “Signing” in M&A simply refers to the execution of the SPA or APA by the seller and the buyer.
- What are the Conditions Precedent?
Conditions Precedent are a set of specific requirements, listed in the SPA, that must be met before a deal can be closed. These conditions are specific to each deal, and can include regulatory approvals, change of control consent by key third parties (clients, suppliers, banks), financing arrangements, and the satisfaction of certain financial covenants.
- What is Closing or Completion in M&A?
The Closing or Completion date corresponds to the time of transfer of ownership of the shares or assets, in exchange for the payment of the purchase price. It happens once the Conditions Precedent are all met.
- What are Representations and Warranties (Reps & Warranties)?
Reps & Warranties are statements made in the SPA by the seller to the buyer about the target company’s financial health, legal status, tax situation and other key aspects. They provide assurances to the buyer and can be used by the buyer to seek indemnification from the seller if the statements are found to be false. Such indemnifications are however customarily subject to limitations in time and amount (de minimis amount, basket or deductible, cap).
M&A process terms
- What is Due Diligence?
Due Diligence (“DD”) is a comprehensive investigation of the target company. It typically covers areas such as finance, tax, legal, and operational aspects. Some industries also involve specific due diligences such as environmental or IT Security DD. It is a relatively heavy process, which involves a thorough review of the company’s books and records, contracts, intellectual property, and other relevant documents by third party consultants hired by the buyer. The seller may also proactively conduct a DD exercise in order to expedite the process (especially when several potential buyers are involved) ; this is then called a Vendor Due Diligence.
- What is a Dataroom?
A dataroom is a secure third-party online platform generally used during the due diligence process, for the seller to share information and documents with potential buyers.
- What is Quality of earnings?
A company’s valuation is, for a large part, derived from its historical performance. The Quality of earnings (QoE) is an exercise carried out during the due diligence phase, with the objective to identify any non-recurring or non-normative events which impacted the historical performance and may not repeat in the future. This may include a large variety of factors, such as below or above-market compensation of the owners, personal expenses of the owners, loss of a major client, large doubtful account, grant received, rent-free period, discount received from a client for a limited period of time, various one-off expenses, etc. This is a critical aspect of a transaction, which may lead to purchase price revisions if not properly prepared by the seller.
- What is an Earn-Out?
An Earn-Out is the deferral of a portion of the purchase price. The payment of an Earn-Out is generally subject to specific conditions which vary upon each transaction based on the goals of the buyer. It is typically based on financial targets such as revenue or EBITDA, but may also imply non-financial targets to achieve specific goals (eg staff retention, maintaining critical certifications, acquiring new customers, etc.)
- What is a Working Capital Adjustment?
A working capital adjustment is a common adjustment made during M&A deals to account for differences in the working capital level of the target company. It ensures that the buyer receives the agreed-upon value of the target company’s net assets. Working Capital Adjustment, if properly handled, can generate significant value in a transaction.
Interested in a full explanation on working capital adjustments ? Read our complete article: Unlocking Value with Net Debt and Working Capital Adjustments in M&A
- What are Net Debt and Net Cash?
Net Debt and Net Cash are usually included in the purchase price of a company. These include debt-like and cash-like items.
Interested in a full explanation on net cash and net debt? Read our complete article: Unlocking Value with Net Debt and Working Capital Adjustments in M&A
- What is the difference between Equity Value and Enterprise Value?
Equity Value represents the value of a company’s shareholders’ equity, while the Enterprise Value also factors in the net debt or net cash position of the company. Investors may also refer to equity value as the valuation on a “cash free, debt free” basis.
Understanding these key M&A terms is essential for anyone involved in selling or buying a business. By familiarizing yourself with these concepts, you can navigate the complex world of mergers and acquisitions with greater confidence. Do you have any question ? Feel free to Contact us !
