Decoding the Deal: Your Guide to M&A Lingo and Acronyms

There are four primary types of deal structures in M&A:

Stock Purchase: The buyer acquires all or a controlling interest in the target company's stock. This means the buyer obtains ownership of the entire business, including all assets, liabilities, and obligations.

Asset Purchase: The buyer purchases specific assets or business units of the target company. In this structure, the buyer only acquires the assets necessary to operate the business, such as intellectual property, equipment, and real estate.

Merger: Two or more companies combine to form a new entity. The companies merge their assets, liabilities, and operations to create a new legal entity.

Recapitalization: refers to measures taken by companies to adjust their debt-to-equity (D/E) ratio within their capital structure. It can be used to allow the owners to liquidate

Here are some of the most common M&A acronyms related to deal structure and their meanings:

Holdback: A portion of the purchase price that is withheld by the buyer for a specified period after closing. This serves as security against potential breaches of representations and warranties or other unforeseen issues.

Retention: Often refers to key employee retention, where incentives are put in place to ensure important staff members stay with the company post-acquisition.

Earnout: A contractual provision where the sellers can receive additional compensation in the future if the business achieves certain financial goals post-acquisition. This aligns the interests of both parties and can bridge valuation gaps.

Asset Sale: A transaction where the buyer purchases specific assets of the target company rather than acquiring the entire company through stock purchase. This allows the buyer to cherry-pick desired assets and potentially avoid certain liabilities.

Here are some additional acronyms commonly used:

LOI: Letter of Intent - A more formal written offer to acquire or invest in a business.

IOI: Indication of Interest - A preliminary, non-binding written letter to acquire or invest in a business.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization - A financial metric often used in valuations.

SPA (Share Purchase Agreement): This is the main legal document in a stock purchase transaction. It outlines the terms and conditions of the stock sale, including the purchase price, representations and warranties, and other key provisions.

APA: Asset Purchase Agreement - Legal documentation for the purchase of a business's assets.

DD: Due Diligence - The process of investigating a business before a transaction.

CIM: Confidential Information Memorandum - A document prepared by the selling company to attract potential buyers.

NDA: Non-Disclosure Agreement - Also known as a confidentiality agreement.

EV: Enterprise Value - The value of a business regardless of current capital structure.

TTM: Trailing Twelve Months - A measure of a business's performance in the most recent twelve-month period.

GAAP: Generally Accepted Accounting Principles - A set of commonly accepted accounting standards.

FCF: Free Cash Flow - An important financial metric in valuations.

LBO: Leveraged Buyout - An acquisition using a significant amount of borrowed money.

PMI: Post-Merger Integration - The process of combining two companies after a merger.

LTV/CAC ratio: is a key performance indicator (KPI) used to measure the relationship between the lifetime value (LTV) of a customer and the cost to acquire that customer (CAC).