Decoding Abbreviations in the Merger & Acquisition Industry, and Understanding Why They Matter
You’re an expert at your business and in your industry, maybe even the best in the world – but the M&A terminology you find yourself faced with during any part of the process of selling your business can be, admittedly, a bit confounding.
Investment bankers, consultants, and M&A advisors are guilty of using terminology that is familiar to them, but entirely foreign to their privately-held business-owner client.
We thought it would be helpful to decode some common M&A terminology and acronyms – helping to level the playing field as you begin your education in the merger & acquisition process.
We’ll start with the most obvious one (and the one we’ve already used several times!)
M&A Terminology & Business Acronyms
M&A (Merger & Acquisition): The terminology related to the selling and buying of businesses.
EBITDA (Earnings Before Interest Taxes Depreciation and Amortization): A financial metric that is most frequently referenced in valuation because it depicts the cash generation capability of the company, regardless of capital or ownership structure. Valuations are usually expressed as some multiple of EBITDA (e.g. your business is worth 6 x EBITDA).
Enterprise Value: The value of your business regardless of current capital structure.
Equity Value: The Enterprise Value of your business, less any bank debt, plus any cash.
Cash Free, Debt Free: This terminology is customary both for valuing a business and M&A transactions. The buyer or investor will pay a certain price and not acquire any of the company’s cash or assume any of the company’s bank debt (these are the responsibilities of the sellers).
GAAP (Generally Accepted Accounting Principles): A set of accounting standards that are commonly accepted and universal. Buyers or investors will want to make sure your financials are in accordance with GAAP.
Q of E (Quality of Earnings Study): A financial due diligence report that has historically been commissioned by buyers (but more recently by sellers in advance of a transaction) and conducted by an accounting firm to determine if the earnings are sustainable and will translate into cash flows.
TTM (Trailing Twelve Months): A measure of how a business is performing in the most recent twelve-month period. Buyers or investors want to understand a company’s performance on an ongoing basis to ensure the business is on track and growing.
IOI (Indication of Interest): A preliminary, non-binding, written letter to acquire or invest in a business. M&A advisors commonly impose IOIs to sort out a final group of potential buyers or investors to visit with the company. It’s usually a few pages long and describes a range of value and some of the other key considerations of their offer or interest.
LOI (Letter of Intent): A more formal written offer to acquire or invest in a business; however, LOIs are still largely non-binding. The document is usually specific on valuation, structure, and other key terms and conditions of a potential buyer’s interest.
SPA / APA / UPA (Stock / Asset / Unit Purchase Agreements): These are legal documentations that become the agreement between a buyer and seller on the purchase of the business. These documents are drafted and negotiated by each respective parties’ attorneys.
It may seem overwhelming to anyone not engaged in the world of mergers and acquisitions on a regular basis, but with this guide, you now you have the tools to follow along with this kind of conversation:
“Now that the LOI is signed, we need to kick off the Q of E so that the buyer can validate that the TTM EBITDA is in accordance with GAAP and that the Enterprise Value is final in the SPA.”