Adjusted EBITDA (AEBITDA)

Adjusted EBITDA is a normalized version of EBITDA that excludes non-recurring, unusual, or discretionary expenses such as personal expenses, litigation settlements, or one-time costs. This adjusted figure provides a clearer view of the company’s sustainable earnings and is often used in valuation. Adjustments should be applied consistently across reporting periods to avoid misleading comparisons and ensure accuracy.

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Asset Sale​

In an asset sale, the buyer purchases specific assets of a company, such as equipment, inventory, intellectual property, and contracts, but typically excludes liabilities, cash, and accounts receivable. The seller retains ownership of the legal entity. Asset sales are often used by buyers to limit their exposure to past liabilities, such as litigation or environmental issues. Tax treatment for asset sales differs from stock sales, as the buyer can often "step up" the tax basis of the acquired assets, providing future tax benefits.

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Asset Sale vs. Stock Sale

In an asset sale, the buyer purchases specific assets of a company, usually excluding liabilities, cash, and accounts receivable. The seller retains ownership of the legal entity. Asset sales are often preferred by buyers because they limit exposure to the company's past liabilities. In a stock sale, the buyer acquires the entire legal entity, including all its assets and liabilities. This type of sale can be advantageous for the seller, as the company’s entire structure—including contracts, tax attributes, and liabilities—transfers to the buyer. However, stock sales may expose buyers to hidden liabilities, which makes due diligence crucial. Both asset and stock sales are governed by contract law and can be subject to tax implications, with the buyer and seller negotiating which approach is more beneficial for the transaction.

 

Asset Valuation vs. Cash Flow Valuation

Asset valuation focuses on valuing a company's tangible and intangible assets, such as equipment, property, or intellectual property, and is often used when a business is distressed or heavily reliant on physical assets. Cash flow valuation, by contrast, assesses the future earning potential of the company by discounting its projected cash flows to present value. In M&A, cash flow valuation is typically preferred for profitable businesses with strong revenue streams, while asset valuation is used for asset-heavy or distressed companies.

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Break-Up Fee

A break-up fee is a penalty paid by one party (buyer or seller) to the other if they withdraw from a transaction after signing a Letter of Intent (LOI) or definitive agreement. Typically, this fee compensates the aggrieved party for the time, resources, and opportunity costs expended during the due diligence process. These fees can range from 1% to 3% of the total deal value in Mergers and Acquisitions (M&A). Break-up fees are often subject to negotiation and can be influenced by antitrust law if the withdrawal is based on regulatory challenges.

 

Buyer (Financial)

A financial buyer refers to an equity sponsor, such as a private equity firm, hedge fund, or institutional investor, that acquires companies primarily for investment purposes. These buyers typically seek to enhance the company’s value through operational improvements, financial restructuring, or strategic add-ons, with the goal of reselling the company for a profit. Financial buyers often utilize leveraged buyouts (LBOs), where a significant portion of the acquisition is funded through debt. The Securities Exchange Commission (SEC) regulates such transactions when public companies are involved.

 

Buyer (Strategic)

A strategic buyer is an operating company—often in the same or a related industry—that acquires another company to achieve synergies, expand market share, diversify offerings, or achieve economies of scale. These buyers are generally looking to integrate the acquired business into their operations and may value long-term strategic benefits over short-term profits. Antitrust regulations, such as those enforced by the Federal Trade Commission (FTC), can come into play in strategic acquisitions if the purchase would create significant market concentration.

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Change of Control

A change of control provision is a clause in contracts, particularly employment or debt agreements, that triggers certain actions or obligations when ownership of a company changes hands, such as in an M&A transaction. For employees, this may result in severance payments or accelerated vesting of stock options. For debt agreements, a change of control may require the repayment of loans or provide lenders with the right to renegotiate terms. Change of control provisions protect parties who could be adversely affected by the new ownership and ensure they have an opportunity to renegotiate their position.

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Clawback​

A clawback is a provision in M&A transactions allowing the buyer to reclaim part of the purchase price or compensation previously paid to the seller if certain conditions are not met post-closing. Clawbacks are commonly used in earn-out agreements, where the seller's future compensation depends on the company's post-sale performance. For example, if the business fails to achieve specified revenue or profit targets, the buyer may invoke the clawback to recoup funds from the seller. This provision ensures that the seller remains accountable for the business's success after the transaction.

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Closing Conditions

Closing conditions are specific requirements or actions that must be fulfilled before the final transfer of ownership in an M&A transaction can occur. These conditions typically include regulatory approvals, such as Hart-Scott-Rodino Antitrust filings in the U.S., the completion of due diligence, the securing of financing, and the resolution of any outstanding legal or financial issues. Closing conditions are critical in protecting both parties by ensuring that all necessary steps are completed before the deal is finalized. If these conditions are not met, the deal may be delayed or terminated.

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Confidentiality Agreement (Non-Disclosure Agreement, NDA)

A confidentiality agreement, also known as a Non-Disclosure Agreement (NDA), is a binding legal contract that prevents the parties involved from disclosing proprietary or sensitive information shared during the course of negotiations or due diligence. Breaching an NDA can result in legal penalties, including injunctions or damages, and can be enforced under various trade secret laws, such as the Defend Trade Secrets Act (DTSA) in the U.S.

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Confidential Information Memorandum (CIM)

A Confidential Information Memorandum (CIM) is a detailed document provided to potential buyers under a Non-Disclosure Agreement (NDA) that outlines key information about a business for sale. It includes financial data, market position, growth opportunities, and operational details. The CIM is a critical component of the early stages of the M&A process, enabling buyers to conduct preliminary due diligence. Misrepresentation or omissions in a CIM can lead to legal disputes if the buyer later discovers discrepancies.

 

Contingent Consideration

Contingent consideration refers to the portion of the purchase price in an M&A transaction that is payable if certain future conditions are met, often related to the company’s performance. This is common in earn-outs, where part of the seller's compensation is contingent on achieving financial targets such as revenue or EBITDA growth. Contingent consideration aligns the interests of the seller and buyer by incentivizing the seller to help the company succeed post-sale. The terms of contingent payments are typically outlined in the Definitive Purchase Agreement (DPA).

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Convertible Debt

Convertible debt is a type of financing in which a loan or bond can be converted into equity at a future date, typically at the discretion of the lender or bondholder. In M&A, convertible debt can be used to structure deals where the buyer or investor provides debt financing with the option to convert the debt into ownership shares if the company meets specific milestones. Convertible debt is advantageous because it allows the investor to participate in the company’s upside potential while minimizing initial risk. The terms of conversion, including conversion rates and trigger events, are outlined in the debt agreement.

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Covenants

Covenants are legally binding promises within a contract. In M&A transactions, common covenants include non-compete agreements, where the seller agrees not to start or join a competing business within a specified period and geographical area. Other types of covenants include assurances of maintaining operational status or refraining from actions that could materially alter the value of the business. These are often enforced under contract law and can include remedies like specific performance or damages.

 

Days Sales Outstanding (DSO)​

Days Sales Outstanding (DSO) is a key financial metric that measures the average number of days it takes a company to collect payment after a sale. A higher DSO may indicate issues with credit policies or customer payment habits, while a lower DSO indicates efficient cash collection. DSO is calculated using the formula:

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DSO = (Accounts Receivable / Total Credit Sales) × Number of Days

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This formula can be explained as follows:

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1. Accounts Receivable represents the total amount owed to the company by its customers.

2. Total Credit Sales is the total amount of sales made on credit during the period.

3. Number of Days is typically 365 for annual calculations, or the number of days in the period being measured.

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The result gives you the average number of days it takes to collect payment on credit sales.

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Debt-Free, Cash-Free (DFCF) Basis

In a Debt-Free, Cash-Free transaction, the buyer acquires the business without assuming any existing debt or gaining any excess cash held by the company at the time of closing. Instead, the seller retains these amounts. This type of deal is common in M&A transactions, as it provides the buyer a clearer view of the business's operational performance without the added burden of past financial obligations. Post-closing adjustments may be made to ensure that any unexpected debt or cash is appropriately accounted for.

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Definitive Purchase Agreement (DPA)/Asset Purchase Agreement (APA)

The Definitive Purchase Agreement (DPA), also known as an Asset Purchase Agreement (APA) in asset-based deals, is the final, legally binding contract that formalizes the terms and conditions of the sale. The agreement typically includes representations and warranties, closing conditions, indemnification clauses, and other provisions critical to the transaction. This document is drafted by a transactional attorney and is governed by relevant corporate and contract law.

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Divest, Divestiture

Divestiture refers to the process of selling off a company’s assets, subsidiaries, or divisions. This can be done as part of a strategic refocus or to comply with regulatory rulings, such as antitrust laws under the Sherman Act. The goal is often to raise capital or streamline operations. Divestitures can occur through outright asset sales or spin-offs, where a company distributes shares of a subsidiary to its shareholders.

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Drag-Along Rights

Drag-along rights are contractual provisions that allow majority shareholders to force minority shareholders to join in the sale of the company. If the majority shareholders agree to sell the company, they can "drag" the minority shareholders along, requiring them to sell their shares on the same terms. Drag-along rights are common in private company shareholder agreements and are intended to facilitate smoother sales processes by preventing minority shareholders from blocking a deal. These rights ensure that a buyer can acquire the entire company without facing holdout issues from minority shareholders.

 

Due Diligence (Financial, Legal, and Operational)

Due diligence refers to the comprehensive review and analysis of a company’s financial, legal, and operational records before completing an M&A transaction. Financial due diligence examines the company's revenue, profits, debts, and financial statements to assess its value and financial health. Legal due diligence reviews contracts, compliance with regulations, litigation risks, and intellectual property. Operational due diligence evaluates the company’s management, supply chain, customer base, and other aspects of its day-to-day functions. The goal of due diligence is to identify risks, validate assumptions, and ensure that the buyer is fully informed before closing the deal.
 

Earn-Out

An earn-out is a financial mechanism where part of the sale price is contingent on the company’s future performance, often tied to revenue, profits, or other specific goals. The seller stays on in an operational role to help achieve these performance metrics. Earn-outs align the seller's incentives with the success of the business post-acquisition but can be legally complex, requiring clear definitions and enforceable benchmarks.​

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Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

EBITDA is a widely used financial metric that measures a company’s operational profitability before accounting for interest, taxes, depreciation, and amortization. It provides a clearer picture of a company's core operational performance by excluding non-operational costs. EBITDA is often used as a baseline for valuation in M&A transactions, typically applying a market-based multiple to derive enterprise value.

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Earnest Money Deposit

An earnest money deposit is an initial payment made by the buyer to demonstrate their seriousness and commitment to the M&A transaction. It is usually a percentage of the total purchase price and is held in escrow. If the deal progresses successfully, the earnest money is applied toward the purchase price. However, if the buyer withdraws without just cause, the seller may retain the deposit as compensation for the time and resources expended. Conversely, if the deal fails due to the seller's actions or unmet conditions, the deposit is returned to the buyer.

 

Enterprise Value (EV)

Enterprise Value (EV) is the total value of a company, calculated as market capitalization plus debt, minority interest, and preferred shares, minus cash and cash equivalents. It reflects the entire value of a company, including its liabilities, and is used to compare companies with different capital structures in M&A deals. EV is often considered a better metric than market capitalization for acquisition purposes, as it includes debt obligations that a buyer would assume.​

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Escrow Agreement

An escrow agreement is a legal document in M&A transactions that establishes a third-party escrow agent to hold funds or assets until all closing conditions or post-closing obligations are fulfilled. Typically, a portion of the purchase price is placed in escrow to cover any indemnification claims, post-closing adjustments, or other contingencies that may arise after the deal closes. The escrow agent ensures that the funds are released according to the terms specified in the agreement. Escrow agreements protect both parties by ensuring that payments or assets are held securely until all agreed-upon conditions are met.

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Escrow Holdback

An Escrow Holdback is a portion of the purchase price held in escrow after closing to cover potential post-closing obligations or contingencies, such as indemnification claims, working capital adjustments, or other liabilities that may arise after the transaction is finalized. This provides protection for the buyer, ensuring that if any of the seller’s representations or warranties are breached, funds are readily available for compensation. Once all conditions are satisfied, any remaining funds are released to the seller.

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Equity Rollover

An Equity Rollover occurs when a seller retains a minority ownership stake in the business after the sale, typically by reinvesting part of their proceeds from the transaction into the acquiring entity. This allows the seller to benefit from the future upside of the business while providing the buyer with a smoother transition due to the seller’s ongoing involvement. Equity rollovers are common in private equity acquisitions where the buyer seeks to incentivize the seller to help drive the business’s post-sale success.

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Fair Market Value (FMV)

Fair Market Value (FMV) refers to the price at which a willing buyer and willing seller would agree to exchange an asset, with both parties having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell. In M&A transactions, FMV is used to assess the value of the target company or its assets. FMV can be determined using various methods, including comparable company analysis, precedent transaction analysis, and discounted cash flow (DCF) analysis. Valuations that do not reflect FMV may be challenged by tax authorities or result in shareholder disputes.

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Fairness Opinion

A fairness opinion is an independent expert analysis provided by a financial advisor or investment bank, confirming whether the terms of an M&A transaction are fair to shareholders from a financial perspective. Fairness opinions are often used by boards of directors in public company transactions to demonstrate that they fulfilled their fiduciary duty to act in the best interests of shareholders. This opinion serves as protection against shareholder lawsuits alleging that the sale price was too low or that the deal was not in the shareholders’ best interests.

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Financing Contingencies

A financing contingency is a clause in the purchase agreement that allows the buyer to exit the deal if they cannot secure adequate financing. This contingency is common in lower-middle-market transactions where buyers may depend on third-party lenders, such as banks or the Small Business Administration (SBA), to finance the purchase. If the buyer fails to obtain financing within the specified timeframe, the deal can be canceled, and the buyer typically forfeits their deposit unless other arrangements have been made.

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General & Administrative (G&A) Expenses

General & Administrative (G&A) expenses refer to the overhead costs associated with running a business, excluding the direct costs of producing goods or services. These expenses include salaries of administrative personnel, office rent, and utilities, and are included in operating expenses, which are deducted from gross profit to calculate operating income.​

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Golden Parachute

A golden parachute is a large severance package granted to top executives in the event that they are terminated or demoted following a change in control, such as a merger or acquisition. Golden parachutes provide financial security for executives but are also designed to incentivize management to act in the shareholders' best interest during a potential takeover. The terms of golden parachutes are typically detailed in employment contracts and are governed by executive compensation laws and Internal Revenue Code (IRC) Section 280G, which limits the deductibility of excessive golden parachute payments.

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Greenmail

Greenmail is a tactic used by a company to buy back its own shares at a premium from a potential acquirer to prevent a hostile takeover. The term "greenmail" combines "green" (money) and "blackmail," as it refers to the acquirer threatening a takeover to drive up the value of their shares, which the target company then buys at a higher price to avoid the takeover. While legal, greenmail is controversial and is often seen as a short-term defense mechanism. Companies engaging in greenmail may face shareholder backlash, and corporate governance rules often discourage the practice.

 

Gross Profit

Gross profit is the financial result derived from subtracting the cost of goods sold (COGS) from total revenue. It represents the profit a company generates from its core operations before accounting for overhead, interest, taxes, and other non-operational expenses.

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Gross Profit Margin​

Gross profit margin is a profitability metric that represents the percentage of revenue remaining after deducting the cost of goods sold (COGS). It is calculated as: Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue * 100%
 

A higher gross profit margin indicates that a company is retaining more revenue from its core operations to cover operating expenses. It is a key indicator of operational efficiency and is frequently analyzed during M&A due diligence.​​

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Hart-Scott-Rodino (HSR) Act

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) is a U.S. federal law that requires companies engaging in large M&A transactions to file pre-merger notifications with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) for antitrust review. The HSR Act applies to transactions that exceed certain financial thresholds, and the review process is intended to prevent anti-competitive mergers that could harm consumers or markets. Parties must wait for a designated period (usually 30 days) after filing before they can close the transaction, during which the regulatory agencies assess whether the merger poses antitrust concerns.

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Holdback

A holdback is a portion of the purchase price that is retained by the buyer after the closing of an M&A transaction, typically placed in escrow. The holdback is used to cover any post-closing obligations, such as indemnification claims or adjustments based on working capital. Once the conditions for the holdback are satisfied, the funds are released to the seller. Holdbacks are common in transactions where some potential uncertainties or risks may arise after closing, and they provide the buyer with protection against unforeseen liabilities.

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Hostile Takeover

A hostile takeover occurs when an acquirer attempts to gain control of a target company without the approval of the company’s board of directors. This is often achieved through a tender offer or by accumulating shares on the open market to gain a controlling stake. Hostile takeovers can lead to significant legal battles, and target companies often employ defense strategies, such as poison pills or white knight defenses, to thwart the acquirer. Hostile takeovers are governed by corporate law and securities regulations, including SEC Rule 14e-2, which requires the target company to respond to a tender offer. In the lower-middle market, this does not apply. However, a study of these events helps inform strategy in the private sector. 

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Indemnification​

Indemnification is a contractual obligation in which one party agrees to compensate the other for certain damages or losses, often arising from breaches of representations and warranties. In M&A, indemnification provisions protect the buyer from undisclosed liabilities, tax obligations, or legal disputes that may arise after the deal closes. Indemnification clauses can specify monetary caps, time limits (known as survival periods), and deductibles (or baskets) before claims can be made. Indemnification is usually a key negotiation point in Definitive Purchase Agreements (DPAs) and can be mitigated with Representations and Warranties Insurance (RWI).

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Indemnity Basket

An indemnity basket is a provision in an M&A agreement that establishes a minimum threshold for claims before the buyer can seek indemnification from the seller. There are two main types of baskets:

1. Deductible Basket: The seller is only liable for indemnification claims that exceed the basket threshold, and only for the amount over the threshold.

2. Tipping Basket: Once the total claims exceed the basket amount, the seller is liable for the entire claim amount, not just the portion that exceeds the threshold. Indemnity baskets are designed to prevent the seller from being burdened with minor claims and help facilitate smoother transactions by setting clear expectations around liability.

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Indemnity Cap

An indemnity cap is a provision in an M&A contract that limits the amount of financial liability one party (usually the seller) can be required to pay in the event of a breach of representations and warranties or other contractual obligations. The indemnity cap protects the seller from unlimited liability by setting a maximum threshold for claims, typically expressed as a percentage of the purchase price. Indemnity caps are heavily negotiated and are designed to balance the buyer’s need for protection with the seller’s desire to limit risk. These provisions are often paired with indemnity baskets, which set a minimum claim threshold before indemnification obligations apply.

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Indemnity Holdback

An Indemnity Holdback is a portion of the purchase price withheld at closing, typically placed in escrow, to cover any future claims related to the seller's representations and warranties in the sale agreement. This holdback protects the buyer by ensuring funds are available to cover unforeseen liabilities, such as undisclosed debts or legal issues that arise post-closing. The funds are usually released after a predetermined period if no claims are made.

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Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the process by which a private company offers shares to the public for the first time, transitioning into a publicly traded entity. Companies typically go public to raise capital, increase liquidity for shareholders, or gain visibility in the marketplace. The IPO process is heavily regulated by the Securities and Exchange Commission (SEC), and companies must file a Registration Statement (Form S-1) that includes detailed financial information and disclosures to potential investors. The IPO process includes underwriting by investment banks, roadshows to market the shares, and ongoing regulatory compliance post-offering.

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Key Man Clause

A key man clause is a provision in an M&A agreement that allows the buyer to terminate or renegotiate the deal if certain key individuals (e.g., founders, executives) leave the company before the transaction is completed. The clause is designed to protect the buyer from losing critical talent or leadership that is essential to the ongoing success of the business. Key man clauses can trigger a requirement for the seller to find a replacement or provide additional compensation to the buyer. They are often used when the business's value is closely tied to the skills and relationships of specific individuals.

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Key Person Insurance

Key Person Insurance is a life insurance policy taken out by a business on the life of a key employee or owner whose death would significantly impact the business. In M&A, key person insurance is often used to protect the buyer in the event that a critical member of the management team or owner passes away before or shortly after the transaction. The policy ensures that the company receives financial compensation to cover the costs of finding and training a replacement.

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Letter of Intent (LOI)

A Letter of Intent (LOI) is a non-binding document that outlines the key terms and conditions of a proposed M&A transaction. The LOI serves as a framework for negotiations and typically includes provisions such as the proposed purchase price, payment structure, exclusivity (no-shop clauses), confidentiality, and timelines for due diligence and closing. While most LOIs are non-binding, certain provisions, such as confidentiality and exclusivity, may be enforceable. The LOI is often the first step in formalizing a deal before the drafting of a Definitive Purchase Agreement (DPA). 

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Leverage Buyout (LBO)

A Leveraged Buyout (LBO) is a financial transaction in which a company is acquired primarily with borrowed funds, using the company’s assets and future cash flows as collateral for the debt. LBOs are typically executed by private equity firms, which seek to improve the acquired company’s performance and sell it at a profit. The use of leverage allows the buyer to control a large company with a relatively small amount of equity, but it also increases the company’s financial risk. Debt covenants are typically included in the financing agreements to limit the borrower’s risk-taking activities.

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Leveraged Recapitalization

A leveraged recapitalization is a form of recapitalization where a company takes on additional debt to fund large dividend payments to shareholders or to repurchase shares. This strategy is often used in private equity transactions to return capital to investors while retaining ownership of the company. Leveraged recapitalizations increase the company’s debt burden, but they can provide liquidity for shareholders without selling the company outright. This strategy is governed by debt covenants and may be subject to credit agreement restrictions.

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Management Buyout (MBO)

A Management Buyout (MBO) is a type of acquisition where a company’s management team purchases the business from the current owners. This is typically financed with a combination of management’s own funds, external debt, and sometimes equity from a private equity firm. MBOs are common in lower middle-market businesses, especially when the existing management team is familiar with the business and sees long-term growth potential. MBOs often align management incentives with business performance post-transaction.

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Lock-Up Agreement

A lock-up agreement is a contractual provision that prevents certain shareholders, typically company insiders or key executives, from selling their shares for a specific period following an IPO or M&A transaction. Lock-up agreements are designed to prevent a large influx of shares into the market immediately after the transaction, which could depress the stock price. These agreements are common in both public offerings and mergers, ensuring market stability during the transition. Lock-up periods typically range from 90 to 180 days and are governed by securities regulations.​

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Material Adverse Change (MAC) Clause​

A Material Adverse Change (MAC) clause is a provision in the purchase agreement that allows the buyer to back out of a deal if significant negative changes occur in the seller’s business or industry between signing the agreement and closing. Examples of material adverse changes include major financial losses, regulatory changes, or lawsuits that could impair the company's value or operations. The MAC clause protects the buyer from unexpected risks that could materially impact the deal, and the scope of what qualifies as a material adverse change is often heavily negotiated.

 

Material Adverse Effect (MAE)

A Material Adverse Effect (MAE) is a legal term used in M&A agreements to refer to any significant negative change in the business, financial condition, or operations of a company that would substantially affect its value or the ability to complete the transaction. MAE clauses give buyers the right to walk away from the deal or renegotiate terms if an unexpected and detrimental event occurs before closing. Examples of MAEs include financial downturns, legal judgments, or major customer losses. These clauses are heavily negotiated, with sellers seeking to narrow the scope of what constitutes an MAE to minimize risk.

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Mergers and Acquisitions (M&A)

Mergers and Acquisitions (M&A) refers to the process of buying, selling, combining, or consolidating companies. This area of corporate finance involves complex legal and financial considerations, including compliance with securities laws, antitrust regulations, and labor laws.

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Mezzanine Financing

Mezzanine financing is a hybrid form of debt and equity financing that is often used in M&A transactions, especially in leveraged buyouts (LBOs). It is subordinate to senior debt but provides lenders with the option to convert the debt into equity in the event of default. Mezzanine financing typically carries higher interest rates due to its subordinate position but allows companies to access capital without diluting ownership significantly. Mezzanine financing can be governed by the terms of credit agreements and is commonly used to bridge the gap between senior debt and equity in a transaction.

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Multiple of Earnings/Revenue

A multiple of earnings or revenue is a valuation approach commonly used in M&A to determine the purchase price of a business based on a multiplier applied to a financial metric such as EBITDA, SDE, or revenue. Multiples are derived from comparable transactions, industry norms, and market conditions. This method is particularly useful in lower-middle-market transactions, where businesses are valued based on factors such as profitability, growth potential, and market position. The multiples applied vary by industry and business size, with high-growth sectors commanding higher multiples.

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Net Working Capital (NWC)

Net Working Capital (NWC) is the difference between a company’s current assets (such as cash, inventory, and accounts receivable) and its current liabilities (such as accounts payable and accrued expenses). NWC is a key measure of a company’s short-term financial health and liquidity. In M&A transactions, the buyer often requires that a certain level of NWC be maintained at closing, and adjustments are made if the actual NWC falls short of the agreed target. NWC adjustments are typically finalized post-closing, once the actual working capital levels are determined.

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Non-Compete Agreement

A non-compete agreement is a contractual clause in which the seller agrees not to compete with the buyer's business for a specified period of time and within a defined geographic area post-sale. These agreements prevent the seller from starting or joining a competing business that could undermine the value of the acquisition. Non-compete agreements are enforceable under state law, though their scope and duration must be reasonable to be upheld in court. Many jurisdictions limit the enforceability of overly broad non-compete clauses due to concerns over restricting trade.​

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Non-Disclosure Agreement (NDA)

A Non-Disclosure Agreement (NDA) is a legally binding contract between parties that prohibits the sharing of confidential or proprietary information with outside parties. In M&A, NDAs are used during the due diligence process to protect sensitive business information from being disclosed to potential buyers, competitors, or third parties. Breaching an NDA can result in legal action and financial damages. NDAs are governed by contract law and may include specific provisions such as non-use clauses, ensuring that the information is used only for the intended purpose of evaluating the transaction.

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Non-Solicitation Clause

A Non-Solicitation Clause is a provision in the purchase agreement that prevents the seller from soliciting the company’s employees, clients, or suppliers for a specified period after the sale. This clause is designed to protect the buyer from losing valuable business relationships or personnel to the seller after the transaction. Non-solicitation clauses are often used in tandem with non-compete agreements.

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Non-Recurring Operating Expenses

Non-recurring operating expenses are one-time, unusual expenses that do not reflect the company's ongoing operational costs. These may include restructuring charges, litigation settlements, or extraordinary losses. In M&A, these expenses are often "added back" to EBITDA to normalize financial performance.

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No-Shop Clause​

A no-shop clause is a provision in a Letter of Intent (LOI) or purchase agreement that prevents the seller from seeking or negotiating offers with other potential buyers for a specified period. The no-shop clause gives the buyer exclusive negotiation rights and prevents the seller from "shopping" the business to others, ensuring that the buyer has a fair chance to complete due diligence and finalize the transaction. Violating a no-shop clause can result in penalties, including a break-up fee. No-shop clauses are common in competitive M&A transactions to lock in exclusivity.

 

Non-Solicitation Agreement

A non-solicitation agreement is a contractual clause that prevents the seller from soliciting the buyer’s employees, customers, or suppliers post-sale. This protects the buyer’s business relationships and workforce stability after the acquisition. Non-solicitation agreements are often paired with non-compete agreements and must comply with employment law to ensure enforceability. Violations of a non-solicitation agreement can lead to legal remedies, including damages or injunctive relief.

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Piggyback Registration Rights

Piggyback registration rights allow shareholders, typically minority investors, to include their shares in a public offering initiated by the company or majority shareholders. These rights ensure that minority shareholders can benefit from liquidity in the event of an IPO or secondary offering. Piggyback rights are included in shareholder agreements and are governed by securities laws, requiring the company to file a registration statement with the SEC. While piggyback rights provide liquidity opportunities, they are often subject to limitations, such as a cap on the number of shares that can be included in the offering.

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Poison Pill

A poison pill is a defense mechanism used by a target company to prevent or discourage a hostile takeover. One common form of a poison pill is a shareholder rights plan, which allows existing shareholders to purchase additional shares at a discounted rate if an outside party acquires a certain percentage of the company's stock. This dilutes the acquirer's stake and makes the takeover prohibitively expensive. Poison pills are subject to state corporate law and must be approved by the target company's board of directors. They are designed to give the company more time to evaluate the takeover offer or find a more favorable buyer (a "white knight").

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Post-Closing Adjustments​

Post-closing adjustments are provisions in the purchase agreement that allow for modifications to the purchase price after the deal is closed. Common adjustments include changes based on working capital, debt levels, or accounts receivable. These adjustments ensure that the final price reflects the company's true financial condition at the time of closing. Post-closing adjustments are typically negotiated during the due diligence phase and are documented in the purchase agreement.

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Post-Merger Integration (PMI)

Post-Merger Integration (PMI) refers to the process of combining two companies into one cohesive entity following the completion of an M&A transaction. PMI involves integrating operations, cultures, systems, and personnel to achieve the synergies anticipated from the deal. Effective PMI is crucial for realizing the full value of an acquisition, but it is often the most challenging phase of M&A. Key elements include consolidating financial systems, aligning leadership, merging corporate cultures, and integrating supply chains. PMI strategies are tailored to the specifics of the deal and are often supported by outside consultants.

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Post-Transaction Earn-Out Disputes

Post-Transaction Earn-Out Disputes occur when there are disagreements between the buyer and seller over the calculation or achievement of the performance metrics outlined in an earn-out agreement. These disputes are common in lower middle-market transactions, as earn-outs can be subjective and open to interpretation, particularly when defining metrics like revenue, profit, or growth. Clear documentation, third-party audits, or mediation are often used to resolve these disputes.​​​