M&A Glossary

Accretion/Dilution

A financial analysis used to determine whether a proposed acquisition will increase (accrete) or decrease (dilute) the acquirer's earnings per share. The analysis compares the acquirer's standalone EPS with the pro forma combined EPS after accounting for the purchase price, financing costs, and expected synergies. Accretive deals are generally viewed favorably by shareholders and boards, while dilutive deals require a compelling strategic rationale to proceed.

Why it matters: If you're selling to a public company, understanding accretion/dilution helps you anticipate how aggressively they can bid and why they may push back on price.

Related: Enterprise Value · Synergies · EBITDA

Acquisition

The purchase of one company by another. Acquisitions can be structured as asset purchases, stock purchases, or mergers. The acquiring company gains control of the target's operations, assets, and liabilities depending on the deal structure. Acquisitions can be friendly (negotiated with the target's board) or hostile (pursued over the objections of the target's management). The structure chosen has significant implications for tax treatment, liability transfer, and employee contracts.

Related: Asset Purchase · Mergers and Acquisitions (M&A) · Deal Structure

Add-Back

An expense added back to a company's earnings to reflect the true economic profitability of the business. Common add-backs include owner compensation above market rate, one-time expenses, personal expenses run through the business, and non-recurring legal or consulting fees. Add-backs are critical to calculating Seller's Discretionary Earnings (SDE) and Adjusted EBITDA. Buyers and their advisors will scrutinize every add-back during due diligence, so supporting documentation is essential.

Why it matters: Every legitimate add-back you can document directly increases your business's perceived profitability — and therefore its sale price. Missing even one material add-back can cost you tens or hundreds of thousands of dollars.

Related: Adjusted EBITDA · Seller's Discretionary Earnings (SDE) · Quality of Earnings (QoE)

Adjusted EBITDA

EBITDA modified to remove non-recurring, non-operational, or owner-specific expenses. Adjusted EBITDA provides a clearer picture of a business's recurring profitability and is the most common earnings metric used in middle-market M&A valuations. Typical adjustments include above-market owner compensation, one-time legal settlements, and non-cash expenses. The integrity of your adjusted EBITDA calculation is a key factor in buyer confidence and deal certainty.

Why it matters: Adjusted EBITDA is the single most important number in your entire deal. It's the number that gets multiplied to determine your business's enterprise value.

Related: EBITDA · Add-Back · Multiple · Enterprise Value

Asset Purchase

A transaction structure where the buyer acquires specific assets and liabilities of a business rather than the company's stock or membership interests. Asset purchases allow the buyer to pick and choose which assets to acquire and often provide tax advantages through a step-up in basis. They also allow the buyer to avoid inheriting unknown or contingent liabilities. Most small and lower-middle-market transactions are structured as asset purchases.

Why it matters: The choice between asset purchase and stock purchase has major tax implications for you as a seller. Always consult your tax advisor before agreeing to deal structure.

Related: Deal Structure · Acquisition · Purchase Agreement

Blind Profile

An anonymized summary of a business for sale, shared with potential buyers before an NDA is signed. The blind profile describes the business in enough detail to gauge interest without revealing the company's identity. Key elements include industry, geographic region, financial summary, and reason for sale. Also known as a teaser or executive summary. A well-crafted blind profile generates buyer interest while protecting confidentiality.

Related: Teaser · CIM (Confidential Information Memorandum) · NDA (Non-Disclosure Agreement)

Bolt-On Acquisition

A smaller acquisition made by a private equity-backed platform company to add capabilities, customers, geography, or product lines. Bolt-on acquisitions are typically integrated into the existing platform rather than operated independently. They are a core component of buy-and-build strategies and roll-up plays. Bolt-ons are usually acquired at lower multiples than the platform, creating immediate value through multiple arbitrage.

Why it matters: If a PE-backed platform is acquiring your business as a bolt-on, understand that they may pay a lower multiple but can often close faster and with more certainty than an independent buyer.

Related: Platform Acquisition · Private Equity · Roll-Up Strategy · Synergies

Book Value

The net asset value of a company as recorded on its balance sheet — total assets minus total liabilities. Book value rarely reflects the true market value of a business, especially for asset-light or service-based companies where goodwill and intangible assets dominate. In asset-heavy industries like manufacturing or real estate, book value may be more relevant. Book value serves as a floor valuation in some transactions.

Related: Fair Market Value · Goodwill · Enterprise Value · Valuation

Break-Up Fee

A penalty paid by one party to the other if a deal falls through due to specific circumstances outlined in the purchase agreement. Break-up fees compensate the non-breaching party for the time, expense, and opportunity cost of pursuing the transaction. They are more common in larger transactions and public company deals. Typical break-up fees range from 1-3% of the transaction value.

Why it matters: Negotiating a break-up fee payable by the buyer protects you from spending months in exclusivity only to have the deal collapse without compensation.

Related: Exclusivity Period · Purchase Agreement · No-Shop Clause

Bridge Financing

Short-term financing used to bridge the gap between the signing and closing of a transaction or between funding rounds. Bridge loans provide immediate capital while longer-term financing is arranged. They typically carry higher interest rates to compensate for their short duration and higher risk profile. In M&A, bridge financing may be used by buyers when permanent debt financing is not yet in place at closing.

Related: Capital Structure · Leverage · SBA Loan

Broker

An intermediary who facilitates the sale of a business by connecting sellers with qualified buyers. Brokers typically handle valuation, marketing, buyer screening, and negotiation. In M&A, brokers often focus on lower-middle-market transactions below $10M in enterprise value. Brokers earn a success fee — typically 8-12% of the transaction value for smaller deals, declining for larger transactions. The quality of your broker directly impacts the sale price, timeline, and deal certainty.

Why it matters: Choosing the right broker or advisor is one of the most consequential decisions you'll make in the sale process. Interview multiple candidates and check references from completed deals.

Related: Investment Banking · Success Fee · Go-to-Market

Business Valuation

The formal process of determining the economic worth of a business using established methodologies. Common approaches include the income approach (discounted cash flow, capitalization of earnings), the market approach (comparable transactions, comparable company analysis), and the asset approach (net asset value). Certified valuations are typically performed by accredited professionals (ASA, CVA, ABV) and are used for tax planning, estate planning, litigation, and transaction advisory.

Why it matters: Getting a professional valuation before going to market helps you set realistic expectations and identify value-enhancement opportunities before buyers find them.

Related: Valuation · Fair Market Value · Comparable Companies Analysis · Comparable Transactions · Discount Rate

Buy-Side

The party in an M&A transaction that is acquiring the business. Buy-side advisory involves helping buyers identify targets, evaluate opportunities, negotiate terms, and close deals. Private equity firms, search funds, strategic acquirers, and family offices are common buy-side participants. Buy-side advisors are compensated through retainers, success fees, or a combination of both.

Related: Strategic Buyer · Private Equity · Search Fund · Family Office

Capital Structure

The mix of debt and equity used to finance a company or an acquisition. Capital structure decisions affect risk, return, and control. In leveraged buyouts, the capital structure often includes senior debt, mezzanine financing, and equity contributions from the sponsor. The optimal capital structure balances the tax advantages of debt against the financial risk of high leverage. Capital structure directly impacts a buyer's return on investment and therefore their willingness to pay.

Related: Leverage · Leveraged Buyout (LBO) · Bridge Financing · Weighted Average Cost of Capital (WACC)

Carve-Out

The sale or spin-off of a division, product line, or business unit from a larger parent company. Carve-outs require separating the target unit's financials, operations, employees, and technology from the parent. They often involve transition services agreements (TSAs) where the parent continues to provide certain services to the carved-out entity for a defined period. Carve-outs can be complex due to shared services, intercompany transactions, and allocation of overhead.

Why it matters: If you're divesting a business unit, plan for 6-12 months of separation planning before going to market. Buyers will pay more for a cleanly separable unit.

Related: Divestiture · Transition Services Agreement (TSA) · Deal Structure

Change of Control

A provision in contracts, loan agreements, or corporate documents that is triggered when ownership of a company changes hands. Change of control clauses may give counterparties the right to terminate agreements, accelerate debt repayment, or renegotiate terms upon a sale. Key contracts to review include customer agreements, vendor contracts, leases, and employment agreements. Identifying and managing change of control provisions is a critical step in deal preparation.

Why it matters: Review every material contract for change of control provisions before going to market. A customer contract that can be terminated upon sale is a significant risk factor that buyers will identify in due diligence.

Related: Due Diligence · Purchase Agreement · Covenant

CIM (Confidential Information Memorandum)

A detailed document prepared by the sell-side that presents a comprehensive overview of a business for sale. The CIM includes financial statements, operational details, growth opportunities, competitive landscape, and key risks. It is shared only with qualified buyers who have signed an NDA. A well-prepared CIM is typically 30-60 pages and tells a compelling story about the business's history, current performance, and future potential.

Why it matters: The CIM is your business's first impression with serious buyers. Investing in a professional, data-rich CIM pays dividends in buyer engagement and competitive tension.

Related: Blind Profile · NDA (Non-Disclosure Agreement) · Go-to-Market · Data Room

Closing

The final step in an M&A transaction where ownership officially transfers from seller to buyer. At closing, all legal documents are executed, funds are wired, and the deal becomes binding. Post-closing obligations such as escrow releases, earnout milestones, and working capital true-ups may follow. The time between signing the definitive agreement and closing can range from same-day to several months, depending on regulatory approvals and other conditions precedent.

Related: Purchase Agreement · Escrow · Working Capital Adjustment · Earnout

Comparable Companies Analysis

A valuation methodology that estimates a company's value by comparing it to similar publicly traded companies. The analysis identifies a set of peer companies and examines their trading multiples — typically EV/EBITDA, EV/Revenue, and P/E ratios. Adjustments are made for differences in size, growth, profitability, and risk. Also known as "trading comps" or "public comps," this method provides a market-based reference point for valuation.

Related: Comparable Transactions · Valuation · Multiple · Enterprise Value

Comparable Transactions

A valuation methodology that estimates a company's value by examining the prices paid in recent M&A transactions involving similar businesses. The analysis identifies comparable deals and calculates the implied multiples (EV/EBITDA, EV/Revenue) paid by acquirers. Also known as "deal comps" or "precedent transactions." This method captures control premiums and market-specific dynamics that public trading multiples may not reflect.

Related: Comparable Companies Analysis · Valuation · Multiple

Competitive Process

A structured sale process in which multiple potential buyers are invited to submit offers simultaneously. Running a competitive process creates buyer urgency, improves valuation, and gives the seller leverage in negotiations. Also known as an auction or broad process. Competitive processes typically involve a two-round bidding structure: initial indications of interest followed by final bids from a shortlist. The process is managed by the sell-side advisor to maintain momentum and confidentiality.

Why it matters: Businesses sold through competitive processes typically achieve 15-30% higher valuations than negotiated one-on-one deals. The investment in running a proper process almost always pays for itself.

Related: Go-to-Market · IOI (Indication of Interest) · Letter of Intent (LOI) · Broker

Confidentiality Agreement

A legally binding contract that requires parties to keep confidential information private during and after the M&A process. While often used interchangeably with NDA (Non-Disclosure Agreement), confidentiality agreements in M&A contexts may include additional provisions such as non-solicitation of employees, standstill agreements, and restrictions on using the information for competitive purposes. These agreements are signed before any material non-public information is shared with potential buyers.

Related: NDA (Non-Disclosure Agreement) · Blind Profile · CIM (Confidential Information Memorandum)

Covenant

A binding promise or restriction in a loan agreement, purchase agreement, or operating agreement that requires or prohibits certain actions. Affirmative covenants require the borrower to do something (maintain insurance, file financial statements). Negative covenants restrict the borrower from certain actions (taking on additional debt, selling assets, paying dividends above a threshold). Breaching covenants can trigger defaults, acceleration of debt, or other remedies.

Related: Purchase Agreement · Operating Agreement · Leverage

Customer Concentration

A risk factor measuring how dependent a business is on a small number of customers. If a single customer accounts for more than 20-30% of revenue, buyers may discount the valuation or structure protections into the deal. Diversified revenue streams reduce buyer risk and support higher multiples. Customer concentration is one of the most scrutinized metrics in due diligence. Reducing concentration before going to market can significantly improve deal outcomes.

Why it matters: Start diversifying your customer base 2-3 years before a planned exit. Even modest progress in reducing concentration from one dominant customer can materially improve your valuation.

Related: Revenue Quality · Due Diligence · Key Person Risk

Data Room

A secure digital repository where sellers store confidential documents for buyer review during due diligence. Virtual data rooms (VDRs) provide controlled access, activity tracking, and document management. A well-organized data room accelerates the due diligence timeline and signals seller professionalism. Common VDR platforms include Intralinks, Datasite, and Box. The data room should be prepared before the process launches, with documents indexed and organized by category.

Why it matters: A disorganized data room is one of the top reasons deals slow down or fall apart. Prepare yours before going to market — not after you sign an LOI.

Related: Virtual Data Room (VDR) · Due Diligence · CIM (Confidential Information Memorandum)

Deal Flow

The pipeline of potential acquisition or investment opportunities available to a buyer, investor, or broker. Strong deal flow is a competitive advantage in M&A because it provides more options and better selection. Deal flow is sourced through proprietary networks, broker relationships, direct outreach, industry conferences, and platforms like Napkin Deals. Quality of deal flow matters more than quantity — the best buyers focus on curated, high-fit opportunities.

Related: Off-Market Deal · Competitive Process · Buy-Side

Deal Structure

The overall framework defining how a transaction is organized, including the form of consideration (cash, stock, debt), payment timing (upfront, deferred, contingent), entity structure (asset vs. stock purchase), and risk allocation mechanisms (escrow, earnouts, indemnification). Deal structure has major implications for tax treatment, liability exposure, and net proceeds to the seller. Creative deal structuring can bridge valuation gaps and align the interests of buyers and sellers.

Why it matters: Don't fixate solely on the headline purchase price. The deal structure — including tax treatment, earnout terms, and escrow holdbacks — determines what you actually take home.

Related: Asset Purchase · Earnout · Escrow · Seller Financing · Equity Rollover

Definitive Agreement

The final, legally binding contract that governs an M&A transaction. The definitive agreement (also called the purchase agreement or acquisition agreement) specifies the purchase price, payment terms, representations and warranties, indemnification provisions, closing conditions, and all other binding terms. It supersedes the LOI and term sheet. Negotiating the definitive agreement typically takes 4-8 weeks and involves significant legal counsel on both sides.

Related: Purchase Agreement · Letter of Intent (LOI) · Representations and Warranties · Closing

Discount Rate

The rate used to calculate the present value of future cash flows in a discounted cash flow (DCF) analysis. The discount rate reflects the risk of the investment — higher risk businesses require higher discount rates, resulting in lower present valuations. For private companies, discount rates typically range from 15-30%, depending on size, industry, and risk profile. The discount rate is often derived from the weighted average cost of capital (WACC) or a build-up method.

Related: Valuation · Weighted Average Cost of Capital (WACC) · Enterprise Value

Divestiture

The sale, liquidation, or spin-off of a subsidiary, division, or asset by a parent company. Divestitures are pursued to raise capital, focus on core operations, satisfy regulatory requirements, or unlock value that is not reflected in the parent's valuation. The divesting company must separate the target entity's operations, financials, and systems, which can be complex and time-consuming. Divestitures create acquisition opportunities for buyers seeking established businesses with existing revenue and infrastructure.

Related: Carve-Out · Transition Services Agreement (TSA) · Acquisition

Drag-Along Rights

A provision in a shareholder or operating agreement that allows majority shareholders to force minority shareholders to participate in the sale of the company on the same terms and conditions. Drag-along rights prevent minority holders from blocking a deal that the majority has approved. They are standard in private equity-backed companies and venture-backed startups. The threshold for triggering drag-along rights is typically 50-75% of outstanding shares or units.

Related: Tag-Along Rights · Shareholder Agreement · Minority Interest

Dry Powder

Uninvested capital committed to private equity, venture capital, or other investment funds that is available for deployment into acquisitions. High levels of dry powder indicate strong buyer demand and can drive up valuations in competitive M&A markets. As of recent years, global private equity dry powder has exceeded $2 trillion, creating significant demand for quality acquisition targets across all sectors and size ranges.

Why it matters: When dry powder levels are high, it's generally a favorable time to sell. More capital chasing deals means more competition for your business and potentially higher valuations.

Related: Private Equity · Competitive Process · Seller's Market / Buyer's Market

Due Diligence

The investigation and analysis conducted by a buyer after a Letter of Intent is signed. Due diligence covers financials, legal, operations, customers, employees, technology, and environmental matters. The goal is to confirm the seller's representations and identify any material risks before closing. Due diligence typically takes 45-90 days and involves teams of accountants, lawyers, and operational specialists. The findings may result in price adjustments, additional deal protections, or in rare cases, deal termination.

Why it matters: Prepare for due diligence before you go to market, not after. Having clean financials, organized documents, and clear answers to common questions accelerates the process and builds buyer confidence.

Related: Data Room · Quality of Earnings (QoE) · Representations and Warranties · Letter of Intent (LOI)

Earnout

A contingent payment structure where a portion of the purchase price is paid to the seller based on the business achieving certain performance milestones after closing. Earnouts bridge valuation gaps between buyer and seller and align incentives during the transition period. Common earnout metrics include revenue, EBITDA, and customer retention targets. Earnout periods typically range from 1-3 years. Sellers should negotiate clear, measurable milestones and protections against buyer interference with the earnout metrics.

Why it matters: Earnouts can be powerful tools when buyer and seller disagree on value, but protect yourself with clear definitions, independent measurement, and anti-sandbagging provisions.

Related: Deal Structure · Closing · Seller Financing · Holdback

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is the most widely used profitability metric in M&A because it normalizes earnings across different capital structures, tax jurisdictions, and accounting policies. Enterprise value is typically expressed as a multiple of EBITDA. EBITDA serves as a proxy for operating cash flow, though it does not account for capital expenditures, working capital changes, or debt service requirements.

Related: Adjusted EBITDA · Seller's Discretionary Earnings (SDE) · Multiple · Enterprise Value

Enterprise Value

The total value of a business, including both equity and debt, minus cash on hand. Enterprise value represents the theoretical takeover price and is the standard metric used in M&A valuation multiples. The formula is: EV = Market Cap + Total Debt - Cash. Enterprise value is used because it provides a capital-structure-neutral view of a business's worth, allowing apples-to-apples comparisons between companies with different leverage levels.

Related: EBITDA · Multiple · Valuation · Book Value

Equity Rollover

A deal structure where the seller reinvests a portion of their sale proceeds into the acquiring entity as equity. Equity rollovers align the seller's interests with the buyer post-close and provide the seller a chance to participate in future upside — often called a "second bite of the apple." Rollovers are common in private equity-sponsored transactions and typically range from 10-30% of total proceeds. The rollover equity is usually in a new holding company controlled by the PE sponsor.

Why it matters: Rolling equity can be lucrative if the buyer grows the business, but understand the governance, liquidity restrictions, and timeline before committing a portion of your life's work to someone else's investment fund.

Related: Private Equity · Deal Structure · Capital Structure

Escrow

A portion of the purchase price held by a neutral third party after closing, released to the seller after certain conditions are met or a specified time period elapses. Escrow accounts protect the buyer against post-closing indemnification claims and working capital adjustments. Typical escrow amounts range from 5-15% of the purchase price, held for 12-24 months. Escrow terms are negotiable, and sellers should push for shorter periods, lower amounts, and clearly defined release conditions.

Why it matters: The escrow holdback is money you've earned but can't access. Negotiate the smallest escrow amount and shortest holding period that the buyer will accept.

Related: Holdback · Indemnification · Working Capital Adjustment · Closing

Exclusivity Period

A defined period during which the seller agrees not to solicit, negotiate with, or entertain offers from other potential buyers. Exclusivity is typically granted when a buyer signs a Letter of Intent and enters due diligence. Standard exclusivity periods range from 45-90 days. Buyers need exclusivity to justify the time and expense of due diligence, while sellers want to limit the duration to maintain leverage and avoid being locked up with a buyer who may not close.

Why it matters: Keep exclusivity periods as short as possible (60 days maximum if you can). The longer you're locked up, the more leverage shifts to the buyer. Include a clear drop-dead date.

Related: Letter of Intent (LOI) · No-Shop Clause · Due Diligence · Competitive Process

Exit Planning

The strategic process of preparing a business and its owner for a future sale or transition. Exit planning typically begins 2-5 years before the intended sale and addresses valuation drivers, operational improvements, tax planning, succession, and personal financial goals. Effective exit planning increases the business's value, reduces transaction risk, and ensures the owner achieves their financial and lifestyle objectives. A comprehensive exit plan coordinates advisors across legal, tax, financial planning, and M&A disciplines.

Why it matters: Sellers who begin exit planning 3+ years before selling typically achieve 20-40% higher valuations than those who sell reactively. The time to start is now.

Related: Valuation · Owner Dependency · Key Person Risk · Business Valuation

Fair Market Value

The price at which a business would change hands between a willing buyer and a willing seller, neither being under compulsion to act and both having reasonable knowledge of the relevant facts. Fair market value is the standard of value used in most M&A transactions, tax-related valuations, and estate planning. It is distinct from investment value, which reflects a specific buyer's synergies and strategic considerations. Fair market value is determined through formal appraisal methods.

Related: Valuation · Business Valuation · Enterprise Value · Book Value

Family Office

A private wealth management organization that manages investments and financial affairs for a single ultra-high-net-worth family (single family office) or multiple families (multi-family office). Family offices are increasingly active as direct acquirers in the lower-middle market, often seeking stable, cash-flowing businesses with long holding periods. Unlike private equity firms, family offices may not have a defined exit timeline, which can be attractive to sellers who care about their business's long-term stewardship.

Why it matters: Family offices can be ideal buyers if you care about your business's legacy and employees. They often offer competitive valuations with longer hold periods and less aggressive cost-cutting.

Related: Private Equity · Buy-Side · Strategic Buyer · Search Fund

Finder's Fee

A commission paid to an intermediary who introduces a buyer and seller that ultimately complete a transaction. Finder's fees are typically smaller than full brokerage commissions and may be structured as a flat fee or percentage of the deal value. Finders generally provide introductions only and do not manage the full sale process. In regulated markets, finders must be careful not to cross the line into broker-dealer activity, which requires registration with FINRA.

Related: Success Fee · Broker · FINRA

FINRA

The Financial Industry Regulatory Authority — the self-regulatory organization that oversees broker-dealers in the United States. FINRA registration is required for individuals and firms that engage in securities transactions, including certain M&A advisory activities involving the sale of stock or membership interests. The M&A broker exemption under SEC rules provides a limited exemption for brokers facilitating the sale of privately held companies, but the boundaries are nuanced. Understanding FINRA requirements is important for both sellers choosing advisors and advisors structuring their practices.

Related: Broker · Investment Banking · Finder's Fee

Goodwill

The intangible value of a business above its net tangible asset value. Goodwill represents brand reputation, customer relationships, employee expertise, proprietary processes, and other assets that cannot be individually identified on the balance sheet. In M&A, goodwill is the purchase price premium over the fair market value of net identifiable assets. For accounting purposes, goodwill must be tested annually for impairment. Most service-based and technology businesses have goodwill that far exceeds their tangible asset value.

Related: Book Value · Goodwill Impairment · Fair Market Value · Intellectual Property (IP)

Goodwill Impairment

An accounting write-down that occurs when the carrying value of goodwill on a company's balance sheet exceeds its fair value. Goodwill impairment typically signals that an acquisition has underperformed expectations — the acquirer overpaid, synergies did not materialize, or the acquired business declined. Impairment charges are non-cash but reduce reported earnings and can signal strategic missteps to investors and stakeholders.

Related: Goodwill · Accretion/Dilution · Synergies

Go-to-Market

In an M&A context, the strategy and process used to bring a business to market for sale. This includes preparing the CIM, building the buyer list, managing outreach, and running the sale process. A strong go-to-market strategy maximizes competitive tension and sale price. Key decisions include whether to run a broad auction or targeted process, which buyer categories to prioritize, and how to sequence outreach to maintain momentum and confidentiality.

Why it matters: Your go-to-market strategy determines who sees your deal and how they perceive it. Work with your advisor to target the right buyers — not just the most buyers.

Related: Competitive Process · CIM (Confidential Information Memorandum) · Blind Profile · Broker

Growth Equity

A type of private equity investment focused on providing capital to mature, profitable companies seeking to accelerate growth through expansion, acquisitions, or new product development. Growth equity investors typically acquire minority stakes (20-49%) and do not use significant leverage. Growth equity sits between venture capital (early-stage, higher risk) and traditional buyouts (control positions, leveraged). It is an attractive option for founders who want capital and strategic support without giving up full control.

Why it matters: If you're not ready for a full exit but need capital to grow, growth equity can provide funding and expertise while letting you retain majority ownership and control.

Related: Private Equity · Recapitalization · Minority Interest

Holdback

A portion of the purchase price withheld by the buyer at closing, typically released after certain post-closing conditions are satisfied. Holdbacks protect the buyer against working capital adjustments, indemnification claims, or seller transition obligations. Unlike escrow, holdback funds are typically held directly by the buyer rather than a neutral third party. Holdback amounts and release terms should be clearly defined in the purchase agreement to avoid disputes.

Related: Escrow · Working Capital Adjustment · Indemnification · Closing

Holding Company

A parent entity that owns controlling interests in one or more subsidiary companies. Holding companies are commonly used in M&A to acquire and manage a portfolio of operating businesses, provide liability protection, and optimize tax structures across the group. They do not typically conduct business operations themselves but instead manage and allocate capital among their subsidiaries. Holding company structures are standard in private equity and family office portfolios.

Related: Platform Acquisition · Private Equity · Capital Structure

Horizontal Merger

A merger between two companies that operate in the same industry and at the same stage of the value chain. Horizontal mergers combine direct competitors to achieve economies of scale, increase market share, eliminate redundancies, and strengthen competitive positioning. Examples include the merger of two regional HVAC companies or two software companies serving the same market. Horizontal mergers may face antitrust scrutiny if the combined entity would have significant market power.

Related: Vertical Merger · Synergies · Mergers and Acquisitions (M&A) · Roll-Up Strategy

Indemnification

A contractual obligation where the seller agrees to compensate the buyer for losses arising from breaches of representations, warranties, or covenants in the purchase agreement. Indemnification provisions define caps (maximum liability), baskets (minimum threshold before claims can be made), and survival periods (how long after closing claims can be brought). Sellers should negotiate reasonable caps, shorter survival periods, and clear exclusions to limit post-closing liability exposure.

Why it matters: Indemnification terms determine your post-closing financial exposure. Negotiate carefully — an uncapped indemnity could put your entire sale proceeds at risk.

Related: Representations and Warranties · Escrow · Purchase Agreement

Intellectual Property (IP)

Legally protected creations of the mind including patents, trademarks, copyrights, trade secrets, and proprietary technology. In M&A, intellectual property is often a significant component of a business's value, particularly for technology, life sciences, and brand-driven companies. Buyers conduct IP due diligence to verify ownership, assess enforceability, identify infringement risks, and confirm that all IP was properly assigned by employees and contractors. Unprotected or poorly documented IP is a common deal risk.

Why it matters: Ensure all IP is properly registered, documented, and assigned to the company (not individuals) before going to market. IP ownership gaps can delay or kill deals.

Related: Goodwill · Due Diligence · Representations and Warranties

Investment Banking

Financial advisory services that assist companies with M&A transactions, capital raising, and strategic advisory. Investment banks typically handle larger transactions (above $25-50M) and provide valuation, deal structuring, buyer/seller sourcing, and transaction management. They employ teams of analysts and associates who build financial models, prepare marketing materials, and manage the deal process. Investment banks charge retainers plus success fees, typically following a modified Lehman formula.

Related: Broker · Success Fee · FINRA

IOI (Indication of Interest)

A non-binding written expression from a potential buyer indicating their preliminary interest in acquiring a business. An IOI typically includes a proposed valuation range, deal structure, financing plan, and due diligence requirements. It precedes the formal Letter of Intent and is used to narrow the field of buyers in a competitive process. IOIs allow sellers to gauge buyer seriousness and compare offers before granting exclusivity or entering deeper negotiations.

Related: Letter of Intent (LOI) · Competitive Process · Valuation · Due Diligence

Key Employee Retention

Strategies and agreements designed to retain critical employees through and after an M&A transaction. Key employee retention plans may include stay bonuses, equity grants, employment agreements, and non-compete arrangements. Buyers want assurance that essential talent will remain post-closing, as employee departures can destroy value. Retention plans are typically structured by the buyer with input from the seller and implemented at or shortly after closing.

Why it matters: Identify your key employees early and have candid conversations with your advisor about retention. Buyers will ask about your team's willingness to stay, and weak answers will cost you.

Related: Key Person Risk · Due Diligence · Change of Control

Key Person Risk

The risk that a business's value is heavily dependent on one individual — typically the owner or founder. Buyers discount valuations when key person risk is high because the departure of that individual could materially impact revenue, customer relationships, or operations. Reducing key person risk requires building a management team, documenting processes, diversifying customer relationships, and delegating decision-making authority. This is one of the most impactful things a seller can do to increase their business's value.

Why it matters: If your business can't run without you for two weeks, buyers will notice. Start delegating now — every process you document and every relationship you share with your team increases your exit value.

Related: Owner Dependency · Key Employee Retention · Exit Planning

Leveraged Buyout (LBO)

An acquisition financed primarily with borrowed money, using the target company's assets and cash flows as collateral for the debt. LBOs are the primary acquisition strategy for private equity firms. The typical LBO capital structure includes 50-70% debt and 30-50% equity. The use of leverage amplifies returns for equity investors when the business performs well, but also increases financial risk. LBO returns are driven by debt paydown, EBITDA growth, and multiple expansion upon exit.

Related: Private Equity · Leverage · Capital Structure · Dry Powder

Leverage

The use of borrowed capital (debt) to finance an acquisition or increase returns on equity. Leveraged buyouts (LBOs) use significant amounts of debt relative to equity. Higher leverage amplifies both returns and risk for the acquiring party. Common leverage metrics include Debt/EBITDA (total leverage) and Senior Debt/EBITDA (senior leverage). Lenders typically limit total leverage to 3-5x EBITDA depending on the business's size, stability, and industry.

Related: Leveraged Buyout (LBO) · Capital Structure · SBA Loan · Bridge Financing

Liquidity Event

A transaction that converts an owner's illiquid equity in a private company into cash or marketable securities. Common liquidity events include a full sale, partial recapitalization, IPO, or merger. For most founders, the sale of their business is their primary liquidity event and the culmination of years or decades of work. Planning for a liquidity event involves coordinating M&A advisory, tax planning, wealth management, and personal financial planning.

Why it matters: Your business sale will likely be the largest financial transaction of your life. Assemble a team of advisors — M&A, tax, legal, and wealth management — well before going to market.

Related: Exit Planning · Recapitalization · Growth Equity

Letter of Intent (LOI)

A written document outlining the key terms and conditions of a proposed acquisition. The LOI is typically non-binding (except for exclusivity and confidentiality provisions) and serves as the framework for negotiating the definitive purchase agreement. Signing an LOI moves the transaction into due diligence. Key LOI terms include purchase price, deal structure, financing, exclusivity period, due diligence timeline, and key conditions to closing. Sellers should have legal counsel review the LOI before signing.

Why it matters: The LOI sets the tone for everything that follows. Fight hard on key terms at this stage — once exclusivity is granted, your leverage diminishes significantly.

Related: IOI (Indication of Interest) · Exclusivity Period · Due Diligence · Definitive Agreement

Management Presentation

A formal meeting where the seller's management team presents the business to potential buyers, typically conducted after the IOI stage and before final bids. Management presentations cover the company's history, operations, financial performance, growth strategy, team, and competitive advantages. They give buyers a chance to assess the management team's competence and credibility. Preparation is critical — management presentations often make or break a buyer's conviction to proceed.

Why it matters: Practice your management presentation until it's polished and natural. Buyers are evaluating you as much as the business. Prepare for tough questions and have data to back up your claims.

Related: Competitive Process · CIM (Confidential Information Memorandum) · IOI (Indication of Interest) · Due Diligence

Material Adverse Change (MAC)

A significant negative change in a company's financial condition, operations, or prospects that occurs between signing the purchase agreement and closing. MAC clauses give the buyer the right to walk away from a deal or renegotiate terms if a material adverse change occurs. The definition of "material" is heavily negotiated and often excludes general economic conditions, industry-wide changes, and the effects of the transaction itself. MAC clauses are one of the most important risk allocation tools in the purchase agreement.

Related: Purchase Agreement · Closing · Representations and Warranties · Due Diligence

Management Buyout (MBO)

A transaction in which a company's existing management team acquires the business from its current owners. MBOs are common when founders want to exit but prefer to sell to people who already know the business. Management teams often partner with private equity firms or use SBA loans to finance the acquisition. MBOs offer continuity for employees and customers and can be structured to provide a clean exit for the selling owner while rewarding loyal management.

Related: Leveraged Buyout (LBO) · SBA Loan · Seller Financing

Mergers and Acquisitions (M&A)

The field of corporate finance dealing with the buying, selling, and combining of companies. M&A transactions include full acquisitions, mergers, divestitures, recapitalizations, and joint ventures. The M&A market spans from small business transfers to multi-billion-dollar corporate deals. Key participants include sellers, buyers (strategic and financial), advisors (brokers, investment banks), attorneys, and accountants. M&A activity is influenced by economic conditions, credit markets, tax policy, and sector-specific trends.

Related: Acquisition · Horizontal Merger · Vertical Merger · Divestiture

Minority Interest

An ownership stake of less than 50% in a company, which does not convey control over major business decisions. Minority interests are common in growth equity investments, family businesses, and partial recapitalizations. Minority investors typically negotiate protective provisions such as board seats, information rights, consent rights for major decisions, and tag-along rights. Minority stakes are generally valued at a discount to controlling interests, reflecting the lack of control and liquidity.

Related: Growth Equity · Tag-Along Rights · Drag-Along Rights · Recapitalization

Multiple

A valuation metric expressing enterprise value as a ratio of a financial metric, most commonly EBITDA or SDE. For example, a business valued at 5x EBITDA with $2M EBITDA has an enterprise value of $10M. Multiples vary by industry, size, growth rate, profitability, recurring revenue, customer concentration, and deal dynamics. In the lower-middle market, EBITDA multiples typically range from 3-7x, with exceptional businesses commanding higher multiples. Multiples are the most common valuation shorthand in M&A.

Why it matters: Don't obsess over multiples in isolation. A 5x multiple on well-documented, adjusted EBITDA is worth far more than an 8x multiple on inflated, unsupportable earnings.

Related: EBITDA · Seller's Discretionary Earnings (SDE) · Enterprise Value · Valuation · Comparable Transactions

NDA (Non-Disclosure Agreement)

A legally binding contract that requires parties to keep confidential information private. In M&A, NDAs are signed by potential buyers before receiving the CIM or any identifying details about the target company. NDAs protect the seller's business from competitive harm during the sale process. Standard NDA provisions include the definition of confidential information, permitted disclosures (e.g., to advisors), duration of obligations, and remedies for breach. Mutual NDAs protect both parties.

Related: Confidentiality Agreement · CIM (Confidential Information Memorandum) · Blind Profile

Net Revenue Retention (NRR)

A metric that measures the percentage of recurring revenue retained from existing customers over a given period, accounting for expansions, contractions, and churn. An NRR above 100% means existing customers are growing faster than they are churning — a powerful signal of product-market fit and customer satisfaction. NRR is particularly important for SaaS and subscription-based businesses and is one of the most closely watched metrics by acquirers in the technology sector.

Why it matters: High NRR (above 110%) can command premium multiples because it demonstrates that your revenue base grows organically without requiring new customer acquisition. Track and optimize this metric.

Related: Revenue Quality · Revenue Run Rate · Customer Concentration

Net Working Capital

Current assets minus current liabilities, representing the short-term operating liquidity of a business. In M&A, the purchase agreement typically defines a target level of net working capital that the seller must deliver at closing. Deviations result in post-closing adjustments — if NWC at closing is below target, the purchase price is reduced; if above, it is increased. The definition and calculation of NWC is one of the most heavily negotiated provisions in the purchase agreement.

Why it matters: Understand the working capital mechanism before signing the LOI. Sellers who don't negotiate the NWC target and definition often face unpleasant post-closing surprises.

Related: Working Capital Adjustment · Closing · Purchase Agreement

No-Shop Clause

A provision in a Letter of Intent or purchase agreement that prohibits the seller from soliciting, encouraging, or engaging with other potential buyers during the exclusivity period. No-shop clauses protect the buyer's investment of time and resources in due diligence. The scope, duration, and exceptions to no-shop clauses are negotiable. Some agreements include "fiduciary out" provisions that allow the seller's board to consider unsolicited superior proposals.

Related: Exclusivity Period · Letter of Intent (LOI) · Competitive Process · Break-Up Fee

Non-Compete

A contractual agreement preventing the seller from starting or working for a competing business for a specified period and geographic area after the sale. Non-compete clauses protect the buyer's investment by ensuring the seller does not siphon away customers, employees, or trade secrets. Standard non-competes run 2-5 years with defined geographic and industry limitations. Overly broad non-competes may be unenforceable, and their legality varies by jurisdiction.

Related: Purchase Agreement · Closing · Indemnification

Off-Market Deal

A business acquisition opportunity that is not publicly listed or broadly marketed. Off-market deals are sourced through proprietary networks, direct outreach, and relationship-based deal flow. They often offer less competition and better pricing for buyers, while providing more confidentiality and discretion for sellers. Off-market deal sourcing is a core capability of sophisticated buy-side advisors and platforms. Napkin Deals specializes in connecting off-market opportunities with qualified buyers.

Related: Deal Flow · Competitive Process · Blind Profile

Operating Agreement

The governing document of a limited liability company (LLC) that defines the rights, responsibilities, and obligations of its members. The operating agreement covers ownership percentages, profit distributions, management structure, voting rights, transfer restrictions, and dissolution procedures. In M&A, the operating agreement is reviewed during due diligence to identify any restrictions on transfer, change of control provisions, or consent requirements that could affect the transaction.

Related: Shareholder Agreement · Change of Control · Drag-Along Rights

Owner Dependency

The degree to which a business relies on its owner for day-to-day operations, customer relationships, or specialized knowledge. High owner dependency reduces a business's value and transferability because buyers fear performance decline after the owner exits. Reducing owner dependency is a key component of exit planning and involves building a management team, documenting processes, and transitioning key customer relationships to other employees.

Why it matters: Owner dependency is the number one value destroyer in small business M&A. Every dollar you invest in building a team that can operate without you comes back as multiples on your exit.

Related: Key Person Risk · Key Employee Retention · Exit Planning

Pari Passu

A Latin term meaning "on equal footing," used in finance and M&A to describe equal treatment among creditors, investors, or other parties. In debt agreements, pari passu means that all lenders in the same class have equal claim to the borrower's assets in the event of default. In equity agreements, pari passu provisions ensure that all shareholders of the same class receive the same distributions, rights, and treatment.

Related: Capital Structure · Shareholder Agreement · Covenant

Platform Acquisition

The initial acquisition made by a private equity firm in a specific industry, which serves as the foundation for future add-on acquisitions. Platform companies are typically larger, well-managed businesses with strong infrastructure that can absorb and integrate smaller bolt-on acquisitions. Platforms are valued at higher multiples because they provide the management, systems, and scale to integrate bolt-ons and realize synergies. Being a platform acquisition generally means a higher valuation and more favorable terms.

Why it matters: If your business has the size, management team, and infrastructure to serve as a platform, you may command a premium valuation from PE buyers pursuing a buy-and-build strategy.

Related: Bolt-On Acquisition · Private Equity · Roll-Up Strategy

Private Equity

An asset class consisting of capital invested in private companies, typically through leveraged buyouts, growth equity, or recapitalizations. PE firms raise capital from institutional investors (pensions, endowments, family offices), acquire companies, improve operations, and exit for a return — usually within a 3-7 year holding period. PE firms are the most active acquirers in the lower-middle market and bring operational expertise, capital, and strategic guidance to the companies they acquire.

Related: Leveraged Buyout (LBO) · Dry Powder · Growth Equity · Family Office · Platform Acquisition

Purchase Agreement

The definitive legal contract governing an M&A transaction. The purchase agreement specifies the purchase price, payment terms, representations and warranties, indemnification provisions, closing conditions, and all other binding terms of the deal. Also called a definitive agreement or acquisition agreement. Negotiating the purchase agreement is one of the most complex and expensive phases of the transaction. Sellers should retain experienced M&A counsel — not just a general business attorney.

Why it matters: Hire an attorney who specializes in M&A transactions, not your general corporate counsel. The purchase agreement has dozens of provisions that can cost or save you hundreds of thousands of dollars.

Related: Definitive Agreement · Representations and Warranties · Indemnification · Closing

Quality of Earnings (QoE)

A financial analysis conducted by a buyer's accounting firm during due diligence to validate the sustainability, accuracy, and completeness of a company's reported earnings. The QoE report examines revenue recognition, expense categorization, add-backs, working capital trends, and customer-level revenue detail. QoE findings frequently result in adjustments to the purchase price, with the average QoE report identifying 10-20% in EBITDA adjustments. Sellers can commission a sell-side QoE report before going to market to preemptively address issues.

Why it matters: Consider commissioning a sell-side QoE report before going to market. It's one of the best investments you can make — it identifies issues before buyers find them and strengthens your negotiating position.

Related: Adjusted EBITDA · Add-Back · Due Diligence · Revenue Quality

Recapitalization

A restructuring of a company's capital structure, typically involving a change in the mix of debt and equity. In M&A, recapitalizations allow owners to take a partial liquidity event while retaining equity in the business. Dividend recaps and minority recaps are common structures. Recapitalizations are attractive for founders who want to "take chips off the table" while continuing to operate and grow the business with the support of a financial partner.

Why it matters: If you're not ready for a full exit, a recapitalization can de-risk your personal finances by converting some equity to cash while preserving your upside in the business.

Related: Liquidity Event · Growth Equity · Private Equity · Capital Structure

Representations and Warranties

Statements of fact made by the seller (and sometimes the buyer) in the purchase agreement regarding the condition of the business, its financials, legal standing, and other material matters. Reps and warranties allocate risk between parties and form the basis for post-closing indemnification claims. Common representations cover financial statements, tax compliance, contracts, IP ownership, litigation, and employee matters. Buyers want broad reps with long survival periods; sellers want narrow reps with short survival periods.

Related: Indemnification · Purchase Agreement · Due Diligence · Material Adverse Change (MAC)

Revenue Quality

An assessment of the sustainability, predictability, and composition of a company's revenue streams. Recurring revenue (subscriptions, contracts, retainers) is valued more highly than project-based or one-time revenue. Revenue quality analysis examines customer concentration, churn, contract terms, pricing power, and growth trends. Businesses with high-quality revenue — diverse, recurring, and growing — command premium valuations because they present lower risk to buyers.

Why it matters: Shift revenue toward recurring contracts and reduce customer concentration. Buyers pay premium multiples for predictable, recurring revenue because it reduces their risk.

Related: Net Revenue Retention (NRR) · Customer Concentration · Revenue Run Rate · Multiple

Revenue Run Rate

An annualized revenue figure calculated by extrapolating a shorter period's revenue over a full year. For example, if a business generates $3M in revenue in Q1, its run rate is $12M. Run rate is useful for projecting annual revenue for fast-growing or seasonal businesses. However, buyers treat run rate figures with caution because they assume consistent performance and may not account for seasonality, churn, or one-time revenue. Trailing twelve months (TTM) revenue is generally preferred over run rate in M&A valuations.

Related: Revenue Quality · Net Revenue Retention (NRR) · EBITDA

Roll-Up Strategy

An acquisition strategy where a buyer consolidates multiple smaller companies in a fragmented industry into a single, larger entity to achieve economies of scale, operational efficiencies, and higher valuation multiples. Roll-ups are common in industries like home services, healthcare, professional services, and distribution. The strategy depends on multiple arbitrage — acquiring small companies at 3-5x EBITDA and creating a combined platform valued at 6-10x EBITDA. Roll-ups are a primary strategy for many private equity firms.

Related: Bolt-On Acquisition · Platform Acquisition · Synergies · Horizontal Merger

Seller's Market / Buyer's Market

Market conditions that favor either sellers or buyers in M&A transactions. A seller's market exists when there are more buyers than quality acquisition targets, driving up valuations and deal terms favorable to sellers. A buyer's market occurs when capital is scarce, deal activity slows, or there is an oversupply of businesses for sale. Market conditions are influenced by interest rates, credit availability, economic confidence, and sector-specific trends.

Why it matters: Timing your sale to coincide with favorable market conditions can meaningfully impact your valuation multiple and deal terms. Monitor M&A market trends 12-24 months before going to market.

Related: Multiple · Competitive Process · Valuation

SBA Loan

A loan partially guaranteed by the U.S. Small Business Administration, commonly used to finance the acquisition of small businesses. SBA 7(a) loans are the most popular for business acquisitions, offering up to $5M with favorable terms including lower down payments (10-20%), longer repayment periods (10-25 years), and competitive interest rates. SBA loans require the buyer to have relevant experience, inject equity, and provide a personal guarantee. They are the most common financing tool for businesses valued under $5M.

Why it matters: Most buyers of small businesses use SBA financing. Understanding SBA requirements helps you position your business for the largest pool of qualified buyers.

Related: Leverage · Bridge Financing · Management Buyout (MBO) · Seller Financing

Search Fund

An investment vehicle where an entrepreneur raises capital from investors to fund a search for a single company to acquire and operate. Search funds typically target profitable, stable businesses in the $1-10M EBITDA range with strong management teams, recurring revenue, and industry tailwinds. The searcher becomes CEO of the acquired company and shares economics with their investors. Search funds are increasingly popular and represent a growing segment of the buyer market in lower-middle-market M&A.

Why it matters: Search fund buyers are often highly motivated, well-capitalized, and eager to close. They can be excellent buyers for businesses where the owner wants to exit fully and hand off operations to a capable operator.

Related: Buy-Side · Family Office · Management Buyout (MBO) · Private Equity

Seller's Discretionary Earnings (SDE)

The total financial benefit a single owner-operator derives from a business. SDE is calculated by adding the owner's total compensation, perks, and discretionary expenses back to net income. SDE is the standard earnings metric for valuing businesses with less than $1M in earnings, where the business is primarily operated by the owner. For larger businesses with professional management teams, adjusted EBITDA is the more appropriate metric.

Why it matters: If your business earns under $1M, SDE is the number that determines your valuation. Document every legitimate owner benefit and discretionary expense to maximize your SDE calculation.

Related: Adjusted EBITDA · Add-Back · Multiple · Valuation

Seller Financing

A deal structure where the seller provides a loan to the buyer to finance a portion of the purchase price. Seller financing demonstrates the seller's confidence in the business and can bridge gaps in buyer financing. Terms typically range from 3-7 years with interest rates of 5-8%. Seller notes are usually subordinated to senior debt and may include personal guarantees from the buyer. Seller financing is particularly common in small business transactions and SBA-financed deals, where 10-20% seller notes are standard.

Why it matters: Offering a reasonable seller note can significantly expand your buyer pool and accelerate the sale. It also signals confidence in the business's future performance.

Related: Deal Structure · SBA Loan · Earnout · Equity Rollover

Shareholder Agreement

A contract among the shareholders of a company that defines their rights, obligations, and the governance framework. Shareholder agreements cover topics including share transfer restrictions, preemptive rights, drag-along and tag-along rights, board composition, dividend policies, and dispute resolution mechanisms. In M&A, the shareholder agreement is reviewed to identify any restrictions or consent requirements that could affect the deal. Multi-owner businesses should have clear shareholder agreements in place before exploring a sale.

Related: Operating Agreement · Drag-Along Rights · Tag-Along Rights · Minority Interest

Strategic Buyer

An acquirer that purchases a company for operational synergies, market expansion, technology, or talent — not purely for financial returns. Strategic buyers often pay higher multiples than financial buyers because they can extract synergy value that a standalone buyer cannot. Examples include competitors, customers, suppliers, and adjacent-market companies. Strategic buyers may be more willing to pay a premium but can also have longer approval processes and integration complexity.

Why it matters: Strategic buyers typically pay 20-40% more than financial buyers because they can achieve synergies. Your advisor should always include relevant strategic buyers in the go-to-market process.

Related: Synergies · Buy-Side · Competitive Process · Multiple

Success Fee

A commission paid to a broker, advisor, or investment bank upon the successful closing of a transaction. Success fees are typically calculated as a percentage of the total transaction value and align the advisor's compensation with the outcome of the deal. Fee structures vary — common models include a flat percentage (e.g., 5% of enterprise value), tiered structures (declining percentages on higher value tiers), and double Lehman formulas. Many advisors also charge a monthly retainer that is credited against the success fee at closing.

Related: Broker · Investment Banking · Finder's Fee

Synergies

The additional value created by combining two companies that would not exist if they operated independently. Revenue synergies include cross-selling opportunities, new market access, and combined product offerings. Cost synergies include eliminating redundant overhead, achieving purchasing economies, and consolidating facilities. Synergies are a key driver of strategic acquisition premiums and are used to justify valuations above standalone trading multiples. However, synergies are often overestimated and difficult to realize in practice.

Why it matters: Quantify and articulate the synergies a buyer would achieve by acquiring your business. Buyers pay for synergies they can see — help them see them.

Related: Strategic Buyer · Horizontal Merger · Vertical Merger · Accretion/Dilution

Tag-Along Rights

A provision that allows minority shareholders to sell their shares on the same terms and conditions as a majority shareholder who is selling their stake. Tag-along rights protect minority investors from being left behind when the majority owner sells at favorable terms. They are the counterpart to drag-along rights and are standard in shareholder agreements and operating agreements for companies with multiple owners.

Related: Drag-Along Rights · Shareholder Agreement · Minority Interest

Take-Private

A transaction in which a publicly traded company is acquired and delisted from stock exchanges, converting it to a privately held company. Take-privates are typically executed by private equity firms or management teams seeking to restructure the business away from public market scrutiny. The acquiring group gains the flexibility to make long-term investments, restructure operations, and execute strategic changes without the quarterly earnings pressure and regulatory requirements of public markets.

Related: Leveraged Buyout (LBO) · Private Equity · Mergers and Acquisitions (M&A)

Teaser

A one-page anonymized summary of a business for sale, used to gauge buyer interest before an NDA is signed. The teaser typically includes the industry, geography, high-level financials, and reason for sale — without identifying the company. Also called a blind profile. A compelling teaser generates enough interest for buyers to sign an NDA and request the full CIM. Teasers should be specific enough to attract relevant buyers while general enough to protect confidentiality.

Related: Blind Profile · CIM (Confidential Information Memorandum) · NDA (Non-Disclosure Agreement) · Go-to-Market

Term Sheet

A non-binding document that outlines the key financial and structural terms of a proposed transaction. Term sheets are commonly used in venture capital and growth equity, while Letters of Intent serve a similar purpose in M&A. Both establish the framework for definitive agreements. Term sheets typically cover valuation, investment amount, governance rights, liquidation preferences, and protective provisions. They are designed to align parties on key terms before incurring the cost of drafting definitive documents.

Related: Letter of Intent (LOI) · Definitive Agreement · Growth Equity

Transition Services Agreement (TSA)

A contract between buyer and seller (or parent company and carved-out subsidiary) that defines the services the seller will continue to provide to the business after closing. TSAs are common in carve-outs and divestitures where the sold entity relies on the parent's IT systems, HR functions, accounting, or other shared services. TSA terms typically range from 3-18 months and include pricing, service levels, and termination provisions. A well-structured TSA ensures business continuity during the transition period.

Related: Carve-Out · Divestiture · Closing

Valuation

The process of determining the economic worth of a business. Valuation methodologies include comparable transactions, comparable company analysis, discounted cash flow (DCF), and asset-based approaches. In lower-middle-market M&A, multiples of EBITDA or SDE are the most common methods. Valuation is both an art and a science — quantitative analysis establishes a range, but the final price is ultimately determined by market dynamics, buyer competition, and negotiation. Getting a professional valuation before going to market is a best practice.

Why it matters: Your business is worth what a buyer will pay. A professional valuation establishes a defensible range, but running a competitive process is what maximizes your actual sale price.

Related: Multiple · EBITDA · Seller's Discretionary Earnings (SDE) · Enterprise Value · Business Valuation · Comparable Transactions

Virtual Data Room (VDR)

A secure online platform used to store and share confidential documents during due diligence. VDRs provide granular access controls, audit trails, and watermarking. A well-organized VDR accelerates buyer review and signals seller professionalism. Leading VDR platforms include Intralinks, Datasite, Firmex, and SecureDocs. VDRs should be organized with a clear folder structure, consistent naming conventions, and an index document that guides buyers through the contents.

Related: Data Room · Due Diligence · CIM (Confidential Information Memorandum)

Vertical Merger

A merger between two companies that operate at different stages of the same industry's supply chain — for example, a manufacturer acquiring a distributor or a software company acquiring a data provider. Vertical mergers can reduce costs by eliminating intermediaries, secure supply chains, capture more of the value chain, and create barriers to competition. They generally face less antitrust scrutiny than horizontal mergers since they do not directly eliminate a competitor.

Related: Horizontal Merger · Synergies · Mergers and Acquisitions (M&A)

Weighted Average Cost of Capital (WACC)

The blended rate of return required by all of a company's capital providers — both debt and equity holders — weighted by their proportional contribution to the total capital structure. WACC is used as the discount rate in discounted cash flow (DCF) valuations and represents the minimum return a company must earn to satisfy its investors. WACC accounts for the cost of debt (adjusted for tax benefits), the cost of equity (often estimated using the Capital Asset Pricing Model), and the relative weight of each in the capital structure.

Related: Discount Rate · Capital Structure · Valuation · Leverage

Working Capital Adjustment

A post-closing mechanism that adjusts the purchase price based on the difference between actual net working capital delivered at closing and the agreed-upon target. If working capital is below target, the seller pays the buyer the shortfall; if above, the buyer pays the seller the excess. The working capital target is typically set at the trailing 12-month average of normalized net working capital. Disputes over working capital adjustments are one of the most common sources of post-closing conflict in M&A.

Why it matters: Negotiate the working capital target, the definition of included items, and the dispute resolution mechanism carefully. These details determine whether you owe money or receive money after closing.

Related: Net Working Capital · Closing · Holdback · Escrow