Glossary

A-D

Accretion/Dilution Analysis: Financial analysis determining whether an acquisition increases (accretive) or decreases (dilutive) the acquirer's earnings per share. Accretive transactions improve EPS, while dilutive transactions reduce EPS.

Asset Purchase: Transaction structure where the buyer purchases specific assets and assumes selected liabilities, rather than purchasing the legal entity. Allows buyer to cherry-pick assets while avoiding unwanted liabilities.

Break-up Fee: Fee paid by the target company to the buyer if the target accepts a competing offer or terminates the agreement under specified circumstances. Compensates buyer for transaction expenses and opportunity cost.

Carve-out: Divestiture where a parent company sells a complete or partial stake in a subsidiary, often through an IPO while retaining some ownership.

Change of Control: Transaction clause triggered when ownership or control of a company changes hands, often giving counterparties specific rights (consent requirements, termination rights, price adjustments).

Comparable Companies Analysis: Valuation method comparing the target to similar publicly traded companies using valuation multiples (EV/Revenue, EV/EBITDA, P/E ratio).

Data Room: Secure physical or virtual location where confidential company information is made available to potential buyers during due diligence. Virtual data rooms (VDRs) are standard in modern M&A.

DCF (Discounted Cash Flow): Intrinsic valuation methodology projecting future free cash flows and discounting them to present value using the weighted average cost of capital (WACC).

Due Diligence: Comprehensive investigation and analysis of a target company conducted by a potential acquirer to validate assumptions, identify risks, and inform valuation and deal structuring.

E-L

Earnout: Purchase price component paid contingent upon the acquired business achieving specified financial or operational targets post-close. Bridges valuation gaps and aligns buyer-seller incentives.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Commonly used profitability metric representing cash earnings from core operations before capital structure, tax, and non-cash accounting impacts.

Enterprise Value: Total value of a company's operations, calculated as equity value plus net debt (debt minus cash) plus other claims (minority interest, preferred stock). Represents the theoretical takeover price.

Equity Value: Market value of a company's equity (common stock), representing the value attributable to shareholders after accounting for debt and other claims.

Escrow: Funds held by a third party at closing to satisfy potential post-close adjustments or indemnification claims. Provides security for buyer's claims without requiring collection efforts against sellers.

Friendly Merger: Transaction where the target company's board approves the acquisition and recommends shareholders accept the offer.

Goodwill: Accounting concept representing the excess of purchase price over the fair value of identifiable net assets acquired. Reflects intangible value such as brand, customer relationships, and workforce.

Holdback: Portion of purchase price withheld at closing to satisfy potential adjustments or claims. Similar to escrow but retained by buyer rather than third party.

Hostile Takeover: Acquisition attempt where the buyer makes an offer directly to shareholders without target board approval or despite board opposition.

Indemnification: Purchase agreement provision requiring sellers to compensate buyers for losses resulting from breaches of representations and warranties or specified risks. Risk allocation mechanism.

Integration: Post-close process of combining acquired company with buyer's operations, systems, and culture to realize synergies and achieve acquisition objectives.

LBO (Leveraged Buyout): Acquisition financed primarily with debt, using the target company's assets and cash flows as collateral. Typically pursued by private equity firms seeking high returns through financial leverage.

Letter of Intent (LOI): Non-binding agreement outlining key transaction terms (price, structure, timing, exclusivity) before comprehensive due diligence and definitive documentation. Signals serious intent while preserving flexibility.

M-P

Management Buyout (MBO): LBO where the target company's existing management team participates as equity investors, partnering with financial sponsors to acquire the business.

Material Adverse Change (MAC): Condition allowing a buyer to terminate a transaction if specified adverse events occur before closing. Heavily negotiated provision defining extraordinary circumstances releasing buyer from obligation.

Net Debt: Total debt minus cash and cash equivalents. Used to adjust enterprise value to equity value: Equity Value = Enterprise Value - Net Debt.

No-Shop Clause: Agreement provision prohibiting the target from soliciting or entertaining competing offers during a specified exclusivity period. Protects buyer's diligence investment.

Non-Disclosure Agreement (NDA): Confidentiality agreement executed before sharing sensitive information, establishing obligations to maintain confidentiality and restrictions on information use.

Normalized Earnings: Historical earnings adjusted for non-recurring items, accounting irregularities, and other factors to reflect sustainable ongoing earnings power. Foundation for valuation.

Precedent Transaction Analysis: Valuation method examining multiples paid in recent comparable acquisitions. Reflects control premiums and synergy expectations built into acquisition pricing.

Pro Forma: Financial statements showing how combined company financials would appear "as if" the transaction had occurred at an earlier date, incorporating adjustments for the transaction.

Purchase Price Allocation: Accounting process allocating transaction purchase price to acquired assets and liabilities at fair value, with excess recorded as goodwill.

Q-Z

Quality of Earnings (QoE): Financial due diligence process normalizing historical earnings to reflect sustainable earnings power, identifying non-recurring items and accounting quality issues.

Representations and Warranties: Seller statements about the condition of the business included in the purchase agreement. Form the basis for indemnification claims if breached.

Reverse Merger: Transaction where a private company acquires a public shell company, becoming publicly traded without conducting an IPO.

Run-Rate: Annualized projection of financial results based on current period performance. Used to project full-year results from partial-year data or to reflect impact of recent changes.

Spin-off: Divestiture where a parent company distributes subsidiary shares to existing shareholders as a dividend, creating an independent publicly traded entity.

Stock Purchase: Transaction structure where the buyer purchases the target company's outstanding shares, acquiring the legal entity with all assets, liabilities, and obligations.

Synergy: Value created through the combination of two companies that couldn't be achieved separately. Includes revenue synergies (cross-selling, market expansion) and cost synergies (overhead elimination, vendor consolidation).

Tender Offer: Acquisition structure where the buyer offers to purchase shares directly from target company shareholders, typically at a premium to market price.

WACC (Weighted Average Cost of Capital): Blended cost of a company's debt and equity capital, weighted by the proportion of each in the capital structure. Used as the discount rate in DCF valuation.

Working Capital: Operating liquidity required to run the business day-to-day, typically defined as current assets (excluding cash) minus current liabilities (excluding debt). Purchase agreements establish working capital targets with adjustment mechanisms if actual closing working capital differs.