It’s not uncommon that M&A advisors take for granted the terms and negotiating techniques we use every day. The truth is, not all these terms are used in every industry and on every transaction. You need to know what your industry’s common M&A terms are and how they can be used as part of the negotiation process of buying and selling a business.
You may recognize and understand a few of the more common terms but truly understanding when and how they are used in any given business is valuable. Timing is critical in the sale or purchase of a business. If a Letter of Intent “LOI” is presented early in the process, it demonstrates an aggressive buyer. No, this doesn’t necessarily mean the acquirer is offering a premium (higher price) because they desire the business. In many cases, it’s the opposite –a fair or even discounted offer is made to avoid participating in an investment bank’s process which creates competition to increase the purchase price. This higher valuation is often supported by using diligence groups who are experienced in defending the important EBITDA amounts, working capital calculations, and possibly the technology.
Most Common Terms
- Letter of Intent “LOI” – referred to as “under contract”
- Earnings Before Interest Tax Depreciation & Amortization “EBITDA”
- Stock Purchase Agreement “SPA” or Asset Purchase Agreement “APA”
- Multiple (shown as “x”)
- Rollover Equity –Your money rolls into the new company with the buyer
- Exclusivity –You can’t speak with other interested parties
What if you receive an unexpected LOI?
Not all LOIs are created equal. Some are very specific which include more than just the purchase price and structure. Depending on how conversations go between the parties and if an investment banker is involved, additional terms may be agreed upon before going under contract (accepting the LOI). Exclusivity is normally a key item parties agree to by signing the LOI. This means the seller cannot speak with other interested parties. The LOI usually shares how the purchase price is determined by sharing the multiple used on either the sales or EBITDA.
Industries like technology, software and select tech-enabled sectors often have multiples of sales in the LOI rather than EBITDA. This is mainly driven by their rapid growth and margin profile. Manufacturing, service, and distribution companies tend to have a multiples of EBITDA included in the LOI as they are normally vied as more stable type industries. Mathematically, either can be used but its best to speak about your business in the more common terminology to demonstrate your experience in these types of conversations.
Less Common Terms
- Asset-Based EBITDA
- Earn-out
- Seller Note
- Leverage Buy-out Model “LBO”
- Discounted Cash Flow “DCF” model
- Mezzanine Debt
- Restricted Stock Units “RSUs”
- Profits Interest Units “PIUs”
Much of the value in the sale process is in negotiating these terms and the strategy/organization of information between parties. As a business owner, it’s important for you to work with your advisors in understanding which terms are being negotiated and identify which are most important to you.
For additional information, contact our M&A experts, Keith Carlson or Ely Friedman.
