If you are at all familiar with my background, you know I spent several years as the CEO of two separate Microsoft businesses. During my time as a Microsoft Partner, I became very adept at slinging around multiple acronyms in a sentence to convey thoughts to my team members as Microsoft is notorious for creating acronyms for everything! Acronyms like BREP, F&O, SPA, CSP, and PSM were thrown together and had specific meaning and conveyed information. Unfortunately for anyone new to the organization, understanding those terms was like learning a second language. M&A, while not as egregiously full of unrecognizable abbreviations, does have its share and if you plan on entering into a transaction either on the buy or sell side, you need to know these terms and how they are used. Here are the top 12 most common acronyms you will most likely hear in an M&A transaction:
- EBITDA – Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is a measure of cash-flow that excludes the capital (or debt) service of the business, which helps with comparability from one transaction to another. A multiple of EBITDA is the most common used valuation metric for private companies.
- CIM– Confidential Information Memorandum. The CIM is prepared early in the sell-side process. It provides an overview of the company, including summary financial statements, metrics, KPI’s and customer data and is designed to put the seller in the best possible light while providing sufficient detail to the buyers so they can prepare an initial IOI or LOI.
- IOI or EOI– Indication of Interest or Express of Interest. An IOI is a non-binding letter prepared by the buyer to the seller in which the main purpose is to express a genuine interest in purchasing the company, but the issuer hasn’t yet had the opportunity to review sufficient data (due diligence) regarding the company. An IOI will offer an approximate price range. An IOI may be issued in advance of an LOI if the buyer is really serious, there are other buyers also interested and there is a sense of urgency to getting some information into the sellers’ hands. An IOI will also give you an idea of who is serious and who is not.
- LOI – Letter of Intent. The LOI is a document that outlines the preliminary terms of an agreement. While this is typically a non-binding document in most respects (except non-disclosure and non-compete), it is important to list out the key aspects of the deal in this document as it will serve as the foundation of the definitive purchase agreement. Once an LOI is accepted it typically prohibits the seller from speaking with other buyers for a specified time period: An IOI does not. A Memorandum of Understanding (MOU). A MOU is very similar to a LOI but is used when there are more than two parties involved.
- SPA – Sales and Purchase Agreement. This is the document, also referred to as the Definitive Agreement that is the main legal binding contract outlining the agreed upon conditions of the buyer and seller. Other agreements such as the Non-Compete or Ongoing Services Agreement are typically in addition to the SPA. You can plan on spending a month or more going back and forth with redlines before both parties are finally happy with all the definitions, terms, and conditions.
- TTM or LTM – Trailing Twelve Months or Last rolling Twelve Months. Most buyers want to see the most recent annualized information. While the calendar or fiscal year end numbers are important, there may be many months in between year end and when buyers are looking at the company. Providing TTM is a common request for financial statements and other company data.
- HB – Hold Back – A hold-back is cash kept back in an escrow account, usually for 12 months, and is there in case there are any unaccrued or unanticipated liabilities or expenses that arise post sale that should have been taken care of by the seller prior to the close if they were known. It can also cover items such as open accounts receivables being collectible, or customers being retained during that time period.
- YOY – Year Over Year. This is really the process of comparing one year over another year, both from a financial statement perspective as well as other management data. Common YOY metrics are revenue, sales, receivables, payables, inventory, customer counts, etc.
- MRR/ARR – Monthly Recurring Revenue and Annual Recurring Revenue. These are terms used mostly in respect to revenue when dealing with hosted solutions or Software as a Service (SaaS) revenue or Anything as a Service (AaaS).
- EV or TEV – Enterprise Value or Total Enterprise Value. These economic measures reflect the market value of a business. Unlike EBITDA, it includes the debt of a company and subtracts the cash and cash equivalents. TEV can be used to compare two companies with different levels of debt and equity.
- Earn-out (while not an acronym is an important term to understand): An earnout is part of a sale transaction where part of the price to be paid is conditional on future performance. This performance is usually tied to either revenue, gross profit margin, customer retention and/or employee retention. Most earnout periods last from 1 – 3 years. And earnout amounts can be calculated either on an annual, bi-annual, or quarterly basis. However annual is most common.
- QofE – Quality of Earnings Report – this is a report prepared typically by a CPA firm during the due-diligence period. This report (either paid for by the buyer or seller) provides a detailed analysis of all the components of a company’s revenue and expenses, and provides key analysis into the customer revenue, working capital, EBITDA adjustments or normalizations. While not an audit or a review, it does focus specifically on the key aspects a buyer would want to know when purchasing the company. It also assesses the sustainability and accuracy of historical earnings as well as the achievability of future projections. Many times, this report is at the request of the board of directors, or of a private equity firm funding an acquisition for a strategic buyer in their portfolio.
To get more detail on EBITDA or normalized EBITDA be sure to read our post here.