The M&A Glossary Every Founder Needs Before Entering a Deal

If you're considering selling your business or pursuing a merger, you're about to enter a world full of acronyms, legal terms, and financial jargon that nobody explains upfront. Advisors and buyers use this language every day, you might be hearing it for the first time.

That knowledge gap is a real disadvantage.

This guide breaks down the most common terms you'll encounter during a merger or acquisition process, in plain English.

The Big Picture Terms

M&A (Mergers & Acquisitions) The broad category that covers any transaction where businesses are combined, bought, or sold. When someone says "we're in an M&A process," it means a deal is being explored or actively worked on.

Enterprise Value (EV) The total value of your business, what a buyer is actually paying for. This is different from what you walk away with at closing. Enterprise Value includes your equity plus any debt the buyer is taking on, minus cash on hand.

Equity Value What's left for you after the debt and other adjustments are subtracted from the Enterprise Value. This is closer to your actual take-home number.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) The single most important number in most M&A deals. It's a way to measure the true operating profitability of your business, stripped of things that vary by ownership structure (like how you're taxed or financed). Buyers use EBITDA to calculate what your business is worth.

Multiple The number buyers multiply by your EBITDA to arrive at a valuation. If your EBITDA is $1M and a buyer offers a 6x multiple, they're valuing your business at $6M. Multiples vary by industry, size, growth rate, and buyer type.

SDE (Seller's Discretionary Earnings) Common in smaller businesses. Similar to EBITDA, but it also adds back the owner's salary and personal benefits, since a new owner would replace those with their own. Often used for businesses under $1M in annual profit.

The Process Terms

CIM (Confidential Information Memorandum) A detailed document your advisor prepares that describes your business to potential buyers. Think of it as a well-organized pitch book, it covers your financials, operations, customers, growth story, and why the business is worth buying.

NDA (Non-Disclosure Agreement) A legal agreement that requires anyone receiving your business information to keep it confidential. Every serious buyer signs one before seeing your financials. Don't share anything sensitive without one in place.

IOI (Indication of Interest) An early, non-binding signal from a buyer that they're interested and willing to pay within a certain range. It's not an offer, it's a starting point. It tells you who's serious enough to keep talking to.

LOI (Letter of Intent) This is a big one. An LOI is a written document from a buyer that outlines the key terms of a proposed deal, price, structure, timeline, and any major conditions. It's still non-binding in most areas, but it marks the official start of exclusivity and due diligence. Receiving an LOI doesn't mean you're sold. It means you've agreed to stop talking to other buyers while you verify the deal.

Exclusivity Once you sign an LOI, you typically agree to a period of exclusivity, usually 60 to 90 days, during which you can only negotiate with that one buyer. This is why having multiple offers before signing an LOI matters. You lose your leverage once exclusivity begins.

Due Diligence (DD) The deep-dive investigation a buyer conducts after the LOI is signed. They'll review your financials, contracts, customer relationships, employee agreements, legal history, and operations in detail. This is where deals slow down, or fall apart. Being prepared for due diligence is one of the most important things you can do.

QoE (Quality of Earnings) A third-party financial analysis that a buyer's accountants perform during due diligence. It verifies that your reported earnings are accurate, consistent, and sustainable. A poor QoE can lead to a lower offer, a restructured deal, or a collapsed transaction.

The Financial Terms

Add-Backs Expenses that get added back to your EBITDA to reflect the true profitability of the business. These are typically one-time or personal expenses that a new owner wouldn't incur, things like your personal vehicle, a one-time legal settlement, or family members on payroll who won't stay on after the sale. Legitimate add-backs increase your EBITDA, which increases your valuation.

Working Capital The cash your business needs to operate day-to-day, typically calculated as current assets minus current liabilities. In most deals, you're expected to deliver the business with a "normal" level of working capital. If you deliver less, the purchase price adjusts down. This is one of the most misunderstood parts of a deal and one of the most common sources of last-minute surprises.

Closing Waterfall The sequence of payments and deductions that happen at closing before you receive your final proceeds. Debt payoffs, advisor fees, escrow holdbacks, and working capital adjustments all come out before your check is cut. The headline number in your LOI is not what you take home.

Escrow / Holdback A portion of your proceeds that gets held back at closing, typically 5% to 10%, and held in escrow for a period of time (usually 12 to 18 months) to cover any post-closing claims or indemnification issues. If nothing comes up, you receive it at the end of the holdback period.

Earnout A portion of your deal proceeds that you receive after closing, contingent on hitting specific performance targets, usually revenue or EBITDA goals. Earnouts allow buyers to reduce upfront risk. For sellers, they can be a way to maximize total deal value, but they carry real risk if the business underperforms or the new ownership changes direction.

Seller Note A form of seller financing where you agree to accept part of your payment over time instead of all at closing. The buyer pays you back with interest over a set period. It reduces the buyer's upfront capital requirement and can sometimes help close valuation gaps, but it means accepting ongoing risk tied to the new owner's performance.

Rolled Equity When a seller retains a portion of ownership in the business after the sale. Common in private equity deals where the buyer wants the founder to remain engaged and have "skin in the game." If the business continues to grow and sells again, you could receive a second payout, sometimes called a "second bite of the apple."

The Buyer Terms

Strategic Buyer A company that acquires your business because it fits their existing operations, a competitor, a supplier, a customer, or someone expanding into your market. Strategic buyers often pay more because they see synergies that create value beyond what your business generates alone.

Financial Buyer Typically a private equity firm or investment group that buys businesses as a financial investment, with the goal of growing and eventually selling them again. They evaluate deals based on return on investment and typically use a combination of their own capital and borrowed money (leverage) to fund acquisitions.

PE (Private Equity) Investment firms that pool capital from investors and use it to acquire businesses. PE firms often target businesses with strong cash flow, a clear growth story, and scalable operations. They typically plan to hold a business for 3 to 7 years before selling.

Platform vs. Add-On In private equity, a "platform" company is the anchor acquisition, the foundation they build around. An "add-on" is a smaller business they acquire and bolt onto the platform. If a PE firm approaches you as an add-on, your business will likely be merged into something larger.

Family Office A private investment entity managing wealth for a high-net-worth family or families. They often have patient capital and a longer investment horizon than traditional PE. Many founder-led businesses find family offices to be attractive buyers because of their flexibility and long-term mindset.

The Legal Terms

Asset Sale vs. Stock Sale One of the most important structural decisions in any deal. In an asset sale, the buyer purchases specific assets of your business (equipment, contracts, customer lists, intellectual property). In a stock sale, the buyer purchases your ownership stake in the company itself, inheriting all assets and liabilities. Sellers typically prefer stock sales for tax reasons. Buyers often prefer asset sales because it limits their liability exposure. Your deal structure will have a meaningful impact on your tax outcome.

Reps and Warranties (R&W) Representations and warranties are legally binding statements you make about your business as part of the purchase agreement. You're essentially certifying that what you've told the buyer is true, about your financials, contracts, litigation history, employee matters, and more. Breaches of reps and warranties can trigger indemnification obligations after closing.

Indemnification A legal obligation to compensate the buyer if something you represented about the business turns out to be inaccurate or if a claim arises from pre-closing operations. This is one reason the escrow holdback exists, it gives the buyer a fund to draw from if an indemnifiable issue surfaces after closing.

Definitive Purchase Agreement (DPA / SPA) The final, fully negotiated legal contract that governs the sale of your business. Also called a Stock Purchase Agreement (SPA) or Asset Purchase Agreement (APA) depending on structure. This is the binding document that closes the deal.

No-Shop / No-Talk Provisions in an LOI that prevent you from soliciting or even discussing offers with other buyers during exclusivity. Understanding what your no-shop clause allows, and doesn't allow, is critical before you sign.

Other Terms Worth Knowing

Retrading When a buyer tries to renegotiate the price or terms after the LOI has been signed often using issues discovered during due diligence as justification. Some retrading is legitimate when real problems are uncovered. Some is opportunistic. It's one of the most frustrating things a founder can experience after getting to the LOI stage.

Management Retention / Employment Agreement Many deals require the founder or key management to stay on for a period of time after closing to ensure a smooth transition. This is often formalized in an employment or consulting agreement and may be tied to earnout or rollover equity provisions.

Confidentiality Running an M&A process is sensitive. If employees, customers, or competitors find out you're considering a sale before you're ready to disclose it, it can damage your business. Managing confidentiality throughout the process, from initial outreach to closing, is something a good M&A advisor will prioritize.

The Bottom Line

Understanding the language is just the first step. The more familiar you are with these terms before entering a process, the better positioned you'll be to ask the right questions, evaluate what you're being offered, and make decisions with confidence. And if you still have questions after reading this, remember that at Founder M&A, our advisors are always here to help.

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