M&A Glossary; Mergers and Acquisitions Terms
338(h)(10) Election – A Section 338(h)(10) election allows an acquiring corporation to treat its acquisition of the stock of a subsidiary corporation or an S corporation as an acquisition of assets followed by a tax-free liquidation, often resulting in a stepped-up basis for such assets.
Acquirer – The individual or company that is purchasing the stock of a Target company in stock purchase or the assets in an asset purchase, or the company which is acquiring a Target by means of a merger.
Arbitration – A form of alternative dispute resolution outside the courts, wherein the parties to a dispute agree to be bound by the decision of one or more arbitrators.
Asset Purchase – An agreement by which a business sells some or all of its assets to an Acquirer.
Assets – The property of a business which is defined in an asset purchase agreement, but which generally includes real estate, tangible personal property such as office equipment, manufacturing, automobiles and inventory, as well as intangible assets such as patents, copyrights and trademarks, and may include cash and securities.
Balance sheet – A snapshot of a company’s financial condition. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its Fiscal Year.
Book value – A determination of a company’s balance sheet value by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. Book value per common share is determined by dividing the book value by the number of common shares outstanding.
Break-Up Fee – A fee paid to a prospective Acquirer if a contemplated transaction is not consummated for reasons specified in the purchase agreement. Also called a “Termination Fee.”
Buy-Sell Agreement – An agreement among the shareholders of a company that governs how the owners of a business can sell their interests in the business, to whom, when, and at what price. The agreement includes provisions for death, disability, retirement, divorce, and voluntary and involuntary transfers. (Also called a Shareholder Agreement).
C Corporation – A corporation which is taxed as an entity that is separate from its shareholders in accordance with Subchapter C of the Internal Revenue Code.
Capital Gains – The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income. Individuals report capital gains on Form 1040, Schedule D.
Closing – The event when the required legal agreements (e.g., stock purchase agreement, asset purchase agreement or merger agreement) are implemented between the parties and shares or assets are exchanged for the consideration specified in the agreements. See also Effective Date.
Confidentiality Agreement – See Non-Disclosure Agreement below.
Covenant Not To Compete – An agreement often signed by an employee or a selling shareholder whereby they agree not to work for competitor companies or form a new competitor business within a specified period after termination of employment or the closing of the acquisition. Also called a “Non-Competition Agreement”.
Effective Date – The date a contract (e.g., a stock or asset purchase agreement) is signed and becomes legally binding. Unless the contract is signed and closed the same day, there may be a period of time between the Effective Date and the Closing date.
Exclusivity – A provision in an agreement, such as a Term Sheet or Letter of Intent, in which the prospective seller agrees not to consider alternative offers or negotiate a separate deal from other suitors for a specific period of time.
Financial Statements – Financial reports of a company which include: Balance Sheet; Income statement (or Profit and Loss statement (“P&L”), Statement of retained earnings which explains the changes in a company’s retained earnings over the reporting period; and Statement of Cash flows which reports a company’s cash flow activities.
Fiscal Year – A 12-month period over which a company budgets its spending. A fiscal year may run over any period of 12 months. (See also Accounting Period).
GAAP – “Generally Accepted Accounting Procedures” are the common set of accounting principles, standards and procedures established by the Financial Accounting Standards Board that companies use to compile their Financial Statements.
Goodwill – An intangible asset which provides a competitive advantage, such as a strong brand and reputation. Following an acquisition, goodwill will appear on the balance sheet of theacquirer in the amount by which the purchase price exceeds the net tangible assets of the Target.
IFRS – Guidelines and rules set by the International Accounting Standards Board (IASB) that companies may follow when compiling Financial Statements.
Indemnification – A contractual term whereby one party agrees to compensate the other party for any loss that the other party may suffer related to the contract or transaction. In stock and asset purchase agreements, it is typical for one party to indemnify the other party for a breach of Representations and Warranties made by such party.
Installment Sale – A sale of property where at least one payment is to be received after the tax year in which the sale occurs. See IRS Publication 537.
Investment Banker – An individual or institution that helps businesses raise capital by issuing and selling securities, and providing advice to clients to facilitate Mergers & Acquisitions.
M&A – An abbreviation for “Mergers & Acquisitions“, which generally refers to the buying and selling of companies, or the combination of two companies in which only one of the companies survives. Acquisitions can be asset purchases, where the buyer purchases the seller’s assets, without assuming any liabilities, or stock purchases, where the buyer purchases the business’s stock and takes over the seller’s business.
Management Buyout – Purchase of a business by its existing management team.
Material Adverse Change – A contractual provision in a stock purchase or asset purchase agreement that specifies that the transaction shall not terminate in the absence of certain material adverse changes to the seller’s business prior to the Closing.
Purchase Price Adjustment – A contractual provision designed to reflect the change in value of an asset between a specific date (e.g., the effective date of an asset or stock purchase agreement) and Closing.
S Corporation – An eligible corporation whose shareholders have elected to have the income of the corporation be passed-through to the shareholders in accordance with Subchapter S of the Internal Revenue Code.
Shareholder Agreement – See Buy-Sell Agreement.
Tax-Free Reorganization – Certain forms of business combinations governed by Internal Revenue Code Section 368 in which shareholders do not incur tax liabilities.
Termination Fee – See “Break Up Fee” above.