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M&A Glossary; Mergers and Acquisitions Terms

338(h)(10) ElectionA 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.

Accounting Period The time period reflected by a set of financial statements, or  the 12-month period  a taxpayer uses to determine his or her income tax. (Also called Fiscal Year)

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.

Acquisition – The purchase of the assets or stock of a business, or the take over of a business 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.

Audited Financial Statements – Financial Statements which have been audited by a Certified Public Accountant in accordance with Generally Accepted Accounting Principles.

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.

Basket – The minimum threshold which must be exceeded before an Acquirer is entitled to receive and Indemnification payment for losses caused by a Seller’s breach of Representations & Warranties.

Book valueA 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 FeeA 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.”

Business Broker – An intermediary between sellers and buyers of small businesses who typically earn a commission upon the closing of a sale of the business.

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.

ClosingThe 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 AgreementSee Non-Disclosure Agreement below.

Covenant Not To CompeteAn 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”.

Due DiligenceA process undertaken by potential Acquirers to analyze and assess the desirability, value, and potential of a business which they may acquire.

Earn-OutA term in a stock purchase agreement or asset purchase agreement which entitles  the seller to an increase in the purchase price if certain financial milestones are achieved.

EBITDA“Earnings Before Interest, Taxes, Depreciation and Amortization”: A measure of cash flow calculated as: Revenue – Expenses (excluding tax, interest, depreciation and amortization).

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.

EquityThe ownership interests in a company,  generally in the form of stock or stock options.

ExclusivityA 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.

IndemnificationA 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 SaleA 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.

Intellectual PropertyA business’s legally protectable intangible assets, including  patents,  copyrights,  trade names, domain names,  trade secrets and trademarks or servicemarks.

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.

Letter of IntentA letter of intent (LOI) is a preliminary agreement between two or more parties which outlines the terms of a potential transaction.

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 ChangeA 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.

MergerThe legal combination of two or more corporations where one corporation goes out of existence and one corporation remains as the surviving entity.

Non-Disclosure AgreementAn agreement to protect confidential information being disclosed to a prospective investor or acquirer. Also called an “NDA” or “Confidentiality Agreement”.

Promissory NoteA promissory note is a form of debt that a maker/debtor issues to raise money or pay as consideration in an acquisition.

Purchase Price AdjustmentA 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.

Purchase Price AllocationThe assignment of fair values to all major assets and liabilities of an acquired business following an acquisition.

Representations & WarrantiesStatements of fact and assurances by one party to the other party that certain facts or conditions are true or will be true at Closing.

Restricted StockShares of stock which may not be sold in a public offering without a federal securities registration or after the expiration of a specific holding.

Reverse Triangular MergerThe merger of the Acquirer’s subsidiary with and into the target company. As a result, the target would become a wholly-owned subsidiary of the Acquirer.

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.

Seller – The seller of a business. In an asset sale, the Seller is the company. In a stock sale, the Sellers are the shareholders.

Security Agreement A document  where a Borrower grants the Lender a security interest in personal property (i.e., collateral).

Shareholder Agreement – See Buy-Sell Agreement.

Spin OffA type of divestiture where a division or subsidiary is sold by the parent company.

Stock Purchase – An agreement for the acquisition of a business by which the shareholders transfer their shares to the acquirer.

Target – The business to be acquired in a proposed acquisition.

Tax-Free ReorganizationCertain forms of business combinations governed by Internal Revenue Code Section 368 in which shareholders do not incur tax liabilities.

Term SheetA document setting forth the terms of a proposed acquisition, merger or securities offering. A term sheet may take the form of a “Letter of Intent”.

Termination FeeSee “Break Up Fee” above.

Triangular MergerA type of merger  where a target company merges with and into a subsidiary of the acquiring corporation.

Working CapitalCurrent assets minus current liabilities. Working capital is a measure of a company’s  liquid assets.

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