Types of Deal Structure and M&A Terms

In M&A there are many terms and concepts that you may find unfamiliar. Here are some common deal structures and M&A terms you should know to help you make informed decisions:    Deal Structures    100% sale: You sell 100% of your business to someone else and completely exit the business. You have little or no relationship with the business after the sale. This is the cleanest exit from a seller’s point of view. This type of deal requires the most due diligence from the buyer,a as they are taking over ownership of the business completely and they want to ensure that there will be no problems after the sale. You will need to define non-compete agreements, along with safeguarding employee interests, to make the transition a smooth one.    Majority sale: You sell a majority of your shares (>50%) giving control of the business to the buyer. You retain some shares but do not control the business anymore. In this type of deal, the buyer will be largely responsible for the business after the sale, but you will also stay as a shareholder thus reducing their risk. If you want to stay in the business after the sale, you need to agree on your role and responsibilities, as well as what happens to your remaining shares in the future.     Minority sale: You sell a non-controlling stake (<50%) in your business to someone else. You still own the majority of the business and control it, and the buyer might want to buy the rest later. It is important for you to agree on how much say the buyer has in the business as a minority shareholder. Due diligence is less detailed as you remain in the business.     Equity partnerships: You sell equity to a partner as part of a strategic partnership between your businesses. It is important to communicate about the strategic partners involvement and ensure they share the vision for your business.    Growth capital: You get new equity investment into the business for growth, typically in return for a minority stake in the business. You need to agree on the investment amount and specific terms and conditions for that investment.     M&A Terminology  Now, how about deal terminology? Here are some important words you should know when you do deals:     Acquirer: The company that buys the business during the M&A and assumes control.     Target company: The business that the buyer buys and the seller sells.    Controlling stake: A shareholding of >50% that allows the buyer to exert control over the business.    Synergies: The benefits that come from combining two businesses, such as saving money or making more money.     Non-Disclosure Agreement (NDA): A contract that says you can't share any confidential information that is shared between parties during negotiations.    Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA): A financial metric reflecting operational profitability. It is a key indicator to assess a company’s earning potential and basis of valuation.     Net Debt: Total debt minus cash and cash equivalents.     Valuation: How much the business is worth.     Acquisition multiple: A measure of the valuation of the business as a multiple of Revenue or EBITDA or another metric.     Letter of Intent (LOI): A non-binding document outlining the preliminary agreement between a buyer and seller before a detailed contract is drafted.    Preferred Stock: A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock and typically pays fixed dividends.    Earnout: A part of the deal where you get more money later if you meet certain goals.     Purchase Agreement: The main contract outlining the terms of the sale, including payment terms, representations and warranties, indemnifications, and other legal conditions.     Covenants: Legally binding agreements or clauses within a contract that stipulate certain actions that must or must not be undertaken by the parties involved.     Closing: The last step is when the payment is made and the ownership changes.     Due Diligence: The process of the buyer checking the information given by the seller