Glossary
A Guide to Acronyms of Selling Your Business.
LOI
Letter of Intent
A non-binding document outlining the proposed terms of the deal, including price and payment structure. For a lower middle market business owner, this is an important step in gauging serious buyer interest. (Be aware that certain clauses, like confidentiality and exclusivity, can be binding, and may carry legal obligations.)
APA
Asset Purchase Agreement
A legal contract detailing the sale of specific assets rather than the entire business. Common in lower middle market transactions, where buyers prefer to acquire only certain assets to avoid assuming liabilities. Sellers should note that asset sales can have tax implications, such as capital gains tax, depending on how assets are classified.
CIM
Confidential Information Memorandum
A detailed document given to qualified buyers, providing a comprehensive overview of the business’s operations, financials, and growth potential. It’s a marketing document that highlights the business’s strengths, but sellers should ensure it also presents a balanced and accurate picture, including risks, to avoid later surprises during due diligence.
MAC
Material Adverse Change
A clause allowing the buyer to walk away from the deal if a significant negative event occurs before closing. What qualifies as "material" can vary, and it’s a heavily negotiated clause. For lower middle market businesses, even seemingly small changes, like the loss of a key customer, could trigger a MAC, so it’s important to clarify this in the agreement.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization
A key financial metric used by buyers to assess the operational profitability of a business, excluding financing and accounting variables. In M&A, EBITDA is often adjusted for one-time or non-recurring expenses (called Adjusted EBITDA) to give a clearer picture of ongoing profitability. Sellers should expect buyers to focus on adjusted figures during negotiations.
NDA
Non-Disclosure Agreement
A legal agreement ensuring confidentiality during the sale process. This protects sensitive financials, proprietary processes, and customer/vendor information. For lower middle market businesses, it’s crucial to ensure the NDA covers all aspects of the business that could be exposed during due diligence.
RWI
Representations and Warranties Insurance
Insurance that protects against breaches of representations and warranties in the sale agreement. While useful, it is not always common in lower middle market transactions due to the cost. Sellers should weigh whether the expense is justified based on the size and risk profile of the transaction.
SPA
Stock Purchase Agreement
A contract where the buyer purchases the seller’s shares, taking over the entire company, including its assets and liabilities. While less common than asset sales in lower middle market deals, sellers should be aware that tax implications (like capital gains tax) can differ between stock and asset sales. Consulting a tax advisor is essential to determine which structure is more advantageous.
Sell with Confidence
Spencer@Madfarm.co | 469-387-3020
