M&A Terminology Glossary
The terms that show up in M&A processes from initial outreach through closing and beyond. Understanding them avoids the most common buy-side and sell-side surprises.
LOI (Letter of Intent)
The LOI (sometimes called a term sheet or memorandum of understanding) is the first written summary of a proposed deal: purchase price, structure (stock vs. asset), key conditions, exclusivity period, target close date, and treatment of major items like working capital. Most provisions are non-binding — they're a basis for negotiation, not a contract. A few provisions are typically binding: exclusivity (the seller can't shop the deal), confidentiality, and expense allocation.
LOIs serve as alignment artifacts before either party invests heavily in diligence and definitive documents. A well-drafted LOI dramatically reduces the chance that diligence reveals fundamentally different expectations on price or structure. A vague LOI virtually guarantees re-trading later.
Due diligence
Due diligence is the buyer's deep investigation of the target across several dimensions: financial (audit-quality review of financials, customer concentration, working capital), legal (corporate records, IP ownership, contract assignability, litigation), commercial (market position, customer interviews, competitive landscape), tax (sales tax exposure, employment classification, R&D credits), HR (compensation arrangements, equity exposure, key-person risk), and technical (codebase quality, security, infrastructure).
Diligence typically takes 30-90 days for mid-market deals and 90-180 days for larger or more complex ones. Sellers prepare a virtual data room with thousands of documents; buyers staff teams of attorneys, accountants, and consultants to review them. Major issues surfaced in diligence either reset the deal terms or kill the transaction.
Definitive agreement (SPA / APA)
The definitive agreement is the binding contract that supersedes the LOI and governs the actual transaction. For a stock deal, it's a Stock Purchase Agreement (SPA); for an asset deal, an Asset Purchase Agreement (APA). The agreement runs hundreds of pages and includes purchase price mechanics, representations and warranties, covenants (pre-close behavior), conditions to close, indemnification, escrow, and remedies. Most M&A negotiation effort goes into the definitive agreement, not the LOI.
The choice between stock and asset structure is consequential. Stock deals transfer the entity (with all liabilities); asset deals transfer specified assets (leaving most liabilities behind). Tax outcomes, contract assignability, and employee transitions all differ. Buyers usually prefer asset deals (cleaner liability picture, step-up in tax basis); sellers usually prefer stock deals (capital gains treatment, fewer transfer taxes).
Reps and warranties
Representations and warranties ("reps and warranties" or "R&W") are the seller's statements of fact about the business: the financials are accurate, the company owns its IP, there's no undisclosed litigation, employment laws have been followed, taxes have been paid. If a rep turns out to be untrue, the buyer can recover damages — typically through escrow first, then sometimes from the sellers directly.
Reps cover dozens of topics; negotiation focuses on which reps survive how long ("survival period"), what triggers indemnification (knowledge qualifiers, materiality thresholds, baskets and caps), and what's excluded. Representations and warranties insurance (RWI) increasingly replaces seller indemnification for institutional deals, with the insurer assuming the indemnity obligation in exchange for a premium.
Earn-out
An earn-out conditions some portion of the purchase price on the target hitting defined post-close metrics — revenue, EBITDA, customer retention, product milestones — over a measurement period (typically 1-3 years). Earn-outs bridge valuation gaps when buyer and seller disagree on the future trajectory: the seller gets paid more if the business performs as promised; the buyer pays less if it doesn't.
Earn-outs are notorious sources of post-close conflict. The buyer controls operations after close and can take actions that depress earn-out metrics (cost cuts, product changes, sales redirection). Disputes over earn-out calculation are common. Sellers should structure earn-outs to use metrics that are objective, hard to manipulate, and not dependent on buyer decisions; both parties should write the calculation in extreme detail in the definitive agreement.
Escrow
An escrow holds a portion of the purchase price (typically 5-15%) for a defined period (typically 12-24 months) to fund any indemnification claims by the buyer. If no claims are made, the escrow releases to the sellers. If claims are made and validated, the buyer recovers from escrow first before pursuing the sellers directly.
Escrow is the buyer's first-line protection against rep breaches and undisclosed liabilities. Negotiation covers escrow size, duration (single survival period or tiered for different rep types), release schedule, and what happens to escrow proceeds during the holding period (typically held in money-market funds with interest going to sellers). Representations and warranties insurance is reducing the use of large escrows, since the insurer becomes the source of indemnification recovery.
Working capital adjustment
Most M&A deals include a working capital adjustment: the purchase price assumes the business is delivered with a defined level of working capital (often the trailing twelve-month average), and the purchase price is adjusted dollar-for-dollar for the difference between actual closing working capital and the target. The mechanism prevents sellers from pulling cash out of the business pre-close or stretching payables to inflate cash, both of which would shift value to the seller at the buyer's expense.
Working capital adjustments are technically straightforward but procedurally complex. Buyer and seller often disagree on how to compute working capital (which balance sheet items are included, how to treat reserves, how to value inventory, which payables are operational vs. financing). Detailed working capital schedules in the definitive agreement minimize disputes; ambiguity here is a frequent source of post-close litigation.
MAC clause (Material Adverse Change)
A MAC clause (sometimes "material adverse effect" or MAE) gives the buyer the right to abandon the deal if a material adverse change in the target's business occurs between signing and closing. MAC clauses are heavily negotiated. Buyers want broad MACs (any significant deterioration); sellers want narrow MACs (specific carve-outs for industry-wide changes, regulatory actions, force majeure, COVID-style events).
Courts interpret MAC clauses narrowly — invoking a MAC successfully requires showing a fundamental, sustained change to the business, not a temporary downturn or a moderate decline. Most attempted MAC invocations fail in litigation. The clause's main practical value is leverage to renegotiate price during a closing-period downturn, not to actually walk.
Closing conditions
Closing conditions are the items that must be true on the closing date for the deal to proceed: regulatory approvals (Hart-Scott-Rodino antitrust review, foreign investment review, industry-specific regulators), third-party consents (assignments of key contracts, lender consents), key-employee retention agreements, completion of audit, no MAC, accuracy of reps as of closing date. If conditions aren't met, either party may walk (subject to break-up fees in some structures).
The gap between signing and closing — typically 30-90 days for mid-market, 6-18 months for regulated megadeals — is when conditions get satisfied. Risk during this period is real: regulatory changes, litigation, customer churn, key-employee departures, and MACs all surface here. Best practice: minimize conditions, prepare them in parallel with diligence, and run closing-prep workstreams from day one of definitive agreement work.
Break-up fee / reverse break-up fee
A break-up fee is a payment made by the seller to the buyer if the seller terminates the deal — typically because the seller accepts a higher "superior proposal." The fee compensates the original buyer for time and money invested in diligence and negotiation, and discourages the seller from shopping the deal. Common range: 2-4% of deal value.
A reverse break-up fee is paid by the buyer if the buyer terminates for specified reasons — usually regulatory blockage or financing failure. Reverse break-up fees are common in deals where regulatory risk or financing risk is non-trivial. Both fees are negotiated heavily in competitive processes; in less-competitive deals, fees may be small or absent.
Earnest money / deposit
Earnest money (more common in real estate transactions but increasingly seen in M&A) is a deposit the buyer puts up to demonstrate commitment and lock in exclusivity. It's typically 1-5% of purchase price, held in escrow during exclusivity, and forfeited if the buyer walks for non-permitted reasons. It's distinct from break-up fees in that it's prepaid rather than promised.
Earnest money is uncommon in standard tech M&A but appears in distressed sales, founder-led liquidity events, and real estate-heavy transactions. The size is calibrated to be painful enough to deter casual interest but small enough that committed buyers can absorb it.