Top Buzzwords & phrases you need to know within M&A

You don’t need to be a financial expert or FD to take your MSP through the M&A process (we recommend you work with a good one though!) but the M&A space is known for having more 3 letter acronyms than us IT guys.

The below are some of the most common phrases and words used during the sale / buy process for a business so we would recommend you become familiar with them.

• Buy & Build

The process of growing an MSP by acquiring other MSP’s and bolting them to the original MSP, to create a larger MSP or holding company. It’s a common practice to grow via a buy and build strategy to increase the value and multiple on exit.

• M&A

Mergers & Acquisitions

• Due Diligence (DD)

Due diligence is an investigation or review performed to confirm facts or details of a matter under consideration. When an acquirer is interested in purchasing your MSP, they will have a process and list of questions to run over about your MSP to form their DD.

• Data Room

A data room or ‘virtual data room’ is a secure location (usually cloud based) that contains key information and documents about a company. The process of Due diligence will normally include reviewing all documents within the data room & in depth Q&A.

• Earn-Out (EO)

An earn-out is a common practice used during the sale of a business. It is used by the buyer to hold back some of the funds to protect their investment but to also motivate the seller during the sale process. Earn-outs can be structured in many ways but its recommend to seek advice from someone with experience before agreeing to EO terms.

• Add-back

When valuing a business, buyers will place an offer on the business (often a multiple of EBITDA). If you have ongoing expenses that won’t be included in your cash flow after a transaction, these are called add backs. For example, owner expenses.

• Information Memorandum (IM)

An IM or information Memorandum within M&A is a short document that serves to provide potential buyers with essential information about the MSP for sale in a well-prepared format.

• LOI (Letter of intent)

A LOI within M&A is a written expression of potential buyers intent to enter into a transaction and a summary of the deal terms.

• Teaser Document / Letter

A teaser document is one of the first steps within the M&A process. The teaser contains high level information about the MSP for sale (without disclosing who they are). This is to create interest from the market. Once NDA’s are signed then further information is disclosed to the potential acquirers.

• Asset

An asset is a tangible investment that has an intrinsic value that adds value to the MSP. For example property, IP etc…

• Liability

Liabilities are any debts or costs your MSP has, whether it’s bank loans, mortgages, unpaid bills, or similar.

• Buy Side

Anything related to the business and parties that are looking to buy the target MSP.

• Sell Side

Anything related to the MSP that is for sale

• Target

The MSP that is available on the market or going through a sale process is often referred to as a target

• MBO

Management Buy-Out – A form of acquisition where a group led by the management of the MSP buy out the majority of the shares from existing shareholders.

• Compound Annual Growth rate (CAGR)

Compound annual growth rate (CAGR) is a measure of growth (%) from one period to another.

• CAPEX

Capital Expenditure – Money invested by a business to acquire or upgrade non-consumable assets. Often an upfront cost.

• OPEX

Operational Expenditure – Money invested by a business on on-going or day to day running of the business or systems. Often costs are spread over a term.

• MRR

Monthly Recurring Revenue

• ARR

Annual Recurring Revenue

• Capital Gains

Capital gain refers to the increase in the value of a capital asset when it is sold from its original purchase price. Capital gains tax also comes into play when an asset is sold for more than what it was originally acquired for.

• Enterprise Value

Enterprise value shows a company’s total value and is generally used in mergers and acquisitions to valuate a prospect.

• Cash free / debt free

Cash free, debt free – when a buyer purchases an MSP/Business and its assets, it is on the basis that the seller will pay off all debt and extract all excess cash prior to completion of the deal.

• NDA

Non-disclosure agreement

• Debenture

A loan agreement in writing between a borrower and a lender. It gives the lender security over the borrower’s assets. Typically, a debenture is used by a bank, factoring company, or invoice discounter to take security against loans.

• Deal flow

Often used by buy side acquiring MSP’s and investors – The process and rate in which business proposals and potential MSP acquisition target opportunities are being received.

• Deferred consideration

Often used during M&A – A deferred consideration is a term used when a % of the deal funds will be paid sometime in the future and not on the completion date.

• EBIT

Earning before interest & tax

• EBITDA

Earnings before interest, text, depreciation & amortization

• Equity

Equity is the value that would be returned to the MSP shareholders – In the event of an acquisition, it is the value of company sale minus any liabilities owed by the company.

• Escrow

Escrow is a legal arrangement in which a third party temporarily holds money or asset until a particular condition has been met.

• Exit

The process of selling your MSP is also known as an ‘Exit’

• Exit Multiple

A term often used to describe the calculation used to value an MSP

• Fiduciary

Fiduciary means trust, and a person with a fiduciary duty has a legal obligation to maintain that trust. For example, lawyers have a fiduciary duty to act in the best interest of their clients. Likewise, financial advisors have a duty to guide in the interest of their clients.

• Holding company

A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group. Sometimes referred to as a platform.

• PE

Private Equity – Is the area of capital investments made into private companies. (not Public).

• VC

Venture Capital – a form of investing and a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential & high returns.

• Platform

Often used to describe the holding company or model of a buy and build strategy

• Restrictive covenants

Restrictive covenants are a legal clause that includes restricted areas within a contract. For example, not allowing you to compete or hire staff from the business for X period once you have left the business. Pay close attention to this section in contracts.

• Non-compete

A non-compete clause is a term in a legal agreement that prevents one or both of the contracting parties from competing with the other party in certain specified ways. For example, once you sell your MSP, you will probably be required to sign an agreement to state you will not setup another MSP within X time frame from completion.

• ROI

Return on Investment

• Roll-up

A series of acquisitions by one company of other companies in the same industry.

• SPA

Sale & purchase agreement or Share Purchase agreement

• Appreciation

Appreciation is an increase in the value of an asset over time

• Amortization

Amortization is the process that systematically reduces the value of an intangible asset over its useful life

• Depreciation

Depreciation lowers an asset’s value over its useful lifespan

• Vesting

Share vesting is the process by which an employee, investor, or partner is rewarded with shares or but receives the full rights to them over a set period of time

• EMI

Enterprise Management Incentive (EMI) – Is an approved employee share scheme that is available to most trading companies, allowing employers to grant share options to key employee’s tax efficiently, as a reward for their efforts within the business and to retain/incentivise staff.

• IP

Intellectual Property – intangible property / assets that is the result of creativity, such as patents, copyrights, etc.