M&A Terminology

Lower Middle Market...AKA LMM

Dictionary Definition

Lower middle market is the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with an annual revenue in the range of $5 million to $50 million are grouped under the lower middle market category.

Plain English

Companies in the LMM have grown beyond the Main Street Market.  They are above $5M in revenue, have multiple employees, systems and processes, etc.  

Why it Matters to…

Indication of Interest...AKA IOI

Dictionary Definition

Presented by a buyer, prior to the LOI, indicating they are interested in pursuing the business further.  Documents includes:

• range of anticipated valuation,
• rough outline of anticipated structure,
• expectation of timeline from LOI acceptance to close, and sources and uses of funds. 

Plain English

Site visits are usually done after IOIs are submitted.  This is generally kept to a small number of buyer groups.  Most sellers do not…

Business & Market Strategy Guide...AKA B&MSG

Dictionary Definition

IRS Revenue Ruling 59-60 determines the basis of fair market value. It states that fair market value is, "The amount at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having a reasonable knowledge of relevant facts."

Plain English

A calculation estimating how much money someo…

Working Capital PEG

Dictionary Definition

A benchmark or baseline amount of net working capital that is agreed upon by the buyer and the seller and is usually determined toward the end of financial due diligence.

Plain English

The Working Capital PEG negotiated between the buyer and the seller. It is the WC amount that will be left in the business as of the date of closing.

What is negotiated?  The basic formula of assets - liabilities = WC is hardly ever the calculation used when negotia…

Working Capital

Dictionary Definition

This ratio reflects the ability to finance current operations and is a measure of the margin of protection for current creditors. This ratio also indicates how efficiently working capital is being used. A low ratio (close to zero) may indicate inefficient use of working capital. A high ratio (high positive or high negative) often signifies overtrading, creating a vulnerable position for creditors.

Plain English

The capital of a business which is used i…

Seller’s Discretionary Earnings...AKA SDE

Dictionary Definition

A seller’s discretionary earnings are the pretax and pre-interest profits before non-cash expenses, one owner’s benefits, one-time investments, and any non-related income or costs.

Plain English

All of the cash at the “bottom line” of your financial statement is available to the business owner.

Why it Matters to You

This tool is used to help you, the business owner, make accurate comparisons between companies.  SDE can so…

Earnings Before Interest, Taxes, Depreciation, Amortization...AKA EBITDA

Dictionary Definition

EBITDA is a proxy for free cash flow.  It adds back the non-cash expenses (depreciation and amortization) as well as the interest and taxes that are a consequence of management decisions. Not every management team would deploy the same capital structures, so these expenses are added back in the calculation.

Plain English

A tool to evaluate a company’s performance without factoring in finance, acc…

Letter of Intent...AKA an LOI

Dictionary Definition

This is the initial offer a buyer submits to a seller.  It lays out:

• general terms of the purchase,
• business value/purchase price,
• real estate plan (if selling RE) purchase/value, structure,
• source and use of funds,
• working capital PEG,
• seller considerations,
• transition timing,
• employment agreement,
• non-compete,
• indemnity cap and basket and
• due diligence expectations.

Plain English

These are initial offers to buy your bu…