Glossary of M&A Terms

Every industry has its own language. M&A is no different. The problem is that most glossaries give you textbook definitions that sound right but miss the context that matters when you are actually in a deal. After advising on dozens of tech and SaaS exits at Livmo, I have seen founders lose leverage, misread LOIs, and sign bad earn-out terms because they did not fully understand the vocabulary on the page in front of them.

This glossary is different. Each term includes the real definition, plus the practical context from actual transactions. Bookmark it. You will need it.

Deal Structure Terms

The building blocks of how a transaction gets put together.

Asset Purchase vs. Stock Purchase. In an asset purchase, the buyer picks which assets and liabilities to acquire. In a stock purchase, the buyer acquires the entire entity, including all liabilities. Most lower middle market deals are asset purchases because buyers want to avoid inheriting unknown liabilities. Sellers often prefer stock sales for tax reasons. This single distinction changes your after-tax proceeds by 5-15% in many deals.

Earn-Out. A portion of the purchase price tied to future performance metrics, typically revenue or EBITDA targets over 12 to 36 months. Buyers love earn-outs because they reduce risk. Sellers should be cautious. In our experience, roughly 60% of earn-outs pay out less than the full amount. The terms of measurement, who controls operations post-close, and what counts as qualifying revenue are where the real negotiation happens. Read more in our guide on how earn-outs can bite you later.

Seller Note. A loan from the seller to the buyer, used to fund part of the purchase price. Typical seller notes cover 10-20% of the deal value with 3-5 year terms. They signal that the seller believes in the business going forward. SBA-backed deals almost always require a seller note of at least 10%. See our deep dive on the ins and outs of seller notes.

Rollover Equity. When the seller retains a minority ownership stake in the combined entity post-acquisition. Common in private equity deals where the PE firm wants the founder to have “skin in the game” during a second growth phase. Typical rollover ranges from 10-30% of proceeds.

Working Capital Adjustment. A post-closing mechanism that adjusts the final purchase price based on the actual working capital delivered at close versus an agreed-upon target, sometimes called the “peg.” This is one of the most common sources of post-closing disputes. We wrote a full breakdown of why working capital changes your final price.

Valuation and Financial Terms

The numbers that determine what your business is worth.

EBITDA. Earnings Before Interest, Taxes, Depreciation, and Amortization. This is the standard profitability metric buyers use to value most businesses. For companies doing under $10M in revenue, Seller’s Discretionary Earnings (SDE) is more common. EBITDA strips out capital structure and accounting decisions to show the core earning power of the business.

SDE (Seller’s Discretionary Earnings). EBITDA plus the owner’s total compensation, benefits, and personal expenses run through the business. Used for owner-operated businesses where the buyer will replace the owner. If you pay yourself $300K and the business earns $500K EBITDA, SDE is $800K. Most businesses under $5M in enterprise value trade on SDE multiples.

Revenue Multiple. Purchase price divided by annual revenue (or ARR for SaaS). SaaS businesses with strong growth and retention typically trade at 3-8x ARR in the lower middle market. This is the primary valuation method for high-growth companies that may not yet be profitable. Use our SaaS Valuation Calculator to benchmark your metrics.

EBITDA Multiple. Purchase price divided by EBITDA. Most established businesses in the lower middle market trade at 4-7x EBITDA. The multiple depends on size, growth rate, customer concentration, and industry. A business doing $2M EBITDA typically commands a higher multiple than one doing $500K, even in the same industry.

Quality of Earnings (QoE). A financial analysis performed by a third-party accounting firm that goes beyond standard GAAP audits. It examines revenue quality, EBITDA normalization, customer cohort behavior, and working capital requirements. Buyers commission QoE reports on nearly every deal above $2M. Smart sellers commission their own first. Read about how QoE reports affect valuations.

Net Revenue Retention (NRR). Measures how much revenue you keep and expand from existing customers over a period, excluding new sales. An NRR above 110% means your existing customers are growing. An NRR below 90% is a red flag that buyers will scrutinize. This is one of the top metrics buyers examine first.

Goodwill. The premium a buyer pays above the fair market value of tangible net assets. In most tech and SaaS acquisitions, goodwill represents the majority of the purchase price because the value lives in software, customer relationships, and recurring revenue, not physical assets.

Due Diligence and Legal Terms

What happens between the handshake and the wire transfer.

Letter of Intent (LOI). A non-binding (usually) document outlining the key terms of a proposed acquisition: price, structure, timeline, exclusivity period, and major conditions. The LOI kicks off due diligence and typically grants the buyer 60-90 days of exclusivity. “Non-binding” applies to the price and terms. The exclusivity and confidentiality clauses are almost always binding.

Due Diligence. The buyer’s investigation of your business across financial, legal, operational, technology, and customer dimensions. This is where deals die. Roughly 30% of signed LOIs never make it to closing, and the cause is almost always something that surfaces during DD. Our due diligence guide covers how to prepare.

Confidential Information Memorandum (CIM). The detailed marketing document your advisor creates to present your business to potential buyers. A strong CIM covers financial performance, growth drivers, market opportunity, team, and competitive positioning. It is the first impression buyers form of your company. Learn how a CIM gets built.

Representations and Warranties (Reps and Warranties). Statements of fact the seller makes about the business in the purchase agreement. These cover everything from financial accuracy to IP ownership to pending litigation. If a rep turns out to be false, the buyer can claw back money through indemnification. The negotiation of reps and warranties is one of the most time-consuming parts of closing.

Indemnification. The seller’s obligation to compensate the buyer for losses arising from breaches of reps and warranties or undisclosed liabilities. Typically capped at 10-25% of the purchase price and subject to a time limit (survival period) of 12-24 months. Some sellers purchase Reps and Warranties Insurance (RWI) to shift this risk to an insurance carrier.

Escrow. A portion of the purchase price (typically 5-15%) held by a third party for a defined period after closing. The escrow protects the buyer against post-closing claims like breached reps or working capital shortfalls. Any amount not claimed by the buyer is released to the seller at the end of the escrow period.

Breakup Fee. A penalty one party pays the other if the deal falls through for specified reasons. In the lower middle market, breakup fees are less common than in large-cap M&A. When they do appear, they typically range from 1-3% of the deal value.

Buyer Types and Transaction Terms

Who is buying, and how they think about your business.

Strategic Buyer. A company that acquires your business to integrate it into their existing operations. Strategic buyers typically pay higher multiples because they can extract synergies: your product fills a gap, your customers complement theirs, or your technology accelerates their roadmap. In our experience, strategic buyers pay 15-30% more than financial buyers for the right fit.

Financial Buyer (Private Equity). An investment firm that acquires businesses to generate returns for their fund investors. PE firms focus on cash flow, growth potential, and operational improvement opportunities. They often use leverage (debt) to amplify returns. Many PE deals involve rollover equity where the founder stays involved. See our guide on different buyer profiles.

Search Fund. An investment vehicle where an individual entrepreneur raises capital from investors to find, acquire, and operate a single company. Search fund buyers are typically MBA graduates backed by institutional investors. They tend to target businesses doing $1-5M EBITDA. The Stanford Search Fund Study provides the best data on this buyer category.

Individual Buyer. A person acquiring a business to own and operate, often funded through SBA loans, personal capital, or a combination. Most businesses under $5M in enterprise value sell to individual buyers. SBA 7(a) loans are the most common financing mechanism, covering up to 90% of the purchase price. Read about SBA loan secrets from a top lender.

Leveraged Buyout (LBO). An acquisition funded primarily with borrowed money, using the target company’s assets and cash flow as collateral. The buyer puts in 20-40% equity and borrows the rest. Common in PE transactions. The debt load is serviced by the acquired company’s cash flow.

Management Buyout (MBO). An acquisition where the company’s existing management team purchases the business, often with PE backing or seller financing. MBOs can be attractive for sellers because the team already knows the business, reducing transition risk and often leading to smoother due diligence.

Process and Advisory Terms

The mechanics of running a sell-side process.

M&A Advisor. A professional who represents the seller throughout the transaction: valuation, marketing, buyer outreach, negotiation, and closing. Unlike business brokers who list businesses on marketplaces, M&A advisors run targeted, confidential processes. At Livmo, we focus exclusively on tech and SaaS exits. The difference between advisors and brokers matters more than most sellers realize. We compared them in detail: M&A Advisor vs. Business Broker.

Retainer. An upfront fee paid to an M&A advisor to begin the engagement. Retainers cover the significant upfront work of valuation, CIM creation, and buyer outreach. Quality advisors charge retainers because the work starts months before a deal closes. See why advisors charge retainers.

Success Fee. The percentage-based commission an M&A advisor earns when the deal closes. Typically 5-12% of the transaction value in the lower middle market, often on a Lehman or Double Lehman scale that decreases as deal size increases.

Exclusivity (No-Shop Clause). A provision in the LOI that prevents the seller from soliciting or entertaining other offers during a defined period, usually 60-90 days. This gives the buyer confidence to invest in due diligence without worrying about a competing bid.

Data Room. A secure virtual repository where the seller shares confidential documents with the buyer during due diligence. A well-organized data room signals professionalism and accelerates the process. A disorganized one raises red flags and slows everything down.

Drag-Along Right. A provision that allows majority shareholders to force minority shareholders to join in the sale of the company on the same terms. This prevents a small shareholder from blocking a deal the majority supports.

Tag-Along Right. The opposite of drag-along. Protects minority shareholders by giving them the right to join a sale on the same terms as the majority. Ensures small shareholders are not left behind in a transaction.

Quick Reference Table

All terms at a glance with the category and why each one matters.

Frequently Asked Questions

Next Steps

Knowing the language is the first step. Knowing your numbers is the second.