Mastering M&A Terms for the Savvy Acquisition Entrepreneur

Team Acquira
-  September 28, 2023
What You’ll Learn:
  • Key terms to know when buying a small business, from offer to close.
  • How to structure your Acquiring Entity for legal and tax purposes.
  • The importance of Due Diligence Lists before and after the Letter of Intent.
  • The role of financing options like SBA 7(a) loans and Seller Notes.
  • Recent changes in SBA loan regulations that benefit the buyer and seller.

Buying a small business can be a rewarding but complex process, filled with paperwork and important decisions. 

One of the key aspects to successfully navigating this journey is understanding the language used in the business acquisition world. 

This guide breaks down some of the most common M&A terms and phrases you’ll encounter, from making an initial offer to finalizing the sale. 

By familiarizing yourself with these terms, you’ll be better equipped to make informed decisions and avoid pitfalls. 

Whether you’re talking with sellers, accountants, or legal advisors, knowing these M&A terms will help you communicate more effectively and ensure you get the deal you expected.

business acquisition common terms
Acquiring EntityWhen you buy a business, you need to choose a structure for legal and taxation purposes. This is your Acquiring Entity. In many cases, the business you’re buying will have been a sole proprietorship, or sometimes a partnership (especially between spouses). You will need advice from an accountant on what structure to choose – often, this will be an S-Corp or C-Corp. It’s important that you make an informed decision up front, as It will be difficult and expensive to change your acquiring entity later. If it’s possible you will want to add additional companies in your geographical or industry space later on, a C-Corp may be your best bet. This is covered extensively in The Last Mile section of our MBA-level Accelerator course. 
Asset Purchase Agreement (APA)A legally binding contract for the future sale of a business in which the assets to be purchased and the liabilities to be excluded are spelled out. The actual sale will occur on the Close Date; the Close may be on the same date or later than the date the APA is signed by both parties. (This is one variant of a Sales Purchase Agreement; the other is the Stock Purchase Agreement, or SPA – see below)
Business Bill of SaleYou will sign many documents at the Close, but the Business Bill of Sale is the most important. Among other things, it specifies the price and any liens or loans outstanding and their disposition. There is also a key section listing assets individually along with their valuation and asset class, for depreciation and tax purposes. This asset class allocation will significantly affect the finances of buyer and seller, and needs to be negotiated prior to the Close.
Business PlanThe Business Plan is your analysis of the business you’re buying and how you plan to develop it. You will need to do it for the SBA, if you’re using them. BUT you should create a more thoughtful one for yourself, which you’ll update over time. It will include Executive Summary, Company Description, Market Analysis, Market Development, Organization & Management, Service or Product Line, Competitive Advantage, Systematization/IT, Risks, Marketing & Sales, Exit Plan. Every few months, you should think through the challenges and opportunities that face you and update your plan accordingly.  For more information on how to create the perfect business plan, check out this article
Close/Closing DateThe Closing Date/Close is when money is exchanged and the assets (and possibly liabilities if you’re using an SPA) are transferred to the buyer. May be referred to as  the “consummation.” The Closing Date is also referred to as the “Effective Date” or the “Close.”
Confidential Information Memorandum (CIM), ProspectusThe CIM (pronounced SIM) is a document used as a tool to market a business to prospective buyers. It includes a detailed description of the business and its operations; a summary of the industry and opportunities in the market; financial information with an analysis of historical results and future projections; and a summary of the proposed structure of the deal. You will likely encounter the CIM very early on in your deal search.
Data RoomData Room is the name for the tool you use to organize all the material for all the stages of your business purchase from Offer to Close.  The data room is mostly a virtual space (and usually organized hierarchically), often using nested Google folders, docs and sheets. But you will get paper copies too, and unless you simply scan or photograph it, you will need a physical area for storage and a method for organizing it. Acquira has lots of experience organizing a data room. To learn more, check out our Accelerator course. 
Due Diligence List – Pre-LOIThe Due Diligence Checklist – Pre-LOI is a list of about 30 questions/requests for documentation that you try to get from the broker or seller to increase your confidence on the deal,  before issuing your LOI. (Some of them might already be in the CIM.) Those you haven’t been able to get, you include in Post-LOI.
Due Diligence List – Post-LOIThis is the list of the other 150+ questions/requests for documentation, which you’ll ask for once you have a signed LOI.. There’s a limit to the seller’s patience, so many of these are weaved into phone calls with the seller or asked at the site visit.
EarnoutA form of residual seller involvement post-sale. (Others are continued partial ownership, holdbacks.) It is a contractual provision stating that the seller is to obtain additional compensation in the future if the business achieves certain financial goals, usually stated as a percentage of gross sales or earnings.
HoldbackA form of residual seller involvement post-sale. Sometimes known as retention amount. Part of the purchase price is withheld for a certain period of time as collateral for the buyer’s possible warranty and indemnification claims against the seller.
Letter of Intent (LOI)You’ll issue the LOI once the seller has signed back the offer letter. It is not legally binding, but indicates you’re serious and willing to do a lot more work. Request for due diligence materials accompanies the LOI (see Due Diligence List – Post-LOI, above).
Licensing Requirements in your Industry and State/LocalityLicensing is an area of vulnerability for you. You can immunize yourself by being aware at least six weeks pre-close of all the licenses you need and whether any of them will be transferred to you in the Closing. Licenses may be required to give your business the right to operate under new ownership in a state or locality, or acknowledge that one or more of your employees has the required technical competence to do the work of your business – or for other reasons.  For more information on  licensing, check out this article
Mutual Non-Disclosure Agreement (MNDA)See Non-Disclosure Agreement, below. The MNDA is a variant of the NDA that applies to the seller as well as the buyer.
Non-Disclosure Agreement (NDA)The NDA is a signed agreement between the seller and the buyer in which you agree not to divulge any of the information you are privy to as you examine the business from the LOI stage onward. May be accompanied by a Non-Disparagement Agreement (binding on both parties).
Offer LetterYou’ll use the offer letter to indicate your interest in the company and suggest the price that you would be prepared to pay: it’s your shot across the bow. The price you give tests the waters, and sets a lower limit for further negotiation. Be careful not to insult the seller: a price perhaps 10% below asking might be appropriate. If you think you’re justified in offering even less,, be prepared to back it up with your reasons. (Often, however, it’s the results of your due diligence which will give you the justification to offer less.) Be aware that some sellers bump up the asking price by 10% or so to offset the broker’s fee, which they would rather you pay.
Pass-Through EntityAlso known as a flow-through entity. Pass-through entities are those forms of  acquiring entities that “pass through” the income they make to owners, shareholders, or investors, in whose hands it is taxed. It is a way of avoiding the double taxation that a C-Corporation entails. Examples of pass-through entities are sole proprietorships, partnerships, LLCs, and S-Corporations.
Personal Guarantee (PG); CollateralA personal guarantee, or PG, refers to an individual’s legally enforceable  promise to repay credit issued to a business in which they serve as an executive or partner. If the business is unable to repay the debt, the individual becomes personally liable for the balance. Sometimes, the PG is synonymous with collateral. But in other cases collateral may limit the individual’s exposure – for example, where collateral is attached to just $100k of a house in which the owner has $250k of equity.
Acronym of Qualified Small Business Stock. These are shares of a Qualified Small Business (QSB) as defined by the IRC: it is an active domestic C-Corporation with gross assets that did not exceed $50 mm at the time stock was issued. Owners of QSBS may have their capital gains treated favorably.
Quality of Earnings (QoE)QoE is an accounting concept that refers to the ability of a company’s reported earnings, or income, to predict its future earnings. Reported earnings may be deemed unreliable following a QoE analysis for various reasons. Perhaps a small owner-operated business never used an accounting professional, and their results are therefore suspect. But perhaps earnings have been manipulated up – to make acquisition more attractive – or down – to avoid payment of taxes.  Acquira’s Quality of Earning service can help ensure that there are no unexpected costs if you’re trying to close on a small business. 
Roll-Over As Business Startup  (ROBS)ROBS  is a way of accessing your retirement funds (there is a  required minimum of $50k if you decide to do this) by transferring them to a C-Corporation in which you have set up a retirement plan. You will need professional assistance to do so, and it’ll cost you about $5k, plus an annual administration fee of up to $1k.  For more information on how ROBS works and if it is right for you, check out this article
Roll-up Merger, Roll-up; Bolt-onAll of these refer to the process of buying additional companies in the same or complementary market space and/or geographical location. You may want to do this once the first company you bought is flourishing.
SBA 7(a) LoansThis is the most popular type of SBA loan for investors wishing to borrow up to $5mm to purchase an existing company. (Investors wishing to start a company from scratch cannot get 7(a) loans.) 7(a) loans have amortizations of up to 10 years, while any real estate component can have an amortization of up to 25 years. Interest rates are very competitive although in the 2023 environment they can be 9% or higher. The May 11, 2023 changes simplified the (arduous) application process by removing the requirement for proof of  good character and removing the need to show in detail that other avenues for loans have been exhausted by simply ticking a box.

SBA loans are initially underwritten by banks or credit unions that work with the SBA, and then handed off to the SBA for approval. The timeline for that approval can sometimes be frustratingly long, especially when the underwriting institution or the SBA cannot lay their hands on a document that you’re sure you sent.
Section 338(h)(10) of the IRCA complex provision that may allow the buyer to treat a Stock Purchase Agreement as an Asset Purchase Agreement, at least in some respects. This allows the buyer to “step up” asset prices to its fair market value, thus reducing the buyer’s tax liability going forward. But the seller has to agree. This is covered extensively in The Last Mile section of our Accelerator course. 
Seller NoteA seller note (seller debt, seller paper) is a form of financing used in small company sale transactions whereby a seller agrees to receive a portion of the acquisition proceeds in a series of debt payments. The interest rate is often very favorable – 3.8-6% in spring 2023 – and it is often possible to negotiate the first one or two years as interest only.
Seller Retention with SBA LoansSeller retention refers to the continued active involvement of the seller after the sale has occurred. The concept of seller retention changed its meaning on May 11, 2023, when the SBA loosened their regulations for continued involvement of the seller in businesses financed by 7(a) loans. Before the 2023 change, seller involvement was restricted to (1) issuing a seller loan to the buyer; and (2) remaining on-site to assist after the sale for a period that could not exceed twelve months.

The May 11 good news means that:
  • the seller can assist in the transition post-close for as long as both parties want, instead of a maximum of twelve months
  • partial sales (in which the seller retains some percentage of ownership) are allowed, with the seller NOT required to guarantee the SBA loan provided that s/he retains less than 20% ownership
  • earn-outs and hold-backs are now permitted in the context of an SBA loan.
Stock Purchase Agreement (SPA)This is one of the two variants of a Sale Purchase Agreement; the other is a Asset Purchase Agreement. The Stock Purchase Agreement is favored by sellers more than buyers. In a Stock Purchase Agreement the buyer purchases all shares or (after May 11, 2023) a portion of shares from the seller. The buyer thus assumes liabilities, both known and unknown. Agreements with vendors and customers often continue after the transfer of ownership, as may intellectual property.

The description of the Asset Purchase Agreement (APA) and Stock Purchase Agreement (SPA) suggests that there is a clear delineation – it’s either one or the other. 

This is not the case. It’s fairly common for a Sales Purchase Agreement to be a hybrid of both. A recent transaction Acquira was privy to involved sale of a company for about 2x EBITDA, where the underlying performance suggested 3.5x would have been appropriate. But the seller had huge bank deposits in the order of $1-2 million, and kept earnings already realized for work-in-progress on large jobs ongoing at the Close.. In turn, the buyer did not take on any debt (which was in any case minimal).


Whether you’re a first-time entrepreneur or a seasoned investor, acquiring a small business is a complex endeavor. 

Having a thorough grasp of the common M&A terms used can greatly enhance your ability to make informed decisions, negotiate effectively, and ultimately, secure a business that aligns with your financial and entrepreneurial aspirations.

Are you interested in becoming an acquisition entrepreneur and operating your own small business? Consider taking our Accelerator course that offers MBA-level teachings that could take you from offer to close in seven months. You’ll also have access to our industry experts as well as a connection to a network of like-minded acquisition entrepreneurs.

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Key Takeaways

  • Understanding acquisition terminology aids in making informed decisions.
  • Due diligence is crucial for verifying the quality of the business.
  • Multiple financing options are available, including SBA loans and Seller Notes.
  • Legal agreements like the Asset Purchase Agreement outline the deal’s terms.
  • Stay updated on SBA regulations as they can affect deal conditions.
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