The M&A process can be a transformative opportunity to increase market share, drive operational efficiencies, and unlock growth opportunities. However, embarking on this journey requires more than just ambition; you also need to have a clear understanding of the process and key terms used in the space to make informed decisions and ensure a successful transaction.
Key Terms To Know Throughout the M&A Process
EBITDA: The abbreviation for Earnings before Interest, Taxes, Depreciation, and Amortization; a calculation used to express cash profit. Essentially, this is your net profit plus additional expense adjustments that a prospective Buyer would not incur. When valuing an agency, Merge utilizes a multiple of EBITDA to determine your agency’s total enterprise value.
Letter of Intent: A non-binding letter that outlines an introductory commitment to do business with another entity. The LOI serves as the blueprint for the transaction between two parties and defines the purchase price, structure, and deal terms. The Merge acquisition team will help guide you through. Also these offer letters and negotiate the most ideal terms on your behalf.
Deal Structure: The financial terms, conditions, and obligations of both the buyer and seller to guide a smooth transition of business ownership. The funding mechanisms outlined in a deal structure are the buyer’s tool to “bridge a valuation” gap between the total enterprise value. Most deal structures will include some combination of the following components: cash at close, seller’s financing, earn-out, rolled equity, and phantom equity. Merge’s role is to advocate for your preferred deal structure which includes the highest amount of “guaranteed funds” (cash at close and seller’s financing).
Working Capital: The difference between an entity’s current assets and current liabilities. Working capital is the overall amount of money needed to run the day-to-day operations of a business. Buyers will typically ask for 2-3 months of operating income post-transaction. Also that the ownership transition does not hinder business operations. Merge will help guide you through all of these house-cleaning steps at the end of the due diligence process.
Earn-Out: This is the potential portion of the purchase price where payment is contingent upon the company achieving predefined milestones within a set period of time following the transaction. Typically, performance metrics tied to top-line revenue are more advantageous for a seller than those tied to EBITDA. The Merge acquisition team will ensure you are well-informed regarding the obligations of any proposed earn-out period and advocate for terms that align with your financial projections and transition timeline.
The M&A process doesn’t have to be daunting! With guidance, advocacy and support from a qualified advisor, it can be an exciting opportunity to launch an agency and its founder into a new chapter of opportunity.
