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Process and documents

Teaser. A one- or two-page anonymous summary of the company, used to gauge buyer interest before anyone signs an NDA. Non-disclosure agreement (NDA). The agreement a buyer signs before receiving the company’s name or any confidential information. Confidential information memorandum (CIM). The full description of the company, its market, financials and prospects, shared only with buyers under NDA. Process letter. The letter that tells buyers what to include in their proposals and when they are due. Management presentation. The presentation management gives to buyers in the diligence phase. Data room. A secure online space where buyers review the company’s documents in diligence. Access is controlled and recorded buyer by buyer. Indication of interest (IOI). A non-binding first-round proposal, usually with a price range and key assumptions. Letter of intent (LOI). A proposal setting out the main terms of the acquisition. Mostly non-binding, apart from provisions such as exclusivity and confidentiality. Exclusivity. A period, agreed in the LOI, during which you negotiate only with one buyer. Purchase agreement. The binding contract for the sale: a stock purchase agreement if the buyer acquires shares, an asset purchase agreement if it acquires assets. Disclosure schedules. Attachments to the purchase agreement listing exceptions to the statements made about the company. Funds flow. The statement showing exactly who is paid what at closing.

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Financial terms

Annual recurring revenue (ARR). Committed recurring revenue, expressed as an annual figure. Define whether usage or consumption revenue is included. Net revenue retention (NRR). What last year’s customers spend this year, including expansion and net of churn, as a percentage of what they spent last year. Gross revenue retention (GRR). The same as NRR but excluding expansion, so it shows only how much revenue was kept. Logo retention. The share of customers, by number rather than revenue, still customers a year later. Cohort analysis. Customers grouped by the year they joined, with their combined revenue tracked in each later year as a share of where it started. Contracted backlog. Signed contracts that have not yet started, shown alongside ARR rather than in it. Deferred revenue. Amounts invoiced or collected for service not yet delivered. In software companies that bill annually in advance, it is often the largest working capital item. EBITDA. Earnings before interest, taxes, depreciation and amortization: a common measure of operating earnings. Normalized (adjusted) EBITDA. EBITDA adjusted to remove owner-specific and one-time items, showing the earnings the business will produce under new ownership. Quality of earnings (QoE). An accounting review that tests the reported earnings and adjustments. A seller may commission one before the sale; the buyer may commission its own. Rule of 40. ARR growth rate plus EBITDA margin. A combined figure above 40 is generally seen as efficient. Some buyers use revenue growth or free cash flow margin instead. Customer acquisition cost (CAC) payback. The months needed to earn back the cost of winning a customer. Gross margin. Revenue less the direct cost of delivering it, such as hosting, AI inference costs, support and services.

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Deal terms

Enterprise value. The value of the business as a whole, before adjusting for cash and debt. Equity value. What shareholders receive: enterprise value plus cash, less debt and debt-like items. Cash-free, debt-free. The usual basis for a price: the seller keeps the cash and repays the debt at closing. Working capital target (peg). The agreed normal level of working capital. The price is adjusted up or down if the actual level at closing differs. Earn-out. Part of the price that is paid only if the company meets agreed targets after closing. Escrow or holdback. Part of the price held back for a period after closing to cover claims under the purchase agreement. Representations and warranties insurance. Insurance that covers breaches of the statements made about the company in the purchase agreement, sometimes reducing the escrow. Rollover equity. Proceeds the owners reinvest in the business, or in the buyer’s group, as part of the transaction.

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Buyer types

Strategic acquirer. A company buying a business that strengthens its own products, customers or market position. Private equity platform. A private equity investment in a company intended to be grown, often through further acquisitions. Add-on acquisition. A company bought by a private equity-owned business to combine with it. Growth equity investor. An investor buying a stake in a fast-growing company, often a minority stake.