60+ essential terms every founder should know before selling their startup. From LOI to earnout, liquidation preference to EBITDA.
An acquisition where the primary goal is to hire the target company's team rather than its product or revenue. Common in tech when big companies want engineering talent.
The value of recurring subscription revenue normalized to a one-year period. Key metric for SaaS valuations. ARR = MRR × 12.
A transaction where the buyer purchases specific assets (IP, customer contracts, equipment) rather than company stock. Often more favorable to buyers for tax reasons.
A penalty the seller pays the buyer if they back out after signing LOI to accept a better offer. Typically 1-3% of deal value.
An intermediary who helps find buyers for small businesses (typically under $5M). Charges 10-15% commission. Different from investment bankers who handle larger deals.
A spreadsheet showing who owns what percentage of the company. Includes founders, investors, employees with options. Critical for exit negotiations.
A provision allowing the buyer to reclaim some of the purchase price if certain post-close conditions aren't met or misrepresentations are discovered.
A secure online repository where sellers share confidential documents with potential buyers during due diligence. Modern data rooms are virtual (Dropbox, DocSend, etc).
The reduction in existing shareholders' ownership percentage when new shares are issued (typically during fundraising). Matters at exit because it determines your payout.
A provision that allows majority shareholders to force minority shareholders to join in the sale of a company. Prevents small shareholders from blocking good exits.
The comprehensive investigation a buyer conducts before acquiring a company. Covers financials, legal, technical, customer, and operational aspects. Typically 60-90 days.
Deferred payment where part of the purchase price is paid only if the business hits certain milestones post-acquisition. Bridges valuation gaps between buyer and seller.
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating profitability used in valuations. Traditional businesses often valued as multiple of EBITDA.
A portion of the purchase price (typically 10-20%) held by a third party for 12-24 months to cover any breaches of reps & warranties discovered post-close.
Your plan for eventually selling or transitioning out of your business. Common strategies: acquisition, management buyout, passing to family, lifestyle business.
An independent valuation from a financial advisor stating that a proposed transaction price is fair. Often required by boards when selling VC-backed companies.
A buyer (typically private equity) focused on return on investment rather than strategic fit. Contrast with strategic buyers who acquire for synergies.
A window (typically 30-60 days) after signing LOI where the seller can actively solicit other offers. Creates competition and can increase valuation.
Synonym for escrow. Portion of purchase price withheld to protect buyer against unknown liabilities or representation breaches.
Contractual protection where the seller agrees to reimburse the buyer for specific losses (lawsuits, misrepresented financials, etc) discovered after closing.
A professional who helps companies with M&A transactions, typically for deals $10M+. Provides buyer sourcing, deal negotiation, and process management. Fees: 2-5% of deal value.
Selling shares to the public via stock exchange. Alternative to acquisition exit. Requires $100M+ revenue, high growth, and significant costs/complexity.
Life insurance policy on critical team members. Buyers often require this if the business is heavily dependent on founder or key employees.
A non-binding document outlining proposed deal terms (price, structure, timeline). Signals serious buyer interest. Typical exclusivity period: 60-90 days.
VC term giving investors the right to get paid before common shareholders in an exit. Can significantly reduce founder payout in smaller exits.
Time period during which sellers cannot sell stock received as part of acquisition payment. Typically 6-12 months. Ensures founders don't immediately dump shares.
The umbrella term for all transactions involving the buying, selling, or combining of companies.
A significant negative event that can allow buyer to renegotiate or walk away. Examples: losing your biggest customer, revenue decline >20%, lawsuit. Often contentiously negotiated.
A valuation method expressing company value as a multiple of a metric (revenue, EBITDA, ARR). Example: 5x ARR multiple means company worth 5× annual recurring revenue.
Legal contract requiring buyers to keep your confidential business information private. First document signed when a buyer expresses interest.
Current assets minus current liabilities. Often part of purchase price adjustments. Buyers typically expect you to leave enough cash to operate the business post-close.
Agreement that seller won't solicit other buyers during exclusivity period (typically in LOI). Violation can trigger break-up fees.
Company value immediately after a funding round. Pre-money valuation + investment amount = post-money valuation. Used to calculate ownership percentages.
The definitive legal document governing the sale. 50-100+ pages covering price, reps & warranties, indemnification, escrow, etc. Heavily negotiated.
Independent analysis of a company's financial statements to verify revenue quality, identify one-time items, and assess sustainability. Common in deals $10M+.
Tax provision allowing founders to exclude up to $10M in capital gains on sale of qualifying startup stock (must hold 5+ years, C-corp, certain conditions). Huge tax savings.
Seller's statements about the business condition (financials are accurate, no pending lawsuits, contracts are valid). Buyer can claw back money if these are false.
Cash incentive paid to key employees to stay through transition period post-acquisition. Typically paid at 6-12 month milestones. Reduces employee flight risk.
Valuation approach dividing enterprise value by annual revenue. Common for SaaS (typically 3-10x ARR depending on growth, margins, churn).
The ratio of company valuation to ARR for software-as-a-service businesses. 2024 median: 5-7x ARR for profitable, growing SaaS companies.
When the seller provides a loan to the buyer for part of the purchase price. Common in smaller deals ($500K-$5M) where buyers can't get full bank financing.
Transaction where buyer purchases the company's stock/shares. Buyer assumes all liabilities. Generally more favorable to sellers from tax perspective.
A company that acquires for strategic reasons (eliminate competitor, acquire customers, geographic expansion). Often pays higher multiples than financial buyers.
Cost savings or revenue increases the buyer expects post-acquisition (eliminate duplicate staff, cross-sell products). Strategic buyers pay for anticipated synergies.
Summary of proposed investment or acquisition terms. Similar to LOI but typically used for fundraising rather than M&A.
Financial metrics calculated for the most recent 12-month period. More current than annual figures. Commonly used for valuations.
When a larger company acquires a smaller one and integrates it into existing operations. Product often sunset in favor of acquirer's platform.
Stock options or shares that haven't fully vested. Typically acceleration clauses determine what happens at acquisition (single-trigger, double-trigger).
The process of determining what a company is worth. Methods include: revenue multiples, EBITDA multiples, discounted cash flow (DCF), comparable transactions.
Investment firms that fund high-growth startups in exchange for equity. Typically expect 10x returns, which shapes exit expectations and requirements.
Gradual earning of stock ownership over time (typically 4 years). Protects company if founder leaves early. Most deals have 1-year cliff then monthly vesting.
Target level of working capital the seller must deliver at close. Purchase price adjusted up/down based on actual working capital at closing.