Investment banking and M&A transactions involve specialized terms that can be unfamiliar to business owners going through a transaction for the first time. Understanding those terms makes it easier to evaluate offers, financing structures, diligence requests, legal documents, and the economics of a deal.
Use this glossary for straightforward explanations of common M&A, investment banking, financing, and restructuring terminology.
Rollover equity is the portion of a seller's stake reinvested into the buyer's new structure rather than cashed out — typically 10 to 30% in a private equity transaction. Understand the capital structure before valuing it. Sellers usually roll into common equity while the sponsor's own investment often sits above it as preferred stock carrying an accruing dividend and a liquidation preference paid first. A 20% rolled stake is 20% of what remains after that preference compounds, which in a flat exit is a great deal less than 20% of the proceeds. Three questions before signing: what security am I rolling into, what ranks ahead of me, and do I have pre-emptive rights when add-on acquisitions issue new equity. Rollover can be the best money in a deal. It is not a smaller version of cash.
Seller financing is where the seller accepts part of the purchase price as a note repaid by the buyer over time, rather than cash at closing. It bridges a funding gap, widens the buyer pool, and can raise the headline price. The risk is straightforward: the seller becomes a lender to a business they no longer control, ranking behind the bank. Where it is used, the note's security, interest rate, and position relative to senior debt matter far more than the amount.
An earnout defers part of the purchase price, paying it only if the business hits agreed targets after closing. Buyers propose them to bridge a valuation gap or to hedge a risk such as customer concentration. Sellers should treat them with care: once the buyer controls the business, the seller's ability to influence the targets is limited, and disputes over how performance is measured are common. If accepting one, negotiate short measurement periods, metrics as high up the income statement as possible, and explicit protections on how the business will be run.
A working capital adjustment compares the working capital actually delivered at closing against an agreed target and adjusts the price for the difference — sometimes dollar for dollar, sometimes only outside a collar. Its purpose is to deliver the business with the working capital needed to run it, so neither side gains by accelerating collections or deferring payables. The money is in the definitions. How the target is calculated matters, and a trailing-twelve-month average penalizes a growing or seasonal business. So does which items count as working capital versus debt, who prepares the closing statement, how long the other side has to object, and how disputes get resolved. Sellers generally push to fix the target and the definitions in the letter of intent, and to require the calculation follow past practice rather than a fresh accounting standard.
Add-backs are expenses removed from reported earnings because they will not recur for a new owner: the owner's above-market salary, personal expenses run through the business, one-off legal costs, or a related-party rent above market rate. Adjusted EBITDA is the result. Since price is usually a multiple of adjusted EBITDA, every dollar of defensible add-back is worth several dollars of purchase price — and every add-back a buyer rejects works the same way in reverse. Documentation, not argument, is what makes them stick.
A quality of earnings report is an independent accounting analysis, usually commissioned by the buyer, that tests whether reported earnings reflect the sustainable cash-generating performance of the business. It scrutinizes revenue recognition, one-off items, owner-related expenses, accruals, and working capital, and produces an adjusted EBITDA figure. Because price is normally a multiple of that figure, a QofE finding can move the purchase price directly — which is why sellers increasingly do their own review first rather than meeting the buyer's findings cold.
Exclusivity, sometimes called a no-shop period, is a commitment by the seller to stop talking to other buyers for a defined window — commonly 45 to 90 days — while the chosen buyer completes diligence. It is what a buyer asks for in exchange for spending money on advisors, and it is the moment a seller's negotiating leverage drops sharply, because the competitive tension that produced the price is switched off. Keeping the window short, and settling as many terms as possible before granting it, is the counterweight.
A letter of intent sets out the terms a buyer proposes: price, structure, conditions, and a timetable to closing. Most of it is expressed as non-binding, but the label is not decisive. Provisions commonly drafted to bind include exclusivity, confidentiality, expense allocation, employee non-solicit, governing law, and in some cases an obligation to negotiate in good faith, which courts in Delaware and New York have enforced. Which parts bind depends on the drafting and the governing state law, so an LOI should go to counsel before signature. Commercially it is closer to final than it looks: it usually fixes price, the treatment of cash and debt, the working capital mechanism, escrow, indemnity limits, and any non-compete. Terms not secured before signing are rarely improved afterward, because exclusivity removes the leverage that won them.
An indication of interest is a non-binding, early-stage expression of a buyer's appetite, usually submitted after reviewing the CIM and financial model. It sets out an approximate valuation range, the proposed structure, the source of financing, and a rough timeline. IOIs are used to narrow a wide field: a seller compares them, selects which parties advance to management presentations, and uses them to gauge where the market is pricing the business before anyone commits.
A management presentation is a meeting, typically two to four hours, where the company's leadership presents the business to a shortlisted buyer and answers questions directly. It usually includes a facility tour and often a dinner beforehand. Its purpose is less informational than it appears — buyers have already read the numbers. What they are assessing is whether the management team is credible, aligned, and capable of delivering the plan they have just been shown.
A data room is a secure online repository holding the documents buyers need to evaluate a business: financial statements, contracts, corporate records, employee information, and operational detail. Access is granted in stages, so early-stage buyers see a limited set and only parties nearing an offer see the sensitive material. A well-organized data room speeds diligence considerably; a disorganized one signals to a buyer that the business is loosely run and invites more questions.
A teaser is a one- or two-page anonymous summary of an opportunity, sent to prospective buyers before any confidentiality agreement is in place. It describes the business — sector, size, financial profile, why it is attractive — without naming it, so a seller can approach a wide universe of buyers without disclosing that the company is for sale. It is the first step in almost every sell-side process, and it exists to protect confidentiality while still generating interest.
A confidential information memorandum is the main document a seller gives prospective buyers, provided only after an NDA is signed. It sets out the company's history, operations, market position, financial performance, and growth prospects in enough detail for a buyer to form a view and make an offer. A good CIM is a deal book rather than a brochure: it answers the questions a sophisticated buyer will ask anyway, in the seller's framing, before the buyer can frame them differently.
A personal guarantee makes an owner personally liable for a business debt if the company cannot repay it, putting personal assets at risk. It is common in SBA and smaller commercial lending, and much less common in institutional cash-flow lending. It is also more negotiable than most owners assume: guarantees can be capped at a fixed amount, limited to specific bad acts such as fraud or misrepresentation rather than general non-payment, or made to fall away once the business hits agreed performance thresholds. Where multiple lenders are competing, the guarantee is often the term that moves first.
A sponsored deal has a private equity firm behind the borrower; a non-sponsored one does not — the company is owner-managed or family-held. Lenders price the difference, and the reason is narrower than it is usually described. It is not mainly about reporting quality or management depth. It is the equity cure: a sponsor has committed capital available to write a cheque if the company trips a covenant, and a founder generally does not. Lenders are pricing the absence of a deep pocket standing behind the credit. Founder-owned borrowers can close part of that gap by producing sponsor-grade financial information and forecasting, but the structural point remains, and it shows up in pricing, leverage, and covenant headroom rather than in whether the deal gets done.
A leverage ratio expresses total debt as a multiple of EBITDA, and it is the single number most lenders anchor on. A company with $3 million of EBITDA and $9 million of debt is levered three times. What multiple a lender will accept depends on the predictability of the earnings, the sector, and the seniority of the debt — recurring-revenue businesses support more, cyclical ones less, and lower-middle-market borrowers currently average around four times total leverage. Note that covenants test net leverage against EBITDA as the credit agreement defines it, not as your accounts report it. It is also the most common financial covenant, tested quarterly, which means a fall in earnings can breach it even when nothing about the debt has changed.
A breach is a default, and it usually costs money before it costs control. Expect a reservation of rights letter, the default rate applied — commonly two percentage points — weekly cash reporting, and the lender's counsel and financial advisor engaged at your expense. From there the outcome is a waiver, or an amendment carrying a fee, reset covenants with tighter step-downs, and often additional collateral or a guarantee as the price. Two things to check before the conversation. Whether your agreement gives you an equity cure right, letting you inject cash and count it toward EBITDA, and how many cures remain. And who currently holds your loan, because it may have been sold — a relationship bank and a credit fund that has already marked you down behave very differently. A borrower who arrives early with a thirteen-week forecast and a plan gets a materially better outcome.
A debt covenant is a condition in a loan agreement that the borrower must meet. Financial covenants set tests measured periodically — a maximum leverage ratio, a minimum debt service coverage ratio, sometimes a minimum EBITDA or liquidity level. Negative covenants restrict actions: taking on more debt, selling assets, paying distributions, or making acquisitions without consent. Covenants exist to give the lender early warning and a seat at the table before a problem becomes a default, which is why headroom matters as much as the interest rate. Expect them: maintenance covenants tested quarterly appear on roughly two-thirds of lower-middle-market loans, against a small minority of larger ones.
A delayed draw term loan is a committed facility a borrower can draw down in stages over an agreed period rather than all at once, at terms fixed when the facility was arranged. It suits acquisition programs particularly well: a buy-and-build strategy can lock in pricing today and access the capital as each acquisition closes, rather than renegotiating financing every time. The borrower usually pays a commitment fee on the undrawn portion — the cost of holding the option open.
A bridge loan is short-term financing that covers a gap until a longer-term solution is in place — funding an acquisition ahead of a permanent facility, curing a covenant breach while a refinancing is arranged, or providing liquidity ahead of a sale. It is priced for speed and risk rather than duration, so it is expensive by design, and it is only sound where the exit from it is genuinely identified. DBD Investment Bank has arranged bridge facilities used to backstop covenant breaches while a full recapitalization was structured.
A unitranche facility combines what would traditionally be senior and subordinated debt into a single loan at one blended rate, usually from one lender or a small club. For the borrower it means one set of documents, one negotiation, and faster execution, which is why it has become a standard structure in private credit for middle-market acquisitions. What is worth knowing is that the simplicity is partly presentational: most unitranche facilities sit over an agreement among lenders that splits the loan into first-out and last-out tranches behind the scenes. The borrower does not sign it and it does not affect day-to-day terms — but in a default, the last-out lender often controls remedies, and it is better to know that before the default than during it.
Mezzanine debt sits between senior debt and equity in the capital structure: subordinated to the bank, ahead of the shareholders, and priced accordingly — typically in the low-to-mid teens, mostly cash-pay with a smaller portion accruing, and sometimes with warrants giving the lender a modest equity participation. Its purpose is to bridge a gap, where senior debt stops short of what a transaction needs and the owner does not want to sell equity to fill the difference. It is expensive, and cheaper than dilution if the business performs. What deserves attention in the documents is the call protection, since mezzanine frequently carries a make-whole that makes early repayment costly if the company is sold or refinanced sooner than planned.
An asset-based loan advances against specific collateral rather than earnings — typically around eighty-five percent of eligible receivables and half to two-thirds of inventory, sometimes equipment or real estate. Because the lender looks to the collateral first, an ABL can support a business with a strong balance sheet but volatile profits, and availability flexes as the asset base grows. The costs are administrative and operational. Expect borrowing-base reporting, field examinations and appraisals, reserves the lender can set at its discretion, and in most facilities cash dominion — a lockbox arrangement where receipts sweep to the lender. Many also carry a fixed charge coverage covenant that springs into effect when availability falls below a threshold. ABLs are common in distribution, manufacturing, and any business where working capital swings with the season.
A bank lends depositors' money under regulatory constraints, which makes it cheaper but more rigid — standardized criteria, slower processes, and limited appetite for anything outside the box. A private credit fund lends investors' capital, so it can price for risk, size a facility to a specific situation, and close faster. In practice: banks win on cost for straightforward, well-collateralized borrowers; private credit wins on flexibility, speed, and willingness to underwrite growth or complexity. Many middle-market companies end up with both, using bank debt for the core facility and private credit for what the bank will not fund.
| Senior bank debt | Private credit | Mezzanine | |
|---|---|---|---|
| Typical cost | Lowest | Higher than bank, below mezzanine | Highest |
| Security | Senior, fully secured | Usually senior or unitranche | Subordinated, often unsecured |
| Speed | Slowest | Fast | Moderate |
| Flexibility on structure | Limited | High | High |
| Covenants | Tightest | Negotiable | Loosest |
| Best suited to | Stable, well-collateralized borrowers | Growth, acquisitions, complex situations | Filling a gap between debt and equity |
Private credit is lending by non-bank institutions — direct lending funds, credit funds, and specialty finance firms — rather than by traditional banks. It has grown into a core part of the middle-market financing landscape because those lenders can move faster, underwrite situations a bank's credit committee would decline, and structure flexibly around a specific business. The trade-off is price: private credit is generally more expensive than bank debt. For borrowers who need speed, size, or a structure a bank will not write, that premium frequently buys something a bank cannot offer at any price.
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