By: Chris Way
You’ve got an offer on your business, and the paperwork reads like alphabet soup: APA, MIPA, ROFR, EBITDA. Before you sign anything, you’ll want to know what all those letters mean!
Buying or selling a business comes with its own language, and the terms you skim past can shape how much you walk away with. In this two-volume edition of Is It Real?, we decode the deal documents, ownership rights, and financial terms that come up again and again in mergers and acquisitions.
Play along, then keep the cheat sheet below handy for your next deal. When you need to know what’s real, Team Way Law is here to help!
Answer Key
Deal documents
- NDA: Non-disclosure agreement, controlling how sensitive information about the deal or business is shared and used
- APA: Asset Purchase Agreement, used when buying a business’s assets rather than its ownership
- MIPA: Membership Interest Purchase Agreement, used when buying the equity of an LLC
- SPA: Stock Purchase Agreement, used when buying the equity of a corporation
Protections and rights
- Basket: How much loss a buyer must absorb before the seller’s indemnity obligation kicks in
- Cap: The limit on how much a seller must pay to indemnify a buyer
- ROFR (Right of First Refusal): The right to match any offer a seller receives for an asset
- ROFO (Right of First Offer): The right to be told first when an asset is for sale and make an offer before anyone else
- Tag-Along: Lets a minority owner join a sale when the majority owner sells, so they aren’t stuck with a new partner
- Drag-Along: Lets the majority owner require a minority owner to join a sale, so the minority owner can’t block it
Money and value
- EBIT: Earnings Before Interest and Taxes, used to measure a business’s operating income
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s like EBIT, but also adds back non-cash expenses tied to capital assets.
- CAGR: Compound Annual Growth Rate, the average yearly growth of an asset or investment, often used in earnouts
- Goodwill: Business value that isn’t tied to physical assets, such as brand loyalty or employee expertise
- Basis: Roughly what you paid for an asset, with certain adjustments, used to calculate gain or loss on a sale
- Allocation Schedule: Divides the purchase price among seven classes of assets, which affects taxes for both buyer and seller