Business Acquisition Glossary
Everything you need to understand when buying a business in India. This comprehensive glossary covers valuation methods, deal structures, legal requirements, and operational terms used in business acquisitions and M&A transactions.
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Valuation Terms
SDE (Seller's Discretionary Earnings)
The total financial benefit a single owner-operator derives from a business annually. Calculated by adding net profit, owner's salary, personal expenses, and non-cash expenses like depreciation. SDE is the primary valuation metric for small businesses under ₹10 crore.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. Measures operational profitability independent of financing decisions and accounting methods. Standard for mid-market transactions (₹10 crore+) where professional management runs operations.
Adjusted EBITDA
EBITDA normalized by removing non-recurring, unusual, or non-operational items. Common adjustments include one-time legal settlements, family employment above market rate, and personal expenses run through the company.
Valuation Multiple
A ratio used to determine business value by multiplying a financial metric (typically SDE or EBITDA) by an industry-appropriate factor. Small businesses in India typically sell for 2-4x SDE or 3-6x EBITDA.
DCF (Discounted Cash Flow)
A valuation method estimating business value based on projected future cash flows, discounted to present value. Common in PE/VC deals but less practical for small business acquisitions.
Fair Market Value (FMV)
The price at which a business would change hands between willing buyer and seller, both having reasonable knowledge of relevant facts. Required for tax purposes and related-party transactions.
Goodwill
Intangible value beyond physical assets—including brand reputation, customer relationships, trained workforce, and market position. The premium paid above net tangible assets.
Book Value
Net worth as recorded in financial statements—total assets minus total liabilities. Represents historical accounting values, not current market values.
Enterprise Value (EV)
Total value of a business including both equity and debt. Calculated as: Equity Value + Total Debt - Cash. Purchase prices are often quoted as enterprise value.
Deal Structure Terms
LOI (Letter of Intent)
Preliminary document outlining principal terms of a proposed acquisition. Typically non-binding except for exclusivity and confidentiality clauses. Secures exclusive negotiating rights for 60-90 days.
SPA (Share Purchase Agreement)
The definitive legal contract governing sale of company shares. Contains purchase price, representations and warranties, indemnification provisions, closing conditions, and post-closing obligations.
APA (Asset Purchase Agreement)
Governs sale of specific business assets rather than company shares. Allows selective acquisition of desired assets while leaving unwanted liabilities behind. Common for proprietorships and partnerships.
Asset Purchase
Acquisition structure where buyer purchases specific assets (equipment, inventory, contracts, IP) rather than company shares. Avoids inheriting unknown liabilities but requires individual asset transfers.
Share Purchase
Acquisition structure where buyer acquires all shares of the target company, becoming owner of the entire legal entity. Company continues with same PAN, accounts, and licenses.
Earnout
Contingent payment mechanism where portion of purchase price is paid based on achieving specified performance targets post-acquisition. Bridges valuation gaps between buyers and sellers.
Seller Financing
When the seller provides a loan to the buyer as part of purchase price. Typically 20-40% of deal value with 15-20% interest over 2-4 years. Demonstrates seller confidence in the business.
Holdback
Portion of purchase price retained by buyer for specified period to secure seller obligations—typically 10-20% held for 12-24 months to cover indemnification claims.
Escrow
Arrangement where neutral third party holds funds or documents, releasing only when specified conditions are satisfied. Provides security to both parties during transaction.
Working Capital Adjustment
Purchase price mechanism ensuring business maintains adequate operating liquidity at closing. Price adjusts based on actual vs. target working capital levels.
Exclusivity (No-Shop)
Contractual commitment where seller agrees not to solicit or negotiate with other buyers for specified period (typically 60-120 days) while negotiating with exclusive buyer.
Due Diligence Terms
Due Diligence
Comprehensive investigation of a target business covering financial, legal, tax, operational, and commercial dimensions. Confirms information, identifies risks, and validates valuation. Typically 30-60 days.
Representations and Warranties
Statements of fact in the SPA covering business condition, legal compliance, and financial accuracy. If false, the other party has recourse through indemnification claims.
Indemnification
Contractual mechanism obligating seller to compensate buyer for losses arising from breached representations or warranties. Buyer's remedy for post-closing problems.
Material Adverse Change (MAC)
Clause allowing transaction termination if significant negative changes affect the target business between signing and closing. Definition heavily negotiated.
Disclosure Schedule
Exhibit to SPA listing exceptions to seller's representations. Brings known issues into the open, preventing future claims based on disclosed matters.
Quality of Earnings (QofE)
In-depth financial analysis validating EBITDA, identifying adjustments, and assessing earnings sustainability. Gold standard for financial due diligence in mid-market deals.
Data Room
Secure repository (typically virtual/cloud-based) containing documents for buyer due diligence review. Organized data rooms accelerate due diligence and signal seller professionalism.
Conditions Precedent (CPs)
Requirements that must be satisfied before parties are obligated to close. Common CPs: satisfactory due diligence, regulatory approvals, no material adverse change.
India-Specific Legal Terms
ROC (Registrar of Companies)
Government authority registering companies and maintaining corporate records. Share transfers require ROC filings including Form SH-4 and stamp duty payment.
MCA (Ministry of Corporate Affairs)
Government ministry administering Companies Act 2013 and corporate law. MCA21 portal used for all company filings and public record searches.
GST (Goods and Services Tax)
India's unified indirect tax on supply of goods and services. GST compliance history is critical in due diligence—non-compliance creates buyer liability risk.
EPF/PF (Employee Provident Fund)
Mandatory retirement savings scheme. Employers must contribute 12% of eligible employee wages. Non-compliance creates significant liability exposure for buyers.
ESI (Employees' State Insurance)
Social security and health insurance scheme. Applies to establishments with 10+ employees with salary below specified threshold. Another key compliance area.
TDS (Tax Deducted at Source)
Mechanism for collecting income tax at payment source. Payers must deduct tax and deposit with government. TDS defaults create buyer liability in acquisitions.
Stamp Duty
Tax on legal documents including share transfers. Rates vary by state (typically 0.25% on shares). Must be paid before ROC accepts share transfer filings.
FDI (Foreign Direct Investment)
Investment by foreign entities in Indian companies. Most sectors allow 100% FDI under automatic route. Some sectors require government approval.
FEMA (Foreign Exchange Management Act)
Law governing foreign exchange transactions and cross-border investments. NRI acquisitions must comply with FEMA regulations for repatriation.
Financing Terms
Down Payment
Initial cash portion paid at closing, typically 25-50% of purchase price. Balance covered by seller financing or bank loans.
Seller Note
Formal promissory note documenting seller financing terms—principal amount, interest rate, repayment schedule, and security arrangements.
LAP (Loan Against Property)
Secured loan using real estate as collateral. Common acquisition financing method in India since dedicated acquisition loans are rare.
Working Capital
Funds needed for day-to-day operations—cash, receivables, and inventory minus payables. Buyers need working capital reserves beyond purchase price.
Debt Service
Total principal and interest payments required on acquisition debt. Critical calculation to ensure business cash flow covers debt obligations.
Transaction Process Terms
Closing (Completion)
Formal event when ownership transfers—signing final documents, paying purchase price, and delivering shares or assets. Post-closing, buyer assumes control.
Transition Period
Post-closing period (typically 30-90 days) where seller helps buyer learn operations, introduces customers and suppliers, and transfers knowledge.
Non-Compete Agreement
Contract restricting seller from competing with the sold business for specified period and geography. Essential to protect purchased goodwill.
Confidentiality Agreement (NDA)
Agreement protecting sensitive business information shared during acquisition process. Required before accessing detailed financials.
Information Memorandum (IM)
Detailed document describing business for sale—history, financials, operations, market position, and growth opportunities. Prepared by seller or broker.
Teaser
Brief anonymous document describing business opportunity without identifying the company. Used to gauge buyer interest before NDA signing.
Key Insight
Understanding M&A terminology is essential for effective negotiation. When buyers and sellers speak the same language, transactions move faster and misunderstandings decrease. Bookmark this glossary for reference during your acquisition journey.
Related Resources
This glossary is for educational purposes. Terminology and practices may vary by transaction. Always consult qualified professionals for specific situations.