M&A Glossary

The Letter of Intent is a pre-contractual document setting out the broad economic and operational terms on which seller and buyer intend to proceed. Non-binding on commercial elements but typically binding on exclusivity, confidentiality and break-up fee. In Italy it can take the form of an MOU (Memorandum of Understanding) or a term sheet.

When it is used. After the first strategic meeting and before starting due diligence. It defines the deal perimeter, indicative price (or range), consideration structure (cash, shares, earn-out), preliminary conditions precedent and expected closing timeline.

Due diligence is the investigative process through which a buyer verifies, before closing, the completeness and accuracy of information provided by the seller. Three dimensions: legal, tax, financial. Often also industrial, IT, ESG, HR.

Output. A Red Flag Report followed by a complete DD Report. Red flags can affect price, trigger escrow clauses, generate specific reps & warranties or lead to deal abortion.

Typical duration. 4–8 weeks for Italian mid-market operations, proportional to target complexity.

The SPA is the contract regulating the transfer of shares from seller to buyer. It represents the legal core of an M&A operation.

Key contents. Price and consideration structure, adjustment mechanisms (Net Debt, Net Working Capital, Cash-Free Debt-Free), reps & warranties, indemnity with cap and survival period, MAC clause, conditions precedent, post-closing non-compete, governing law and jurisdiction.

In Italy typically subject to Italian law with Milan or Rome jurisdiction; cross-border deals often use English law.

Earn-out is a variable component of the price, whose payment is conditional on post-closing targets (revenue, EBITDA, margins, milestones). It bridges a valuation gap between seller and buyer, or keeps the seller engaged in management.

Typical duration. 12–36 months. Italian tax treatment. Earn-out collected generally qualifies as capital gain (26% substitute tax), except for requalifications.

Carve-out is the separation and subsequent disposal of a business unit, division or asset from a parent company. It typically involves creating a NewCo into which contracts, employees, assets and selected liabilities are transferred.

When used. To focus on core business, reduce debt, monetize non-strategic assets, or sell to a buyer interested only in part of the group.

Representations and warranties are contractual statements by which the seller confirms specific facts about the sold company: no litigation, tax compliance, validity of key contracts, asset ownership, environmental compliance, etc.

Effect. If a representation proves false post-closing, the buyer is entitled to indemnity, within cap (maximum amount), basket (threshold) and survival period (typically 18–24 months for general reps, 5–10 years for tax reps) limits.

The Material Adverse Change clause allows the buyer not to proceed with closing if between signing and closing an event occurs that has or may have a materially adverse effect on the target.

What constitutes MAC. Defined contractually. Typical exclusions: macro events (recession, war, pandemic — except for disproportionate impact on target), general regulatory changes, market fluctuations. Italian courts interpret MAC restrictively: it requires a significant and lasting event, not temporary.

Escrow is a fiduciary deposit with a third party (bank, notary, trustee) of part of the price, tied to the satisfaction of post-closing conditions. It protects the buyer against potential indemnity from reps & warranties or open litigation.

Typical amount. 5–15% of price. Duration. Aligned with reps survival period (often 18–24 months).

Indemnity is the seller’s obligation to compensate the buyer for damages arising from breaches of reps & warranties or specifically identified liabilities. Structured with cap (ceiling), basket (threshold), de minimis (minimum amount per single claim) and survival period.

Typical cap. 20–40% of price for general reps. 100% for fundamental reps (share ownership, capacity). Special indemnity: specific coverage without cap for known risks identified in DD.

The Disclosure Schedule is the SPA exhibit in which the seller lists exceptions to reps & warranties. It protects the seller from future claims on facts already known to the buyer at signing.

Logic. “I represent X, except as specified in the Disclosure Schedule.” The DS completeness is crucial: omissions can generate litigation.

Two complementary clauses in shareholder agreements.

Drag-along. Allows the majority shareholder to force minority shareholders to sell their shares on the same terms when a controlling stake is sold. Protects the ability to close a deal without small-shareholder vetoes.

Tag-along. Mirror right: minority shareholders can join the majority’s sale on the same terms. Protects minorities from “solo” sales by the majority.

Lock-up is the temporary prohibition for the seller (often founder or management) from disposing of residual or consideration shares (stock). Typical durations: 6–36 months.

When used. In M&A with partially equity consideration, in IPOs, in operations where management remains on board post-closing.

Put option. Right of a shareholder to sell their stake to a predetermined counterparty, at fixed price and conditions (formula or fixed price). Guaranteed exit.

Call option. Right of a shareholder to purchase shares from a predetermined counterparty. Used for progressive control consolidation.

Exercise. Defined time windows, trigger events (IPO, change of control, KPI failure).

An LBO is the acquisition of a company financed predominantly with debt (senior, mezzanine, vendor loan), whose service will be sustained by target cash flows. Typical of private equity operations.

Typical Italian structure. NewCo acquires target then merges by incorporation (Merger Leveraged Buyout). NewCo debt transfers to the target post-merger. Requirements: compliance with art. 2358 Italian Civil Code (financial assistance).

Management Buyout is an acquisition led by the incumbent management, typically supported by a private equity fund. Management invests own equity (“skin in the game”) alongside the financial sponsor.

Variants. MBI (Management Buy-In): management team is external. BIMBO (Buy-In Management Buyout): mix of internal and external managers.

A bolt-on acquisition (or tuck-in) is a small acquisition added to an existing platform to expand geography, product or clients. Typical of private equity buy-and-build strategies.

Criteria. Purchase multiples lower than platform’s, quick operational synergies, integration within 6–12 months.

Vendor loan is a loan the seller grants to the buyer to finance part of the acquisition price. Alternative financing to bank debt.

When used. Operations where bank financing covers only partially the price, or to align seller incentives with post-closing performance (e.g., subordinated to earn-out).

Bridge financing is a short-term (6–18 months) bridge loan covering a temporal gap, e.g. between acquisition closing and long-term refinancing on the bond market or via IPO.

Typical structures. Committed bridge, backstop bridge, rescue bridge. High cost, designed to be replaced with permanent instruments.

Non-Performing Loans (NPL). Distressed credits with debtor insolvency: severe default, banking bad loans, payments stopped for over 90 days. Subject to block disposal to specialized funds (GACS, securitizations).

Unlikely to Pay (UTP). Credits where the bank deems full repayment unlikely without restructuring actions, but where the debtor is not yet in declared insolvency. Active management with possible turnaround.

A beauty contest is a restricted competitive process where the lead advisor invites a limited number of potential buyers (3–8) to submit indicative offers on a target. More selective than a public auction but sufficiently competitive to maximize price.

Phases. Anonymous teaser → NDA → Information Memorandum → Non-Binding Offer (NBO) → Shortlist → Due Diligence → Binding Offer → Final negotiation with best & final.

A Virtual Data Room is a secure online repository where the seller makes documents available for buyer due diligence: financial statements, contracts, legal, HR, operational documentation.

Italian/international providers. Intralinks, Datasite, iDeals, SecureDocs. Key features: granular permissions, watermarking, integrated Q&A, audit trail, digital NDA.

The Q&A process is the formal channel through which the buyer, during due diligence, asks questions to the seller about data room documents and information. Typically managed within the VDR itself, with written responses verified by seller’s lawyers.

Legal function. Written answers may supplement the Disclosure Schedule or constitute contractual representations in reps & warranties.

Two temporally distinct moments of an M&A operation.

Signing. SPA signature. The operation is commercially closed but conditional.

Closing. Actual execution: share transfer, price payment, any handover. Takes place after all conditions precedent (antitrust approvals, lender waivers, change-of-control contract consents) are satisfied. Typical signing-closing distance: 30–180 days.

Conditions precedent are events that must occur between signing and closing for the operation to be completed. If they don’t occur by the long-stop date, the affected party can withdraw.

Typical examples. Antitrust approval (ICA/EU), change-of-control waivers on key contracts, certified tax regularity, lender consents, shareholder approvals, regulatory approvals (Bank of Italy, Consob, Central Bank), Golden Power.

A fairness opinion is a written opinion from an independent financial advisor on the economic fairness of an operation for shareholders (or a class of shareholders). Typically requested in operations on listed companies, tender offers, mergers, related-party transactions.

Purpose. Support the board’s decision and protect directors from shareholder claims. In Italy reference to the Self-Discipline Code and Consob related-parties regulation.