Dictionary
Legal Literacy Dictionary.
The legal vocabulary that shows up in letters of intent, purchase agreements, and closing documents — defined in plain English.
55 terms in this dictionary
Disclaimer
For educational purposes only. Definitions are simplified and are not intended to replace the language contained in any Letter of Intent, Purchase Agreement, financing documents, or other transaction documents. If a term is specifically defined in your transaction documents, the contractual definition will govern.
- Ancillary Documents
- The additional agreements signed alongside the Purchase Agreement — Bill of Sale, Assignment & Assumption, Promissory Note, Security Agreement, Escrow Agreement, Employment Agreement, Consulting Agreement.
- Asset Purchase
- A transaction in which the buyer purchases selected assets of the business instead of purchasing the legal entity itself. The most common structure for small and middle-market businesses.
- Assignment
- The legal transfer of a contract, lease, permit, license, intellectual property right, or other legal interest from one party to another.
- Assignment & Assumption Agreement
- An agreement transferring specified contracts, assets, or liabilities from the seller to the buyer.
- Basket
- An indemnification threshold that determines when one party may begin recovering losses from the other — a deductible in an insurance policy.
- Bill of Sale
- A document transferring ownership of tangible personal property from the seller to the buyer.
- Bolt-On Acquisition
- A smaller acquisition completed by an existing company to expand operations, geographic reach, customers, or capabilities.
- Business Broker
- A professional who assists buyers and sellers with marketing businesses, identifying counterparties, negotiating terms, and facilitating transactions.
- Cap
- An agreed limitation on the maximum amount one party may recover under an indemnification provision.
- Closing
- The point at which ownership officially transfers from seller to buyer after all closing conditions have been satisfied.
- Closing Binder
- A collection of all documents signed and delivered in connection with the acquisition.
- Closing Conditions
- Requirements that must be satisfied before either party is obligated to complete the transaction.
- Closing Statement
- A document showing how the purchase price and transaction funds are distributed at closing.
- Confidentiality Agreement (NDA)
- An agreement requiring parties to keep confidential information private during acquisition discussions.
- Covenant
- A contractual promise requiring a party to perform — or refrain from performing — certain actions.
- Data Room
- A secure location where the seller makes documents available for buyer due diligence. Modern transactions often use virtual data rooms.
- Definitive Agreements
- The final binding contracts governing the acquisition. The Purchase Agreement is typically the primary definitive agreement.
- Disclosure Schedules
- Documents attached to the Purchase Agreement identifying exceptions to the seller's representations and warranties.
- Due Diligence
- The investigation performed before closing to evaluate the legal, financial, operational, and commercial aspects of the business.
- Earnout
- A portion of the purchase price that becomes payable only if the business achieves specified performance targets after closing.
- Escrow
- Money held by an independent third party until specified contractual conditions are satisfied.
- Exclusivity
- A negotiated period during which the seller agrees not to negotiate with competing buyers. Also known as a No-Shop Provision.
- Governing Law
- The state whose laws will govern interpretation of the transaction documents.
- Holdback
- A portion of the purchase price withheld after closing to secure certain seller obligations.
- Indemnification
- A contractual mechanism allocating responsibility for specified post-closing losses between buyer and seller.
- Independent Sponsor
- An investor who identifies acquisition opportunities before raising capital from outside investors.
- Integration
- The process of combining operations after closing.
- Intellectual Property
- Legal rights protecting intangible assets — trademarks, copyrights, patents, trade secrets, domain names, proprietary software.
- Letter of Intent (LOI)
- A preliminary agreement outlining the principal business terms of the proposed acquisition before negotiating the definitive agreements. Many LOIs contain both binding and non-binding provisions.
- Material Adverse Effect (MAE)
- A significant negative event affecting the business. Purchase Agreements often include detailed negotiated definitions.
- Membership Interest
- Ownership interest in a Limited Liability Company (LLC).
- Membership Interest Purchase
- An acquisition in which the buyer purchases the ownership interests of an LLC instead of purchasing selected assets.
- Merger
- A transaction in which two legal entities combine into one surviving entity.
- No-Shop Provision
- A contractual promise restricting the seller from negotiating with competing buyers during a specified exclusivity period.
- Non-Compete Agreement
- An agreement restricting specified competitive activities following closing.
- Non-Solicitation Agreement
- An agreement restricting solicitation of customers, employees, or other business relationships after closing.
- Personal Guaranty
- A commitment by an individual to become personally responsible for specified obligations if the primary borrower fails to perform.
- Platform Acquisition
- The initial acquisition upon which a larger acquisition strategy is built.
- Private Equity
- Investment firms that acquire, improve, and eventually sell businesses to generate returns for investors.
- Promissory Note
- A written promise to repay borrowed money under agreed repayment terms. Seller financing is frequently documented through a Promissory Note.
- Purchase Agreement
- The principal contract governing the acquisition — rights, obligations, purchase price, closing conditions, representations, warranties, indemnification, and numerous other legal terms.
- Recapitalization
- A restructuring of a company's ownership or capital structure. Some owners sell only a portion of their business through a recapitalization.
- Representation
- A factual statement made by one party regarding the business or transaction.
- Warranty
- A contractual assurance regarding the accuracy of certain facts or circumstances. Representations and warranties are commonly negotiated together.
- Rollover Equity
- When a seller contributes a portion of the value of their business into the acquiring company rather than receiving all cash at closing.
- Search Fund
- An investment model in which entrepreneurs raise capital to identify, acquire, operate, and grow a privately held business.
- Security Agreement
- An agreement granting a lender or seller a security interest in collateral.
- Seller Financing
- A financing arrangement in which the seller receives part of the purchase price over time instead of entirely at closing.
- Specific Performance
- A legal remedy allowing a court to require a party to perform its contractual obligations rather than merely paying monetary damages.
- Stock Purchase
- An acquisition in which the buyer purchases ownership of a corporation by acquiring its shares.
- Strategic Buyer
- A company acquiring another business to achieve strategic objectives — expanding products, customers, or geographic reach.
- Survival Period
- The period after closing during which specified contractual obligations remain enforceable.
- Transition Services Agreement
- An agreement requiring the seller to assist the buyer after closing for a specified period.
- Virtual Data Room (VDR)
- A secure online repository used to organize and share due diligence materials during an acquisition.
- Working Capital Adjustment
- A post-closing adjustment that increases or decreases the purchase price based on the business's actual working capital at closing compared to an agreed target.
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