Software M&A Glossary

An acquirer, often called the buyer, is the company or investor purchasing a business. Acquirers generally fall into two categories. Strategic acquirers are operating companies that buy to expand their product offerings, customer base, or market reach. Financial acquirers, usually private equity firms, buy to grow the business and earn a return when they sell it later. Each type values different things, which is why the same company can receive very different offers depending on who’s making them.

An acquisition is a transaction in which one company buys a controlling stake in another, typically more than 50% of its equity, or buys its assets outright. In software M&A, “acquisition” usually refers to a full sale, though founders can also sell a majority stake and retain a piece of the upside through a recapitalization or rolled equity.

An add-on acquisition is a company bought by a private equity firm to fold into a business it already owns, called its platform. Add-ons let the PE firm grow the platform faster by adding products, customers, or geographic reach. For a founder, being an add-on often means a quicker process and a clear strategic fit, since the acquirer already knows the market. The offer is usually judged on how well your company complements the platform, not only on your standalone numbers.

Annual recurring revenue (ARR) is the annualized value of recurring subscription revenue at a particular point in time. It generally excludes one-time implementation fees, consulting, hardware, and other nonrecurring charges. Buyers examine how ARR is defined, whether it is supported by customer agreements and billing records, and how likely it is to renew.

ARR = Monthly Recurring Revenue × 12

ARR growth measures the percentage change in annual recurring revenue over a defined period, usually year-over-year. Buyers consider the growth rate alongside retention, expansion, pricing changes, and the consistency of new customer acquisition. Growth that depends on a few unusual wins may be viewed differently from growth supported by repeatable customer demand.

ARR per employee measures annual recurring revenue per full-time employee. It is one indicator of operating leverage: whether recurring revenue can grow without proportional increases in staffing. Buyers interpret the figure in the context of the company’s size, delivery model, outsourced resources, and stage of investment.

A benchmark median is the middle value of a metric across a group of comparable companies, such that half perform better and half perform worse. Medians are used instead of averages because a few outliers can pull an average far from what’s typical. When you see your NRR or gross margin next to a benchmark median, you’re seeing how you stack up against the typical peer, which is the same comparison an acquirer will make.

Benchmarking is comparing your company’s metrics against a relevant peer group to see where you lead and where you lag. Acquirers benchmark every company they look at, so doing it first is one of the most useful things a founder can do. It shows which strengths to lead with in a process and which gaps are worth fixing before you get there. The peer group matters: a vertical software company should be compared with vertical software companies of similar size, not the whole market.

A bootstrapped company is one built without outside investment, funded by its own revenue and the founders’ capital. Bootstrapped software companies often operate leaner and more profitably than venture-backed peers, a fact many acquirers find attractive. They also tend to have simpler cap tables, which can make a deal easier to close.

A broad process is a sale process in which an advisor reaches out to a wide set of potential acquirers. The goal is competitive tension: when several qualified acquirers are bidding, sellers tend to see better prices and terms than when negotiating with a single party. A broad process takes real preparation, including positioning the company, building materials, and managing many conversations at once.

CAC payback period measures the number of months required to recover the cost of acquiring a customer from the gross profit generated by that customer’s recurring revenue. Shorter payback generally means less capital is tied up in acquiring growth. Buyers also consider customer type, sales cycle, retention, and whether acquisition spending and new MRR are measured consistently.

CAC Payback (months) = CAC per New Customer ÷ (New MRR per Customer × Gross Margin)

CAPEX, short for capital expenditures, is the money spent to buy or upgrade long-term assets such as servers, equipment, or office buildouts. CAPEX is recorded on the balance sheet and expensed gradually through depreciation instead of all at once. Some software companies also capitalize development costs, and acquirers will look closely at how that’s done, since it can make EBITDA look stronger than the cash the business produces.

Cash at close is the portion of the purchase price paid to the seller in cash on the day the deal closes. It’s different from the headline price, which can also include earn-outs, rolled equity, escrow, or holdbacks that are paid later or depend on future events. Two offers with the same headline number can look very different once you compare cash at close, which is why it’s one of the first things to check in any LOI.

Cost of goods sold (COGS) is the direct cost of delivering your software to customers. For SaaS companies, this usually includes hosting, third-party software embedded in your product, customer support, and implementation or onboarding staff. COGS drives gross margin, and acquirers often reclassify expenses during due diligence if they believe some belong in COGS. Learn more about COGS.

Competitive positioning is how your company stands out from alternatives in the eyes of your customers and the market. That includes whom you compete with, why customers pick you, and what keeps them from switching. Acquirers want a clear, credible answer here, because it tells them whether your growth and pricing can hold up as competitors respond. A strong position often comes from owning a specific workflow, a vertical, or data that others can’t easily replicate.

A confidential information memorandum (CIM) is a detailed document that an advisor prepares to introduce your company to potential acquirers, which is shared once they sign a nondisclosure agreement. A CIM covers the company’s history, products, customers, team, financials, and growth opportunities. Its real job is to tell your story in a way that frames value before acquirers form their own conclusions. A well-built CIM also anticipates the hard questions, which keeps a process moving later on.

CARR, or contracted annual recurring revenue, is recurring revenue supported by executed customer agreements. It may include committed future amounts that have not yet been billed, depending on the reporting convention. It should be distinguished from current ARR, recognized revenue, and bookings. Buyers review contract terms, start dates, cancellation rights, and implementation dependencies before treating committed amounts as dependable future revenue.

Covenants are promises in a deal agreement that a party will or won’t take certain actions. In M&A, covenants often govern how the seller runs the business between signing and closing, such as prohibiting new debt or major hires without approval. Others apply after closing, like non-compete or non-solicitation terms. Breaching a covenant can lead to claims against the seller, so founders should understand the covenants before signing.

Customer acquisition cost (CAC) is the average sales and marketing cost of acquiring a new customer. For a consistent calculation, include the sales and marketing expenses attributable to new customer acquisition, such as salaries, commissions, and marketing programs, and divide by the number of new customers acquired over the corresponding period. Buyers review CAC alongside payback and customer lifetime value to understand growth efficiency.

CAC = Sales & Marketing Spend Attributable to New Customer Acquisition ÷ New Customers Acquired

Customer churn is the share of customers who cancel or don’t renew over a period. Churn is one of the clearest signals of product fit and customer satisfaction, and high churn means growth has to work twice as hard just to stay even. Acquirers will dig into why customers leave, whether churn is concentrated in a particular segment, and whether it’s improving or worsening.

Customer Churn Rate = Customers Lost During Period ÷ Customers at Start of Period

Customer concentration describes how much of your revenue depends on a small number of customers, often measured as the share of ARR from your top customer or your top 10 customers. High concentration is a risk because losing one large account can change the whole business overnight. Acquirers may lower their valuation or add structure, such as earn-outs, to protect against it, so it’s worth tracking and addressing well before a sale.

Customer lifetime value (LTV) estimates the gross profit a company earns from a customer over the lifetime of the relationship. In SEG’s simplified churn-based approach, average annual recurring revenue per customer is adjusted for gross margin and divided by annual revenue churn. This estimate is sensitive to churn assumptions and should not be treated as a precise forecast for every customer cohort. Buyers consider LTV alongside acquisition cost and retention trends.

Estimated LTV = (Average Customer ARR × Gross Margin) ÷ Annual Revenue Churn Rate

Deal structure is how a transaction is put together: what’s being bought, how it’s paid for, and when the seller gets paid. Structure covers whether the deal is a stock purchase, an asset purchase, or a merger, as well as the mix of cash at close, rolled equity, earn-outs, and escrow. Structure affects your taxes, your risk after closing, and how much you take home, so it deserves as much attention as the price.

Deferred revenue is money a company has collected or billed for products or services it has not yet delivered. For SaaS companies, this commonly occurs when customers pay for subscriptions in advance each year. The company records the amount as a liability and recognizes it as revenue over the period the software is provided. In an acquisition, deferred revenue can affect the working capital adjustment and the amount a founder receives at closing. Buyers and sellers may negotiate how much of that obligation should be reflected in the purchase price, making the treatment of deferred revenue an important part of deal negotiations.

A divestiture is the sale of part of a company, such as a product line, business unit, or subsidiary, while the parent company keeps the rest. Companies divest to focus on their core business, raise capital, or let a product grow under an owner better suited to it. Divestitures add complexity, since the business being sold must be cleanly separated from shared systems, staff, and contracts.

Due diligence is the deep review an acquirer conducts after an LOI is signed to confirm that the business is what it appears to be. Due diligence typically covers financial, accounting, tax, legal, technology, security, and recurring revenue metrics, and it often runs 60 to 90 days. Most deals that fall apart or get repriced do so here, which is why preparing your data and documents before a process starts is one of the best investments a founder can make.

An earn-out is a portion of the purchase price paid after closing, contingent on the business meeting agreed-upon targets, such as revenue, ARR, or EBITDA, within a set period. Earn-outs help close a gap when the seller believes the company is worth more than the acquirer is willing to pay up front. They also shift risk to the seller, since you may no longer control the decisions that determine whether targets are met. Clear definitions, realistic targets, and protections for how the business is run are essential.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a measure of operating earnings that excludes certain financing, tax, and noncash accounting expenses. Buyers use EBITDA and adjusted EBITDA to assess profitability and compare businesses, but EBITDA is not the same as cash flow because it does not account for working capital movements, capital expenditures, or debt service. Learn how to calculate EBITDA here.

EBITDA margin measures EBITDA as a percentage of total revenue. Buyers assess it alongside growth, gross margin, and the sustainability of operating costs. SEG uses EBITDA margin together with ARR growth in its Rule of 40 calculation.

EBITDA Margin (%) = EBITDA ÷ Total Revenue × 100

Escrow is a portion of the purchase price held by a neutral third party for a set period after closing, usually 12 to 24 months. If problems surface that breach the seller’s promises in the purchase agreement, the acquirer can recover losses from the escrow. If nothing comes up, the money is released to the seller. R&W insurance has reduced or replaced escrow in many deals.

EV/Revenue is a valuation multiple calculated by dividing enterprise value by a company’s revenue over a specified period, often the trailing 12 months (EV/REV TTM). It is distinct from EV/ARR, which uses annual recurring revenue as the denominator. Buyers assess the quality and mix of revenue, growth, retention, profitability, and strategic fit when interpreting the multiple.

EV/Revenue = Enterprise Value ÷ Revenue for the Specified Period

EV/ARR = Enterprise Value ÷ Annual Recurring Revenue

An exclusivity requirement is a provision, usually included in a letter of intent (LOI), that prevents a seller from negotiating with other potential buyers for an agreed period. Exclusivity gives the buyer time to complete due diligence without competing offers. It also changes the seller’s negotiating position: if the buyer seeks to renegotiate, the seller has fewer active alternatives. Founders should resolve the most important economic and transaction terms before agreeing to exclusivity.

An exit strategy is a founder’s plan to eventually sell or transfer ownership of the company. Options include a sale to a strategic, a sale or recapitalization with a PE firm, a management buyout, or an IPO. A good exit strategy starts years before a sale, because the choices you make about growth, profitability, and team today shape which options will be available later.

A golden parachute is a package of benefits promised to senior executives if they lose their jobs after a change of control, such as severance pay, accelerated vesting of equity, bonuses, or continued benefits.

Goodwill is the amount of an acquisition purchase price allocated more than the fair value of identifiable net assets, including separately recognized intangible assets such as customer relationships and developed technology. It may reflect expected synergies, an assembled workforce, and other value that cannot be recognized separately.

Gross margin is the percentage of revenue remaining after the direct costs of delivering products or services, commonly called cost of goods sold (COGS). Buyers review cost classification and may evaluate subscription and professional services margins separately to understand the economics of the business.

Gross Margin (%) = (Revenue − COGS) ÷ Revenue × 100

Gross revenue retention (GRR) measures the percentage of beginning recurring revenue retained from the same customer cohort, excluding expansion. It subtracts churn and contraction and cannot exceed 100%. Buyers use GRR to assess the durability of existing customer revenue without the effects of upselling or price-driven expansion.

GRR (%) = (Beginning ARR − Churned ARR − Contraction ARR) ÷ Beginning ARR × 100

A holdback is a portion of the purchase price the acquirer keeps and pays later, once certain conditions are met after closing. Holdbacks work like escrow, except the acquirer holds the funds directly rather than a third party. They’re often tied to specific items such as a final working capital adjustment or a known legal matter. Because the acquirer controls the funds, the release terms should be spelled out clearly in the purchase agreement.

Identifiable assets are assets that can be separately measured and valued in an acquisition, such as cash, receivables, equipment, software code, trademarks, and customer contracts. Anything the acquirer pays above the value of these assets, net of liabilities, is recorded as goodwill. How the price gets split between the two has accounting and tax consequences for both sides.

An indication of interest (IOI) is a non-binding letter in which a potential acquirer signals serious interest and gives a preliminary valuation, usually as a range. IOIs often also outline the proposed deal structure, diligence needs, management plans, and timing. In a competitive process, IOIs help the seller and advisor narrow the field to the acquirers worth spending real time with before moving to LOIs.

A letter of intent (LOI) is a document in which an acquirer outlines the proposed price and key terms of a deal, and is signed by both parties before due diligence begins. Most of an LOI is non-binding, though exclusivity and confidentiality provisions usually are binding. Signing an LOI is a turning point: it typically ends the competitive part of the process, so the seller’s best chance to negotiate price, structure, and terms comes before signing.

Logo retention measures the percentage of customers retained over a period, regardless of the revenue each customer contributes. A small customer and a large customer each count as one logo. Buyers examine logo retention alongside GRR and NRR to understand whether revenue retention is concentrated among a subset of accounts. 

Logo Retention (%) = (Beginning Customers − Customers Lost) ÷ Beginning Customers × 100

The LTV:CAC ratio compares the estimated lifetime gross profit from a customer with the cost of acquiring that customer. SEG’s framework uses gross-profit-adjusted LTV and acquisition cost per new customer. Buyers consider the ratio together with retention, payback, customer segments, and the assumptions behind the LTV estimate.

LTV:CAC = Estimated Customer Lifetime Value ÷ Customer Acquisition Cost

A management meeting is a session, often a presentation followed by Q&A, where the founder and leadership team meet a potential acquirer during a sale process. It’s the acquirer’s chance to understand the team, the strategy, and the story behind the numbers, and the seller’s chance to judge fit. Management meetings frequently shape how acquirers feel about a company more than any document does.

Market growth is the rate at which the overall market you sell into expands, typically measured as the annual growth in total spending. Acquirers pay close attention because a growing market makes your own growth easier to sustain and easier to believe. A company growing quickly in a flat market raises the question of where the next customers will come from, while a fast-growing market gives an acquirer more room to invest.

A multiple is a shorthand for valuation, expressed as the purchase price divided by a key financial metric. In software M&A, the most common are EV/Revenue (or EV/ARR) and EV/EBITDA. Multiples let people compare deals of different sizes on equal footing.

Net working capital (NWC) is the value of the short-term assets a business uses to operate, minus its short-term obligations. In M&A, the acquirer and seller agree on a target level of NWC the company should have at closing, often called the “peg.” If actual NWC comes in below the peg, the purchase price goes down, and if it comes in above, the price can go up. For subscription software companies with significant deferred revenue, the NWC calculation can materially affect the final purchase price.

Net Working Capital = Current Assets (excluding cash) − Current Liabilities (excluding debt)

Net revenue retention (NRR) measures the change in recurring revenue from an existing customer cohort over a period, including expansion and excluding revenue from newly acquired customers. NRR above 100% indicates that expansion from existing customers more than offsets churn and contraction. Buyers consider NRR alongside GRR because expansion can mask underlying customer losses.

NRR (%) = (Beginning ARR + Expansion ARR − Churned ARR − Contraction ARR) ÷ Beginning ARR × 100

A PE-backed strategic buyer is an operating company owned by a private equity firm that acquires other businesses to build its own business. It combines traits of both acquirer types: the strategic interest of a company that knows your market and can use your product, plus the capital and deal experience of its PE owner. This group has become one of the most active sources of software acquisitions. For a seller, it often means a strong strategic fit with a disciplined, process-driven acquirer.

Percentile rank shows where a company’s metric falls relative to a peer group, expressed as the percentage of peers it outperforms. A company in the 80th percentile for NRR outperforms 80% of its peers on that metric. Percentile ranks make it easier to see how competitive each metric really is, and where you’d stand out or fall short in an acquirer’s eyes.

A perpetual license is a software pricing model in which a customer pays once for the right to use a version of the software indefinitely, often with a separate annual fee for maintenance and support. Perpetual license revenue is less predictable than subscription revenue because new sales must be won each year again. Acquirers usually value it at a lower multiple, which is why many companies have moved to subscription models, often well ahead of a sale.

A platform acquisition is a private equity firm’s first investment in a particular market, intended to serve as the foundation on which it will build through add-on acquisitions. Platforms are usually larger, well-run companies with strong leadership teams, since the PE firm relies on them to absorb future deals. Platform buyers look closely at management depth, systems, and scalability, not only financial performance.

Product delivery model refers to how your software reaches customers and how they pay for it, such as cloud-based SaaS, on-premise installation, hosted, or a hybrid. The delivery model affects revenue predictability, gross margin, and how easily the business scales. Acquirers generally place the highest value on multi-tenant cloud SaaS, because it tends to produce the most recurring revenue and the most efficient cost structure.

Product differentiation is what makes your product meaningfully different from alternatives in a way customers care about and are willing to pay for. Real differentiation might come from deep functionality for a specific industry, proprietary data, integrations that are hard to replace, or ownership of a critical workflow. Acquirers look for it because differentiation protects pricing, supports retention, and makes growth more durable as competitors catch up.

The purchase agreement is the final, binding contract that sets out every term of the sale. It covers the price and how it’s paid, what’s being sold, the representations and warranties each side makes, covenants, indemnification, and conditions for closing. Most of the detailed negotiation happens here, and terms that seemed settled in the LOI can be challenged, which is why experienced legal counsel and advisors matter at this stage.

A quality of earnings (QofE) report is an independent review of a company’s financials, conducted by an accounting firm, to confirm that reported earnings reflect the true, repeatable performance of the business. A QofE tests revenue recognition, adjusted EBITDA add-backs, working capital, and one-time items.

A recapitalization, or recap, is a transaction in which a founder sells a portion of the company, typically to a private equity firm, while retaining a meaningful ownership stake. In a majority recap, the founder sells more than 50%; in a minority recap, less than 50%. A recap lets founders take significant cash off the table now while still sharing in future growth, often with a partner who brings capital and operating support.

Representations and warranties insurance (RWI) is an insurance policy, usually purchased by the acquirer, that covers losses if the seller’s statements in the purchase agreement prove inaccurate. RWI shifts much of the post-closing risk from the seller to an insurer, which can reduce or eliminate the need for a large escrow. For founders, it often means a cleaner exit and more of the proceeds in hand at closing.

Revenue growth measures the percentage change in total recognized revenue over a defined period, typically year-over-year. Unlike ARR growth, it includes services and other nonrecurring revenue. Buyers examine the revenue mix and whether growth is recurring, repeatable, and supported by healthy margins.

Revenue Growth (%) = (Current-Period Revenue − Prior-Period Revenue) ÷ Prior-Period Revenue × 100

Revenue recognition is the accounting process that determines when a company records revenue from its customers. Under accrual accounting, software subscription revenue is generally recognized over the period the software is provided, rather than when the customer pays. Implementation fees, professional services, and contracts with multiple products or services may require different treatment. Buyers examine revenue recognition during financial due diligence to determine whether reported revenue and earnings accurately reflect the company’s performance. Inconsistent or incorrect practices can lead to financial adjustments, valuation changes, or delays in closing.

Revenue scalability is a company’s ability to grow revenue faster than the costs needed to support it. Scalable software businesses can add customers without adding headcount or infrastructure at the same pace, so margins widen as they grow. Acquirers look for signs of scalability in gross margin trends, ARR per employee, and how much of the product is self-serve versus heavily customized for each customer.

Rollover equity is the portion of a seller’s ownership value reinvested in the post-transaction business rather than received in cash at closing. It is common in private equity transactions and can give founders participation in a later exit. The amount and rights vary by deal. Founders should examine governance, dilution, liquidity, and the terms of the new equity rather than focusing only on the headline rollover percentage.

The Rule of 40 is a software performance benchmark that combines ARR growth rate and EBITDA margin to evaluate growth and profitability together. Under SEG’s 22 Factors methodology, a company with 25% ARR growth and a 20% EBITDA margin scores 45%. Buyers also examine the individual components: the same score can describe very different operating profiles.

Rule of 40 (%) = ARR Growth Rate (%) + EBITDA Margin (%)

A sponsor buyer is a financial acquirer, most often a private equity firm, that buys companies with capital raised from its investors. Sponsors plan to grow the business over a set holding period, often three to seven years, and then sell it for a return.

A success fee is what an M&A advisor earns when a transaction closes, usually calculated as a percentage of the deal value. Success fees align the advisor’s interests with the sellers’, since the advisor is paid more when the outcome is better. It’s worth understanding how the fee is calculated, including whether it applies to earn-outs, rolled equity, and other deferred consideration.

The target, or seller, is the company being acquired in a transaction. After closing, the target becomes part of the acquirer, whether as a fully integrated product, a standalone business unit, or a platform for future acquisitions. How the acquirer plans to run the business after the deal is worth asking about early, since it affects your team, customers, and any earn-out.

Technical debt is the accumulated cost of shortcuts, outdated technology, or design decisions that make software harder to maintain, improve, or scale. It can include legacy code, outdated infrastructure, limited automated testing, or systems that require significant manual work. Some technical debt is a reasonable trade-off when developing software quickly, but unresolved issues can slow product development, increase costs, and create security or reliability risks. During technical due diligence, buyers assess whether the technology can support future growth and what investment may be required after closing. Significant technical debt can affect valuation, deal terms, or a buyer’s willingness to proceed.

A term sheet is a short, mostly non-binding summary of the key terms of a proposed investment or acquisition, most often used by private equity and growth investors. It covers valuation, structure, governance, and conditions.

A third-party technology review is an independent assessment of a company’s technology, conducted by outside specialists on behalf of the acquirer during diligence. It usually covers code quality, architecture, scalability, security, open-source use, and intellectual property ownership. Issues found here can affect price or terms, so many sellers review their own technology first to fix problems before acquirers find them.

Total addressable market (TAM) is the total annual revenue opportunity available if your product captured every potential customer in its market. Acquirers use TAM to assess how much room the business has for growth after acquisition. A credible TAM is built from the bottom up, using actual numbers of potential customers and realistic pricing, rather than quoting a broad industry figure that your product only partially serves.

Weighted average rank is a single overall score that combines a company’s percentile ranks across several metrics, giving more weight to the ones that matter most to acquirers. For example, retention and growth might count more than a secondary efficiency metric. It offers a quick, balanced view of how a company compares to peers overall, while the individual ranks show where its specific strengths and gaps are.

A zero-indemnity deal is a transaction in which the seller has no ongoing financial liability for breaches of representations and warranties after closing, except in cases such as fraud. Zero-indemnity deals are usually made possible by R&W insurance, which covers those risks instead. For sellers, it means a cleaner break at closing and less of the purchase price tied up in escrow.