ETA Semantic Glossary
M&A and Search Fund Glossary for Acquisition Founders
A source-backed dictionary for acquisition entrepreneurs aligning search, investment, diligence, purchase, financing, and buyer-entity records.
Which M&A and search fund terms should an acquisition entrepreneur understand before forming a deal entity?
Acquisition entrepreneurs should understand the vehicle, sponsor, financing, diligence, purchase-agreement, and tax terms that determine who owns, funds, signs for, and operates a deal entity. Definitions create a shared vocabulary, but counsel, tax advisers, lenders, and accountants must apply each term to the actual transaction.
- Use vehicle and sponsor terms to map the search entity, acquisition buyer, owners, managers, and capital providers.
- Use diligence, agreement, and economics terms to keep the proposed entity aligned with the actual purchase and financing documents.
- Use tax and allocation terms only as discussion prompts for qualified advisers; a state filing does not determine their treatment.
Reviewed for legal terminology
Omer Aydin, Head of LegalTech. Last reviewed 2026-09-02.
M&A and search fund definitions
Vehicles & Sponsors
Special Purpose Vehicle (SPV)
Also called: SPV, special purpose entity
A special purpose vehicle is a separate legal entity organized for a defined transaction, investment, asset, or financing role. The label describes the vehicle's intended scope; it does not by itself establish securities status, tax classification, bankruptcy remoteness, or a guaranteed liability outcome.
How it appears in an acquisition
An acquisition team may use an SPV as the named buyer, borrower, co-investment vehicle, or single-asset owner when the approved transaction needs records distinct from the sponsor and operating company.
Formation connection
Before formation, identify the SPV's purpose, owners, manager, signers, state, registered agent, and expected closing role. The accepted legal name should then remain consistent across the EIN, governing records, purchase documents, lender file, and bank onboarding.
Professional boundary
Counsel, tax advisers, lenders, securities professionals, and administrators must determine whether the proposed structure achieves its intended legal, tax, financing, or regulatory result.
Source
- SEC: Private Funds: Federal overview of pooled investment entities and exempt-offering boundaries.
Vehicles & Sponsors
Search Fund
Also called: traditional search fund
A search fund is an entrepreneurship-through-acquisition model in which one or more entrepreneurs raise search capital to identify a privately held business and, if a suitable target is found, seek separate acquisition capital to purchase and operate it.
How it appears in an acquisition
The search stage pays for sourcing and diligence, while the acquisition stage introduces the buyer entity, transaction financing, investor approvals, and post-close operating ownership. Those stages may use different legal entities and capitalization records.
Formation connection
A search entity should be formed around the approved search budget, ownership, management, signatory authority, and investor documents. The acquisition vehicle is normally designed later around a specific target, lender, ownership plan, and purchase agreement.
Professional boundary
The term describes an investment model, not a securities exemption, guaranteed financing path, or universal entity structure. Counsel, tax advisers, and investors control the documents and approvals.
Source
- Stanford GSB: Search Fund Primer: Academic overview of the search-fund model from entrepreneur and investor perspectives.
Vehicles & Sponsors
Fundless Sponsor
Also called: deal-by-deal sponsor
A fundless sponsor is an acquisition sponsor that does not control a committed blind-pool fund for future deals and instead assembles equity for a specific transaction after identifying an opportunity. Market participants sometimes use the term alongside independent sponsor, although documents may distinguish the roles.
How it appears in an acquisition
The sponsor typically sources a target, negotiates preliminary terms, coordinates diligence, and presents the opportunity to capital partners. The final buyer and investment vehicles must reflect the actual investors, control rights, fees, and financing for that deal.
Formation connection
The sponsor business can exist before a target is selected, while a transaction-specific SPV or acquisition company may be formed only after the ownership and closing structure is approved.
Professional boundary
The label does not determine broker-dealer, investment-adviser, securities, fiduciary, tax, or compensation treatment. Qualified advisers must analyze the sponsor's actual activities and agreements.
Source
- UNC Institute for Private Capital: Independent Sponsors: Current institutional research on deal-by-deal independent-sponsor investing without committed blind-pool capital.
Vehicles & Sponsors
Independent Sponsor
Also called: unfunded sponsor
An independent sponsor is an individual or team that identifies and advances acquisition opportunities without first raising a traditional committed private-equity fund. Capital is generally arranged deal by deal after a target and proposed transaction have been developed.
How it appears in an acquisition
Independent sponsors coordinate the search, preliminary transaction, capital partners, diligence, management plan, and closing. A sponsor entity and one or more target-specific acquisition vehicles can have different owners, contracts, and purposes.
Formation connection
Formation should follow a written entity map that distinguishes the sponsor's ongoing business from the buyer, borrower, co-investment, and post-close operating entities approved for a specific transaction.
Professional boundary
An independent-sponsor label does not settle securities, adviser, broker, fiduciary, compensation, tax, or governance obligations. Those questions depend on conduct, documents, and applicable law.
Source
- UNC Institute for Private Capital: Independent Sponsors: Current institutional research on deal-by-deal independent-sponsor investing without committed blind-pool capital.
Deal Economics
Rollover Equity
Also called: equity rollover, seller rollover
Rollover equity is a negotiated part of an acquisition in which a seller retains or reinvests a portion of sale value as ownership in the post-closing buyer or holding structure instead of receiving that portion entirely in cash.
How it appears in an acquisition
The continuing stake can affect purchase consideration, post-close capitalization, governance, dilution, transfer rights, distributions, and the seller's economic exposure. Its rights may differ from the buyer's other equity unless the documents say otherwise.
Formation connection
Before forming the acquisition group, the transaction team should identify which entity issues the rollover interest, who owns it, and how that ownership appears in the approved capitalization and governing records.
Professional boundary
Rollover equity is illiquid and its value can rise or fall. Legal and tax advisers must structure the exchange, rights, valuation, and tax treatment for the actual seller and buyer.
Source
- Carta: Rollover Equity: Current explanation of seller equity continuing in the post-transaction ownership structure.
Deal Economics
Seller Note
Also called: seller financing note, acquisition promissory note
A seller note is a buyer's written debt obligation to pay part of the purchase consideration to the seller after closing under negotiated principal, interest, maturity, payment, default, security, subordination, and remedy terms.
How it appears in an acquisition
Seller notes can bridge a financing gap or defer consideration, but they are debt rather than continuing ownership unless separate equity is expressly issued. The obligor, guarantors, collateral, payment account, and priority should match the definitive documents.
Formation connection
If a new acquisition entity will sign the note, it must exist and have approved authority before execution. Its legal name and signer should be consistent across the note, purchase agreement, lender file, EIN, and bank records.
Professional boundary
A seller note is not automatically eligible for SBA standby treatment and is not equivalent to an earnout. Counsel, lenders, and tax advisers control the final structure and consequences.
Source
- SBA: 7(a) Loans: Official program overview confirming complete and partial changes of ownership as permitted uses.
Deal Economics
Earnout
Also called: earn-out, contingent consideration
An earnout is contingent purchase consideration paid only if defined post-closing performance targets or events occur during an agreed measurement period. The purchase agreement sets the metric, calculation, operating covenants, reporting, dispute process, payment timing, and limits.
How it appears in an acquisition
Earnouts can address a valuation gap, but they can also create disputes over accounting policies, buyer control, integration decisions, and whether the target met the agreed measure. They are different from fixed deferred debt and seller rollover equity.
Formation connection
The acquisition and operating entities named in the earnout provisions must match the approved buyer structure, responsible reporting entity, authorized decision-makers, ownership records, and post-close records.
Professional boundary
Formation software cannot design an earnout or predict its tax, accounting, employment, securities, or dispute consequences. Transaction counsel and financial advisers must draft and model it.
Source
- Harvard Law School Forum: The Art and Science of Earn-Outs: Current legal analysis of contingent purchase consideration, bespoke drafting, and recurring earnout disputes.
Diligence & Agreements
Letter of Intent (LOI)
Also called: LOI, acquisition letter of intent
A letter of intent is a preliminary acquisition document that records proposed deal terms and process expectations before the definitive purchase agreement. Some provisions may be expressly binding, such as confidentiality, exclusivity, access, expenses, or governing law, while principal transaction terms may remain nonbinding.
How it appears in an acquisition
An LOI can identify the proposed buyer, target, purchase form, price framework, financing assumptions, diligence process, exclusivity period, and expected closing schedule. Its wording determines what the parties have and have not committed to.
Formation connection
If the LOI names a new buyer or acquisition SPV, confirm whether that entity must exist before signature and who has authority to sign. Avoid inventing an entity identity that conflicts with the later approved structure.
Professional boundary
The binding effect of any provision depends on the actual language and applicable law. Counsel should draft or review the LOI; a filed public example is not a reusable template.
Source
- SEC EDGAR: Non-Binding Letter of Intent Example: Live filed example distinguishing proposed acquisition terms from expressly binding sections; not a universal template.
Diligence & Agreements
Quality of Earnings (QofE)
Also called: QofE, quality of earnings report
A quality of earnings analysis is financial due diligence that evaluates the composition, sustainability, and normalization of a target's earnings, including recurring revenue and expenses, working-capital needs, accounting policies, and proposed adjustments. It is not the same as a financial-statement audit.
How it appears in an acquisition
Buyers, sellers, lenders, and investors may use QofE findings to test valuation assumptions, debt capacity, purchase-price mechanics, and diligence questions. The analysis can change transaction decisions but does not itself amend the legal structure.
Formation connection
QofE findings can influence whether the transaction proceeds and how the buyer or financing is structured. Entity formation should wait for an approved buyer map rather than treat early diligence assumptions as final.
Professional boundary
A qualified accounting or financial-diligence team performs the analysis. Lovie does not audit financial statements, validate add-backs, calculate normalized EBITDA, or certify target performance.
Source
- CBIZ: Quality of Earnings in Due Diligence: Accounting explanation of normalized earnings analysis and how it differs from a financial-statement audit.
Deal Economics
Working Capital Peg
Also called: working capital target
A working capital peg is the negotiated target level of working capital a business is expected to deliver at closing. The purchase agreement defines the included accounts, accounting principles, measurement period, estimate, true-up process, dispute procedure, and resulting purchase-price adjustment.
How it appears in an acquisition
The peg helps distinguish ordinary operating liquidity from value transferred through the purchase price. Its calculation is deal-specific and can be affected by seasonality, growth, unusual balances, debt-like items, cash, and accounting consistency.
Formation connection
The buyer and operating entities should have clear responsibility for the closing statement, post-close books, adjustment payment, and dispute process. Those operational roles should match the approved entity map and signatory record.
Professional boundary
Accountants, financial advisers, and transaction counsel must define and calculate the peg. Formation software cannot decide the target, accounting methodology, or economic adjustment.
Source
- BDO: Net Working Capital in M&A: Page-specific M&A analysis of working-capital pegs and closing purchase-price adjustments.
Diligence & Agreements
Asset Purchase Agreement
Also called: APA, asset acquisition agreement
An asset purchase agreement is the definitive contract governing a buyer's acquisition of specified business assets and assumption of specified liabilities. It identifies what transfers, what remains excluded, the consideration, conditions, representations, covenants, indemnities, closing deliverables, and related assignments or consents.
How it appears in an acquisition
An asset deal can require separate treatment for contracts, permits, employees, intellectual property, real estate, inventory, receivables, and liabilities. The agreement and schedules—not the buyer's state filing—define the acquired package.
Formation connection
The named buyer must exist and have authority before it signs or closes. Its legal name, state, manager or officers, signers, EIN, and post-close operating role should align with the definitive agreement and ancillary documents.
Professional boundary
Lovie does not select assets, liabilities, tax treatment, successor-risk positions, or contract consents. Transaction counsel and tax advisers must prepare and review the agreement and structure.
Source
- Cornell LII: Asset Purchase Agreement: Legal definition of an agreement governing the transfer of specified business assets.
Diligence & Agreements
Stock Purchase Agreement
Also called: SPA, equity purchase agreement
A stock purchase agreement is the definitive contract governing the transfer of shares or other equity interests in a target entity. Unlike an asset purchase, the target entity generally remains in place while its ownership changes, subject to the agreement's conditions, representations, covenants, and closing mechanics.
How it appears in an acquisition
Because the target survives, its contracts, permits, employees, assets, liabilities, and history remain with that entity unless another document or applicable law changes them. Change-of-control consents and financing requirements still need review.
Formation connection
A newly formed buyer may acquire the target's equity. The buyer's legal identity, owners, authority, EIN, financing role, and signers should be settled before it executes the agreement or related closing documents.
Professional boundary
A public EDGAR agreement illustrates negotiated terms but is not a universal form. Counsel, tax advisers, lenders, and diligence specialists must assess the actual target and transaction.
Source
- Cornell LII: Stock Purchase Agreement: Legal definition of a contract transferring corporate stock and the provisions such agreements commonly address.
Tax & Allocation
Section 338(h)(10) Election
Also called: 338(h)(10) election, Section 338 election
A Section 338(h)(10) election is a joint federal tax election available only for certain qualifying stock purchases. When validly made, the transaction is treated for federal income tax purposes as a deemed asset sale by the target followed by a deemed liquidation, despite the legal stock transfer.
How it appears in an acquisition
The election can materially change seller and buyer tax consequences, asset basis, reporting, price negotiations, and purchase-price allocation. It is not available in every stock acquisition and is not created by labeling a transaction an asset deal.
Formation connection
The buyer entity and target classification must fit the adviser-approved transaction before filing. Formation records should preserve the exact legal parties, but state formation does not determine eligibility or complete the election.
Professional boundary
Qualified tax counsel and accountants must confirm statutory eligibility, model both sides, negotiate the economics, obtain required signatures, allocate consideration, and file Form 8023 on time.
Source
- IRS: About Form 8023: Official filing source for elections under Internal Revenue Code section 338 for qualifying stock purchases.
Vehicles & Sponsors
Co-Investment
Also called: co-investment vehicle, direct co-investment
A co-investment is an investment made alongside a primary sponsor or fund in a specific transaction, commonly through a direct interest or a separate vehicle. Its allocation, economics, governance, information rights, conflicts, fees, and exit treatment depend on the approved documents.
How it appears in an acquisition
A co-investment can provide additional equity for one acquisition and give selected investors exposure to that deal. It can also require a distinct ownership ledger, approval process, subscription record, and relationship to the sponsor's main fund or vehicle.
Formation connection
If a separate vehicle is approved, define its owners, manager, signers, target, state, registered agent, and closing role before formation. Keep the vehicle's ledger distinct from the target's ownership record.
Professional boundary
Lovie does not allocate opportunities, resolve sponsor conflicts, solicit investors, set fees, administer subscriptions, or select a securities exemption. The responsible professionals control those decisions.
Source
- American Bar Association: Structuring Co-Investments: Business Law analysis of co-investment rights, governance, allocation, and conflict considerations.
Tax & Allocation
Purchase Price Allocation
Also called: PPA, acquisition price allocation
Purchase price allocation is the process of assigning acquisition consideration among transferred assets and liabilities under the accounting, tax, and transaction rules that apply. For an applicable asset acquisition, buyer and seller generally report agreed tax allocations on IRS Form 8594.
How it appears in an acquisition
The allocation can affect tax basis, depreciation or amortization, gain characterization, financial reporting, and negotiation between buyer and seller. It is distinct from allocating an investment opportunity among funds or co-investors.
Formation connection
The buyer entity must be correctly identified before the allocation and tax filings are completed. Formation creates the legal buyer record but does not determine asset values, classes, consideration, or reporting positions.
Professional boundary
Valuation, accounting, transaction, and tax professionals must determine the applicable rules, consideration, asset classes, methodology, consistency, and required filings for the actual deal.
Source
- IRS: About Form 8594: Official source for allocation reporting in applicable asset acquisitions.
Turn the approved entity map into a Formation workflow
Use the glossary to align terminology with your advisers, then return to the ETA hub for structure-specific formation guidance. Lovie files only the entity data you review and approve; transaction, tax, securities, lending, and accounting work remain separate.