If you find you the jargon used in mergers and acquisitions puzzling, we are here to help. This comprehensive glossary illuminates the key terms you’ll need to grasp when preparing to sell your business.
Accretive: By definition, in corporate finance, accretive acquisitions of assets or businesses must ultimately add more value to a company, than the expenditures associated with the acquisition. This can be due to the fact that the newly-acquired assets in question are purchased at a discount to their perceived current market value, or if the assets are expected to grow, as a direct result of the transaction.
Imagine you have a collection of stickers, and you get a new sticker to add to your collection. Your collection becomes more valuable because it has more stickers in it. In this example, adding a new sticker is “accretive” to the value of your collection.
In business or finance, when something is said to be “accretive,” it typically means that an action, like acquiring a new company or making an investment, is expected to increase the value of the company or investment per share.
For instance, if a company buys another company and this acquisition is “accretive to earnings,” it means that the purchase is expected to increase the company’s earnings per share. It’s like adding a valuable sticker to the collection, making the overall collection (or, in this case, the company) more valuable on a per-share basis.
Acqui-hiring: This refers to acquisitions made primarily to obtain the skills and expertise of a company’s staff rather than to gain control of their product or service. It’s a strategy typically used in the tech industry. Acqui-hiring typically refers to acquiring the talent or technology of a business.
Adjustments: These are modifications made to financial statements or projections to correct or allocate values appropriately, providing a more accurate depiction of a company’s financial health and operational performance.
Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted to reflect the profitability of your business in a buyer’s hands. Typical adjustments that may drive up reported EBITDA would be things like executive compensation (assuming you’re paying yourself more than it would cost to replace you with a general manager), personal travel, automobile expenses, one-time extraordinary expenses (such as a lawsuit), etc.
Anti-Dilution Clause: This provision protects an investor’s ownership percentage in a company from being diluted by additional share issuances, thereby maintaining their influence and value in the company.
Imagine you and three friends decide to start a lemonade stand together, and each of you owns an equal 25% share. But later, you all decide to bring in another friend to help, and you give the new friend some of the company’s shares. Now, everyone’s individual piece of the lemonade stand is smaller because you have to split it five ways instead of four. This is called “dilution.”
Now, let’s say you had an agreement or a “special rule” that if anyone new comes in, your piece of the lemonade stand stays the same, and only the others have to share their pieces with the new friend. This “special rule” would be like an anti-dilution clause in the business world.
An anti-dilution clause is a provision that protects an investor from having their ownership percentage decreased (or diluted) when new shares are issued in the future, like when the company raises more money or when employees exercise stock options. This means that the investor gets to keep a constant share of the company, and the dilution impacts the other shareholders, usually the founders or employees, who end up with a smaller piece of the company.
Arbitrage: This is a strategy used to take advantage of price discrepancies of a single asset in different markets. Traders buy the asset in a lower-priced market and sell it in a higher-priced one to make a profit without taking any market risk.
Imagine you have two local grocery stores, Store A and Store B. One day, you notice that Store A is selling apples for $1 each, but Store B is buying apples for $2 each. So, you buy an apple from Store A for $1 and then sell it to Store B for $2, making a $1 profit without much risk. This is a basic form of arbitrage.
In finance and trading, “arbitrage” involves buying and selling the same asset or equivalent assets in different markets to take advantage of price differences, allowing the trader to make a risk-free profit. For example, if a stock is selling for $50 on one stock exchange and $51 on another, an arbitrager could buy the stock for $50 at the first exchange and sell it for $51 at the second exchange, making a $1 profit per share with very low risk.
Asset Purchase Agreement (APA): This is a contract that outlines the terms and conditions related to the purchase or sale of a company’s assets. It is different from a stock purchase agreement (SPA), where company stocks are sold instead of assets.
Basket: Often used in an acquisition agreement, a “basket” provides for a threshold amount of losses/damages incurred because you did not disclose something important prior to closing, after which the acquirer is entitled to compensation. There are two types of baskets used in M&A transactions. One is a “true deductible,” which works like an insurance policy. In other words, there’s an amount of money the acquirer needs to lose before they are entitled to compensation. The other type is called a “tipping basket,” whereby if a loss exceeds the basket amount, then the acquirer is entitled to compensation for the entire loss—not just the portion that exceeds the deductible. Let’s imagine a scenario where you sell the shares of your company, and at the time of the acquisition you have a $200,000 receivable that you told the acquirer is collectible. If there were a $150,000 true deductible basket in place, and the acquirer was unable to collect the $200,000, they would be entitled to $50,000 of compensation ($200,000 minus $150,000). However, if the agreement stipulated a $150,000 tipping basket, the acquirer would be entitled to the entire amount, because the $200,000 loss exceeds the $150,000 tipping basket.
Churn: This measures the rate at which customers stop using a subscription-based service or product over a given period of time. A high churn rate can be problematic as it indicates customer dissatisfaction or lack of engagement.
Cliff Vesting: This is a vesting schedule where an employee gains access to their full benefits or stock options after a specified period, rather than gradually. If employees leave before this period, they receive nothing.
Imagine you join a new club at school, and the club has a rule: If you stay in the club for at least a year, you get a cool reward, like a special club T-shirt. However, if you leave the club before a year is up, you get nothing.
In this analogy, the one-year mark is like a “cliff” in cliff vesting. If you’re in a job with a cliff vesting schedule, you won’t get any of your benefits (like stock options) until you’ve worked there for a certain period of time (like one or two years). This specific time is the “cliff.” If you leave the job before reaching the cliff, you lose those benefits. But once you’ve reached the cliff, you instantly get the agreed-upon portion or all of your benefits, and you might continue to earn more benefits the longer you stay.
So, cliff vesting is like a commitment reward system where you need to stay in your job for a certain period to get your rewards, and if you leave early, you walk away empty-handed.
Confidential Information Memorandum (CIM): This document is used in M&A (Mergers and Acquisitions) transactions to convey important information about a business, including its operations, financials, and outlook, to prospective buyers or investors.
Consideration: The price an acquirer pays for a business. The most common forms of consideration are cash and stock.
Covenant: A promise to do (or not do) something. Typical covenants you may need to sign are a covenant not to compete directly with your acquirer and/or not hire your current staff in another capacity for a period of time.
Convertible Note: This is a type of short-term debt that can be converted into equity, typically during a future financing round. It’s often used by startups when it’s too early to determine the company’s valuation. Imagine your friend is opening a lemonade stand and needs $10 to start it. You decide to lend them the $10 they need. But instead of just asking your friend to pay you back in money, you both agree that you can choose to get paid back with lemonades once the stand is up and running.
A convertible note works similarly in the business world. It is a form of short-term debt that converts into equity. In simpler terms, when you give money to a company using a convertible note, you’re initially lending money to the company, just like a loan. But, instead of getting paid back with money, you have the option to get paid back with shares in the company. So, if the company does really well, having shares might be more valuable than just getting your money back with interest.
In essence, a convertible note is like lending money to a friend’s lemonade stand with the option to choose lemonades over your money back in the future if you believe those lemonades will be worth more than your initial $10.
Dominance Theory: This theory posits that businesses can gain and maintain market dominance by controlling resources, limiting competition, and manipulating consumer behavior to establish a strong, potentially unassailable market presence.
Downstroke: The minimum amount of money you stand to make from an acquisition. Let’s say you agree to sell your business for $5 million up front and the possibility of another $2 million tied to an earnout. Your downstroke in this example would be $5 million.
Due-Diligence: This is a comprehensive appraisal of a business or investment undertaken before a merger, acquisition, or investment. It seeks to validate the information provided and uncover any potential risks or liabilities.
Earn-out: This is a financing arrangement for the purchase of a business, where the seller must meet certain performance goals before receiving the full purchase price. It reduces the buyer’s risk and aligns the interests of both parties post-acquisition.
Employer Net Promoter Score (eNPS): This metric assesses employee loyalty by measuring the willingness of employees to recommend their workplace to others. It’s an indication of employee satisfaction and organizational health.
Errors and Omissions Insurance (E&O): This is a form of liability insurance that protects companies and their employees against claims of inadequate or negligent actions, particularly in professional advice and services.
Escrow: An amount of money that is held by a lawyer for a period of time after an M&A transaction. An escrow is set up to deal with any disputes that may arise after the transaction closes.
Equity Ratchet: This provision enables certain shareholders to maintain their proportional shareholding in a company during subsequent financing rounds, preventing dilution of their ownership stakes.
Imagine you and three friends decide to make a lemonade stand together. Each of you agrees to own 25% of the stand. However, you all make a deal that if the lemonade stand doesn’t make at least $10 a day, your share will increase to 30%, and your friends’ shares will decrease proportionally.
An equity ratchet in business is a bit like this scenario. It’s a mechanism that allows the ownership (equity) of a company to be adjusted, or “ratcheted,” usually in favor of investors or minority shareholders, based on the performance of the company.
For example, if a company does not meet certain financial targets or the value of the company falls below a certain level, an equity ratchet provision can trigger to increase the percentage of the company owned by the investor and decrease the percentage owned by the existing shareholders, like the founders or employees.
So, an equity ratchet is like a special arrangement that can change the ownership shares in a company based on how well the company is doing, usually to protect the interests of certain shareholders or investors.
General Partner (GP): In a partnership or limited partnership, a GP has management authority and unlimited personal liability. They are responsible for the daily operations and bear a significant portion of the risk.
Hurdle Rate: This is the minimum rate of return that an investment must earn before being considered. It’s used to assess investment risk and is especially relevant in mutual funds and hedge funds to evaluate performance.
Imagine you and your friends create a lemonade stand. Before starting, you all agree that the money you make first should cover the cost of the lemons, sugar, and cups you bought. Only after covering those costs, you’ll start counting any extra money as your “profit” or “success.”
In business, a “hurdle rate” is somewhat similar to this initial cost covering. It’s the minimum rate of return on an investment that a company or investor expects or desires to make before they decide to undertake a project or investment. If a project is expected to have a return below this rate, the company might decide not to pursue it because it’s not expected to make enough money.
In simpler terms, the hurdle rate is like a financial bar or a “hurdle” that a project or investment must clear for it to be considered worthwhile. If the expected returns don’t “jump” over this hurdle, then it might not be a good idea to go ahead with the project or investment.
Indemnification: Literally means “compensation for loss or harm.” In an M&A transaction, you might provide indemnification for promises (“reps and warranties”) you make in a share or an asset purchase agreement.
Investment thesis: The strategic reason(s) a company may choose to invest in or acquire a business.
Letter of Intent (LOI): This document outlines the basic terms and conditions of a deal before a formal agreement is drawn up. It serves as a mutual commitment between the buyer and the seller to move forward with the transaction on the agreed-upon terms.
Less Than Truckload (LTL): This shipping method is used for transporting relatively small freight, or when freight doesn’t require the use of an entire trailer. It’s typically used when freight weighs between 150 and 15,000 pounds.
Limited Partner (LP): An LP invests capital but does not have management authority or unlimited liability. They have limited liability, meaning they can only lose their investment and are not responsible for the partnership’s debts beyond their investment.
Liquidation Preference: Let’s say you’re at a party, and everyone at the party has chipped in to buy a pizza. But before the pizza arrives, the party gets cancelled. Now, you’d want to make sure you get your share of the money back that was collected for the pizza, right?
In the world of business, a “liquidation preference” is a bit like that. It’s a rule set in a contract that says who gets their money back first if the “party” (in this case, the company) has to shut down and sell off everything it owns.
Usually, this rule is set up to protect the people who took the biggest risk by investing money into the company. These folks usually own something called “preferred stock,” which is a special kind of ownership that comes with some extra privileges. One of those privileges is often a liquidation preference.
So, if the company goes under or is acquired, the people with the liquidation preference (usually the investors or preferred stockholders) get in the front of the line to get their money back. They get paid before anyone else, like employees who own regular shares (“common stock”) or lenders who the company owes money to.
In simple terms, a liquidation preference is like a VIP pass that ensures you get your money back first if a company has to shut down or gets acquired. It’s a way to protect the investment of people who put in money, often at the early stages when the company is most at risk.
Look-Back Provision: This provision in an insurance policy allows claims to be made for injuries or illnesses that occurred before the policy was purchased, based on the stipulation that the insured was unaware of the illness or injury at the time of purchase.
LTV:CAC Definition: The Lifetime Value to Customer Acquisition Cost ratio compares the value of a customer over time to the cost of acquiring that customer. It’s crucial for evaluating the long-term value of a customer and the profitability of customer acquisition strategies.
Mezzanine Debt: Mezzanine debt is a kind of borrowing that sits in between regular debt (like a typical bank loan) and ownership stake (like owning shares in a company). It’s not the first debt to get paid back if a company runs into trouble, but it’s ahead of stockholders. So, it’s sort of in the “middle” — hence the term “mezzanine,” which often refers to a middle floor between the ground and main floor in a building.
Why would anyone go for this middle-of-the-road option? Well, mezzanine debt usually comes with some sweeteners, often in the form of “warrants.” These are like bonus tickets that give you the option to buy shares in the company later on. So, besides getting your loan repaid with interest, you might get a piece of the company’s future growth.
Companies often use this type of debt when they want to buy another company or when they want to change who owns the company, such as in a buyout. It can make the deal more attractive for the new owners and help it happen more smoothly. If things go south and the company can’t pay its bills, mezzanine debt gives the new owners a better spot in line to get their money back compared to some other stakeholders, but they’re still behind regular bank loans and other more senior forms of debt.
In short, mezzanine debt is a more flexible and potentially rewarding form of borrowing that’s often used in big business moves like acquisitions and buyouts.
Minimum Viable Product (MVP): This refers to the version of a new product that includes only the necessary features to meet the needs of early adopters. It’s used to validate market demand and gather feedback for further development.
MSA (Master Service Agreement): This contract outlines the general terms, responsibilities, and legalities to be followed between two parties engaging in a business relationship, particularly when multiple projects or transactions are involved.
Note: In the world of mergers and acquisitions (M&A), a “note” is like an IOU, a promise to pay back money.
Imagine two kids, Sally and Bob. Sally has a lot of candies, and Bob wants to have some. They decide to strike a deal. Sally gives some candies to Bob today, and Bob promises to give Sally some of his lunch money next week. Here, Bob’s promise is similar to a “note” in M&A.
When one company decides to buy another company, they might not pay all the money upfront. Instead, they might pay part of it later. This promise to pay a certain amount in the future is often written down as a “note.”
This way, the seller gets some money now and more money later, and the buyer doesn’t have to come up with all the money at once. It’s a way for both parties to feel comfortable with moving forward with the deal.
Net Promoter Score (NPS): This metric gauges customer satisfaction and loyalty by measuring the willingness of customers to recommend a company’s products or services to others.
Offering Memorandum: This legal document provides detailed information about a security offering to potential buyers. It typically includes information on the company’s operations, management, financials, and details of the security being offered.
Pik Note: Also known as “Payment in Kind” Note, this is a type of loan where the borrower can pay interest with additional debt rather than cash. It allows companies more flexibility in managing cash flows but can lead to higher debt levels.
Imagine you lend $10 to a friend to help them start a lemonade stand. You both agree that instead of paying you back in cash, they can pay you back by giving you extra lemonades over time. So, you might not get immediate cash, but you are getting paid back in a different form, and you can hope to sell those extra lemonades to get cash eventually.
A “PIK note” (Payment In Kind note) in finance works somewhat similarly. It’s a type of loan where the borrower can pay the interest with additional principal balance instead of cash. This means, instead of paying cash interest to the lender regularly, the borrower can just add the interest amount to the total amount they owe (the principal) and pay everything later, usually when the note matures or is due.
So, a PIK note allows a borrower to take a loan without the need to pay cash interest regularly, and instead, they pay more at the end. This can be beneficial for companies that are tight on cash and prefer to settle the dues later when they hopefully have better cash flow.
Preferred Preference: In venture financing, this term outlines the hierarchy of investor payouts, where certain investors have a preferential right to receive payouts before others, often due to negotiated contractual terms. Imagine you and your friends are at a pie-eating party. Everyone brings pies, but some people bring more pies or special pies, and everyone agrees that those who brought the special or extra pies should get served first if there are not enough slices to go around.
In the business world, when people invest money in a company, they sometimes get “preferred shares” instead of “common shares.” These preferred shares are like the special pies at the party. If the company makes money or is sold, the people with the preferred shares (special pies) get their money back before the people with common shares (regular pies).
So, a “preferred preference” or “liquidation preference” ensures that some investors get their investment back first, before other investors, if the company is sold or makes a profit. It’s a way of rewarding those who took a special risk or made a special contribution to the company.
Procurement: This is the business process of identifying, selecting, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process.
Product-led Growth (PLG): This is a business development strategy where the product itself serves as the primary driver of customer acquisition, conversion, and expansion, relying on product usage as the main growth lever.
Prop deal: Short for “proprietary deal,” which describes a situation where the seller is negotiating with one buyer.
Put Option: A put option is a bit like an insurance policy for your stock investment.
Imagine you own a stock that you think might go down in price, and you want to protect yourself from losing too much money. A put option can be your safety net.
Here’s how it works:
So, let’s say you own a stock that’s currently worth $50. You buy a put option with a strike price of $40 that expires in one month. You pay a premium, maybe a few dollars per share, for this right.
Two things can happen:
Remember, unlike owning a stock, which you can keep for as long as the company is in business, an option has an expiration date. Once that date passes, the option is either used (exercised) or it becomes worthless.
So in simple terms, a put option is a way to pay a little money now to protect yourself from potentially losing a lot more money later. It’s a form of financial safety net for your stock investment.
Quality of earnings (or “Q of E”): When an acquirer has secured an exclusive position to purchase your business via an LOI, and the transaction is over $1 million or $2 million in value, the acquirer will often hire an outside CPA firm that specializes in reviewing financial documentation, to provide an analysis of your historical EBITDA compared with the values provided in your CIM. A Q of E report can often be a milestone, enabling an acquirer to consider a major portion of their due diligence completed.
Re-Trading: This occurs when a buyer attempts to renegotiate the purchase price of a deal after initially agreeing to one. It is often seen unfavorably as it occurs after due diligence, seemingly exploiting newly discovered information.
SAM: Serviceable Addressable Market, is a smaller slice of the overall market that a company chooses to focus on and realistically serve with its products or services. While the Total Addressable Market (TAM) represents the entire market that could potentially be interested in a product, the SAM is a more specific and manageable portion within the TAM.
Think of it this way: if you have a company that makes high-end smartphones, your TAM might be all the people in the world who could potentially buy a smartphone. However, your SAM would be a more defined group, such as people in a certain income bracket who are willing to spend a premium on a smartphone. SAM helps businesses concentrate their resources, marketing efforts, and product development on a target audience that they can effectively reach and serve, rather than trying to appeal to everyone in the entire market. It’s about finding your niche within the larger market.
Sellers Discretionary Earnings (SDE): This represents the earnings of a business before the owner’s salary, interest, taxes, depreciation, and amortization. It’s used to assess the true earning potential of a small business. Imagine you have a lemonade stand. At the end of the day, you count how much money you made. But from this money, you need to pay for the lemons, sugar, cups, etc. What you have left after paying for these things is similar to what businesses call “profit.”
However, if you paid yourself a small amount for your time running the lemonade stand, or maybe you bought a new sign to attract more customers, those are costs that are specific to you as the owner and are considered “discretionary.” They are costs that a new owner might not have or might choose to spend differently.
So, Seller’s Discretionary Earnings (SDE) in business terms is like the money left from the lemonade stand, plus any extra costs or payments that were specific to the current owner. It’s a way to show how much money a new owner might expect to earn from the business, considering they might have different ways of running things. In simpler terms, it’s a measure of a business’s earning power from the viewpoint of the owner.
Shotgun Clause: A “shotgun clause” is a type of buy-sell agreement often included in the partnership or shareholder agreements of a privately-held company. This clause is designed to resolve situations where partners or shareholders want to separate from each other due to disagreements or other issues.
How it Works:
Statement of Work (SOW): This document, typically attached to a Master Services Agreement (MSA), describes the specific tasks, deliverables, timelines, and quality of work to be completed under a contract.
Tag-Along Rights: These rights protect minority shareholders by allowing them to join a sale initiated by majority shareholders, preventing them from being left in an unfavorable position with the new controlling entity. Imagine you and a group of friends own a big box of toys together. Your friend, who owns the most toys in the box, decides to sell his toys to another kid in the neighborhood. Now, you might think, “Hey, if he’s selling his toys, maybe I should sell mine too!”
Tag-along rights are kind of like this scenario. In the business world, when a group of people owns a company together, and one of the major owners (usually someone with a big share of the company) decides to sell their part, tag-along rights allow the smaller owners to join in and sell their shares too, under the same terms, conditions, and price.
So, if you’re a smaller owner in a company, and you have tag-along rights, you get to “tag along” if a larger owner sells their share, ensuring that you get the opportunity to sell your part of the company under the same favorable conditions. It’s like making sure that if your friend sells his toys, you get the chance to sell yours too.
TAM: “Total Addressable Market.” It’s a business term that represents the overall revenue opportunity available for a product or service in a specific market. To put it simply, TAM is the maximum amount of money a company could potentially make if they captured every single customer in a given market who might be interested in what they’re selling.
Teaser: A short (one-to-two-page) document prepared by the seller’s intermediary to entice potential acquirers into learning more about a business. A teaser typically is anonymous and is designed to provide enough information to entice an acquirer to sign an NDA in return for a CIM that identifies the seller’s company.
Turn: M&A professionals use this term to describe an additional multiple of earnings. For example, imagine you’re originally offered four times EBITDA for your business, and your M&A professional got the acquirer to raise their offer to five times EBITDA. The M&A professional would refer to their win as getting you an “extra turn.”
Venture Debt: Imagine you’ve started a small tech company and you’ve got a great new app that you think will be a hit. You’ve already raised some money by selling shares of your company to investors, which is known as “equity financing.” But you need more cash to grow faster — maybe to hire more people, market your app, or develop new features.
This is where “venture debt” comes in. Instead of selling more shares and giving away more ownership of your company, you borrow money. This loan is a bit special because it’s designed for young, growing companies like yours that may not have a lot of things to use as collateral (like buildings or equipment).
Venture debt can come from banks that specialize in lending to startups or from other types of lenders that are not banks. These lenders are willing to take a higher risk compared to banks that lend to established businesses. They lend you the money with the understanding that your company is still growing, and the goal is to help you reach a point where you can either become profitable or raise more money from investors at a better valuation (which means your company would be worth more).
Why would you consider this? Well, the good part about venture debt is that you don’t have to give away more ownership in your company to get the extra money you need. So, if your business does well, you and your current shareholders get to keep a bigger slice of the pie.
In simpler terms, venture debt is like a special loan for young, fast-growing companies. It’s often used alongside regular investment methods, allowing startups to get the extra money they need without giving away more ownership. It’s riskier for the lender, but it can be a good deal for the startup.
Vesting: This refers to the process where an employee earns rights to receive benefits from an employer’s contribution to the employee’s retirement plan account or stock option over a period of time. Imagine you join a club at school, and the club gives out special badges to members who stay in the club for a whole year. You are told when you join that you will “earn” your badge bit by bit over the year. If you leave the club before the year ends, you don’t get to keep the badge.
Vesting in the business world is similar. When you start a new job, your company might offer you benefits like stock options (a chance to buy company stock at a special price) as a part of your compensation. But, just like the club badge, you earn this benefit over time, usually several years. This earning process is called “vesting.”
For example, if your company’s stock options have a four-year vesting schedule, you might earn the right to buy 1/4 of your total stock options each year. If you leave the company before the four years are up, you only get to keep the portion of your stock options that have vested, i.e., the part you have earned by staying with the company for that time.
So, vesting is like a reward that you fully earn or “vest” in over time as you stay with your company or fulfill other conditions.
Warrant: This is a derivative that confers the right, but not the obligation, to buy or sell a security—most commonly, equity—at a certain price before expiration. Let’s say you have a coupon that lets you buy a toy for $10 at a toy store. Even if the toy’s price goes up to $15, you can still use your coupon to buy it for $10. But, this coupon has an expiry date, so you have to use it before it expires.
Similarly, a warrant in the business world is like a special coupon that gives you the right to buy a certain number of shares of a company at a fixed price, called the “exercise price,” before a certain date. If the company does well and the market price of the shares goes above the exercise price, you can use your warrant to buy the shares at the lower, fixed price, and you might choose to sell them at the higher market price to make a profit. But, like a coupon, a warrant has an expiry date, so you have to use it before it’s no longer valid.
So, in simple terms, a warrant is like a special, time-limited opportunity to buy shares of a company at a fixed price, which could potentially lead to making money if the company does well.
Waterfall: This term describes a method of capital distribution among the participants of a venture or investment fund, defining the hierarchy and amounts in which the participants receive profits. To explain it simply, let’s use an analogy:
Imagine you and your friends have built a multi-level fountain, like a waterfall, with each level representing different people who get the water (money). At the top, you have a small pool, then as water overflows, it goes to the next level and then the next, and so on, until it reaches the bottom.
Now, suppose you pour a bucket of water (representing money) into the top pool. The top pool might represent the investors or lenders who get paid back first. Once that pool is full, the water overflows to the next level, filling the pool of, let’s say, company owners or shareholders. If there is still water left, it goes down to the next levels, which might represent employees or other stakeholders.
So, a “waterfall” in business terms is the sequential way in which money is distributed to different groups of people in a company, with some groups being prioritized to receive their “water” (money) before others. The details of who gets paid when are usually laid out in a company’s financial agreements or contracts, specifying the “order” of the waterfall.