Reference
Business sale and M&A glossary
The vocabulary used in US business sale transactions, defined in the way buyers, sellers, brokers, lenders and transaction attorneys actually use it.
Valuation
- Seller's discretionary earnings (SDE)
- Pre-tax profit plus one owner's compensation and benefits, interest, depreciation, amortization and non-recurring or personal expenses. The standard earnings measure for owner-operated businesses.
- EBITDA
- Earnings before interest, taxes, depreciation and amortization — the standard earnings measure once a business runs with paid management in place.
- Adjusted EBITDA
- EBITDA restated to remove non-recurring items and to charge market-rate compensation for owner roles, so the figure reflects ongoing operating performance.
- Normalized earnings
- Reported earnings recast to remove distortions — personal expenses, one-off costs, related-party rent and below- or above-market owner pay — so buyers can price the business on a comparable basis.
- Add-back
- An expense added back to reported profit because it is discretionary, personal or non-recurring. Each add-back must be evidenced to survive a buyer's quality of earnings review.
- Earnings multiple
- The factor applied to SDE or adjusted EBITDA to arrive at value. Set by industry, size, growth, revenue quality, customer concentration and owner dependence.
- Asking price
- The value advertised for the business, typically stated cash-free and debt-free with a normal level of working capital included.
- Enterprise value
- The value of the operating business before adjusting for cash, debt and working capital at closing. Cash to the seller is derived from it, not equal to it.
- Customer concentration
- The share of revenue held by the largest customers. High concentration reduces the multiple because the buyer inherits the risk of losing a single relationship.
- Owner dependence
- The extent to which sales, technical delivery or key relationships rely on the owner personally. The single most common reason a small business prices below its industry range.
Process
- Non-disclosure agreement (NDA)
- The confidentiality contract signed before a buyer receives identifiable information, usually also restricting contact with employees, customers and suppliers.
- Confidential information memorandum (CIM)
- The main sale document: business model, market, customers, operations, management, recast financials and growth opportunities in enough depth to support an offer.
- Buyer qualification
- Verification that a prospective buyer has the capital, financing route and relevant background to complete, carried out before confidential information is released.
- Letter of intent (LOI)
- The document recording agreed headline terms before due diligence: price, structure, financing, timetable and exclusivity. Mostly non-binding except for confidentiality, exclusivity and expenses.
- Exclusivity (no-shop)
- The period in which the seller agrees not to market the business or negotiate with other buyers while the buyer completes diligence.
- Due diligence
- The buyer's verification of financial, tax, legal, commercial, employment, property and operational matters before closing.
- Quality of earnings (QoE)
- An accountant's review testing whether reported and adjusted earnings are accurate, sustainable and supported by underlying records.
- Purchase agreement
- The binding contract that transfers the business, setting out price, adjustments, representations and warranties, indemnities and closing conditions.
Deal structure
- Asset sale
- A transaction in which the buyer acquires specified assets and assumes specified liabilities rather than the legal entity.
- Stock (equity) sale
- A transaction in which the buyer acquires the ownership interests in the company, taking it with its contracts, licenses and history.
- Working capital peg
- The agreed normal level of working capital to be delivered at closing, with the price adjusted up or down for any difference.
- Seller note
- Part of the price left outstanding and repaid by the buyer over time under agreed terms, often subordinated to bank or SBA debt.
- Earnout
- Additional consideration payable if defined future results are achieved, used to bridge differing views of value.
- Rollover equity
- A stake the seller retains in the acquiring structure, giving a second payout if the business performs under new ownership.
- Purchase price allocation
- The agreed split of the price across asset classes and goodwill, which determines tax treatment for both parties.
Buyers
- Management buyout (MBO)
- An acquisition led by the existing management team, usually supported by bank debt, a seller note or outside equity.
- Strategic buyer
- An operating company acquiring for commercial reasons such as market entry, capacity, customers or product range.
- Financial buyer
- A private equity fund, family office, search fund or individual investor buying primarily for cash flow and return.
- Platform and add-on acquisition
- A platform is the first company acquired in a sector; add-on or bolt-on acquisitions expand it by geography, service line or capacity.
- Search fund
- A vehicle in which an individual raises investor capital to find and acquire one business and then run it.
- Recapitalization
- A partial sale in which the owner sells a majority or minority stake and retains an interest, often with an investor partner.
- Off-market opportunity
- A business that is not publicly advertised for sale and is reached by identifying the company and approaching the owner directly.
Real estate & financing
- Owner-occupied commercial real estate
- Property occupied by the business that operates in it, commonly held in a separate entity owned by the same principals.
- Market rent adjustment
- Charging a market rent against earnings when the property is owned by the seller, so the business and the property are each valued on their own merits.
- SBA 7(a) loan
- An SBA-guaranteed loan program commonly used by US buyers for business acquisitions, with eligibility and terms determined by the lender and the SBA.
- SBA 504 loan
- An SBA program directed at owner-occupied commercial real estate and long-lived equipment, structured through a bank and a certified development company.
- Lease assignment
- The landlord's consent to transfer an existing lease to the buyer. Remaining term, renewal options and consent conditions frequently determine whether a deal is financeable.
Definitions are provided for general information and are not legal, tax or accounting advice.