Glossary
Business sale terms, in plain English.
The words you will hear when you sell or buy a business, from SDE and add-backs to LOIs, earnouts, and tail periods, defined in one or two sentences each.
- Add-backs
- Expenses added back to a business’s reported profit to show its true earning power for a new owner, such as the owner’s salary, one-time costs, and documented personal expenses. Each add-back needs a paper trail to survive a buyer’s and lender’s review. Learn more →
- Asset sale
- A sale in which the buyer purchases the business’s assets (equipment, inventory, goodwill, contracts) rather than the legal entity, usually leaving most liabilities with the seller. Most small and lower-middle-market deals are asset sales. Learn more →
- Broker’s opinion of value (BOV)
- A market-based estimate, prepared by a business broker, of what a business would likely sell for to real buyers today, based on normalized earnings and comparable sales. It is not a certified appraisal. Learn more →
- Buy-side representation
- When a broker or advisor represents the buyer in an acquisition: defining the search, sourcing on- and off-market targets, valuing them, and managing diligence and closing. Learn more →
- CIM (confidential information memorandum)
- The detailed document describing a business for sale, covering operations, financials, customers, staff, and the reason for sale, released only to qualified buyers who have signed an NDA. Learn more →
- Customer concentration
- How much of a business’s revenue comes from its largest customers. Buyers and lenders usually treat any single customer above roughly 15 to 20 percent of revenue as a risk that lowers value. Learn more →
- Due diligence
- The buyer’s investigation after a letter of intent and before closing, verifying the financials, operations, legal standing, and transition plan of the business. Learn more →
- Earnout
- A portion of the purchase price paid after closing only if the business hits agreed performance targets, such as revenue or gross profit, over a set period. Learn more →
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization, after paying a market-rate manager. Larger businesses with a management team are usually priced on a multiple of adjusted EBITDA. Learn more →
- Engagement letter (listing agreement)
- The contract between a seller and a broker that sets the fee, the term, the tail period, and the broker’s responsibilities. Read it closely before signing. Learn more →
- Escrow or holdback
- Part of the purchase price held back after closing, often with a third party, to cover post-closing claims or adjustments, then released to the seller if no valid claims arise. Learn more →
- FF&E
- Furniture, fixtures, and equipment. In most small-business sales FF&E is included in the price rather than valued on top of earnings. Learn more →
- Goodwill
- The part of a business’s value above its tangible assets: its reputation, customer relationships, brand, and earning power. In an asset sale, the allocation of price to goodwill affects both sides’ taxes. Learn more →
- Indication of interest (IOI)
- A non-binding early offer, often a price range, that a buyer submits before a letter of intent in a structured sale process. Learn more →
- Intermediary
- A broker who facilitates a transaction between a seller and a buyer with both parties’ written consent, without advocating for one side against the other on price or terms. Learn more →
- Letter of intent (LOI)
- A mostly non-binding document setting out the main terms of a deal (price, structure, timing, exclusivity) before due diligence and the definitive purchase agreement. Learn more →
- Lower middle market
- Companies larger than Main Street businesses but smaller than those large investment banks pursue, commonly about $1 million to $5 million of EBITDA. Learn more →
- Main Street business
- A small, typically owner-operated business, such as a restaurant, shop, or local service company, usually valued on a multiple of SDE. Learn more →
- Multiple
- The number a buyer multiplies earnings (SDE or EBITDA) by to arrive at a price. It rises with growth, recurring revenue, diversification, and lower owner dependence. Learn more →
- NDA (non-disclosure agreement)
- A confidentiality agreement a buyer signs before receiving a business’s identity, financials, or CIM. Learn more →
- Normalized earnings
- Earnings adjusted to remove one-time, non-operating, and owner-specific items so they reflect what the business will earn for a new owner. Learn more →
- Off-market deal
- A business sold without a public listing, usually through direct outreach or a broker’s relationships. Many of the best acquisitions are off-market. Learn more →
- Owner dependence
- How much a business relies on its owner for sales, operations, or relationships. High owner dependence lowers value because it raises the risk of a failed transition. Learn more →
- Quality of earnings (QoE)
- An accounting review, usually by a CPA firm, that tests whether a business’s reported earnings are accurate, recurring, and properly adjusted. Learn more →
- Recurring revenue
- Revenue that repeats without a new sale each time, such as service contracts, subscriptions, and maintenance agreements. Buyers pay higher multiples for it. Learn more →
- SBA 7(a) loan
- The U.S. Small Business Administration’s main guaranteed loan program, widely used to finance business acquisitions with a relatively small buyer down payment. Learn more →
- SDE (seller’s discretionary earnings)
- Pre-tax profit plus one owner’s compensation, interest, depreciation, amortization, and documented personal or one-time expenses. Owner-operated businesses are usually priced on a multiple of SDE. Learn more →
- Seller financing (seller note)
- Part of the purchase price paid to the seller over time under a promissory note rather than at closing, usually secured by the business assets. Learn more →
- Stock sale
- A sale in which the buyer purchases the ownership of the legal entity itself, taking its assets and liabilities together. Learn more →
- Success fee
- A broker’s fee paid only when a sale closes, typically a percentage of total consideration. Learn more →
- Tail period
- A period after a listing agreement ends during which the broker still earns a fee if the business sells to a buyer the broker introduced. Learn more →
- Total consideration
- Everything the seller receives in a sale: cash at closing, seller notes, earnouts, assumed debt, and other payments. Learn more →
- Working capital
- Current assets minus current liabilities. Many deals set a working-capital target so the business is delivered with enough cash, receivables, and inventory to keep operating. Learn more →