M&A terms, plain English.

Seller’s Discretionary Earnings (SDE) measures the normalized, operating profitability of small to mid-sized businesses (SMBs).

Conceptually, SDE represents the earnings of a small business before income taxes, non-operating income and expenses, owner’s compensation, non-cash add backs (depreciation and amortization), interest expense or income, and non-recurring items, including personal expenses.

Read more How Much Is My Business Worth?

EBITDA—short for Earnings Before Interest, Taxes, Depreciation, and Amortization—measures a company’s normalized operating cash flow generated by its core business activities.

In simple terms, EBITDA is a proxy for the recurring operating profitability of a company since the effects of non-cash items like depreciation and amortization (D&A) are removed.

EBITDA is calculated by adjusting operating income (EBIT) for non-cash items, namely the add-back of depreciation and amortization (D&A). In contrast, the formula to calculate EBITDA can start with net income, from which taxes, interest expense, depreciation, and amortization are added back.

Read more How Much Is My Business Worth?

Addbacks and adjustments come in various forms, but they are most commonly used by business owners to manipulate their financial statements. These adjustments involve adding back non-core, one-time, or personal items to the income statement, effectively reducing net income or eliminating certain expenses. For instance, a business owner might add back personal expenses or revenue that are not directly related to the company’s operations.

Publicly traded corporations or private equity groups often scrutinize these adjustments closely. If an acquirer expects an item to be part of the business going forward or if it’s not included on the income statement, it’s likely an adjustment.

A “recast financial statement” is a crucial tool used by a buyer to assess the price they’re willing to pay for your business and determine how much a bank will lend to the buyer.

This recast statement reconstructs the earnings a buyer would enjoy from the business by:

• Normalizing the figures by eliminating unusual, non-recurring, and one-time or extraordinary income and expenses.
• Showing adjustments for accounting anomalies.
• Identifying owner compensation, owner “perks,” or fringe benefits.
• Detailing non-cash expenses, such as depreciation and amortization, interest, investments in future growth (e.g., new facilities or expansion), and other common items in privately-held businesses.

A key metric to know when determining a business value is the business valuation multiple for that specific business. This is a method of valuation where you determine the potential future earning power of a company by assigning a multiplier to a current revenue or earnings benchmark.

The business valuation multiple is based on the idea that similar companies sell at similar prices, and so it looks at the value of comparable companies and also at recent company sales in the same industry.

Read more How Much Is My Business Worth?

Goodwill is an intangible asset that arises when one company acquires another and pays more than the fair value of its net identifiable assets.

When a company purchases another, it often pays more than the net fair value of the target’s assets and liabilities. This excess is recorded as goodwill, an intangible asset, reflecting brand strength, customer loyalty, and proprietary technology, among other factors. It signifies a competitive edge and justifies premiums paid during acquisitions.

Owner dependency in business refers to the risk that a company relies too heavily on its founder for daily operations, decision-making, and client relationships, making the business fragile and limiting its ability to grow or be sold at a high value.

This can create a single point of failure, where the absence of the founder could cause the business to stall or unravel.

It is one of the few valuation factors an owner can genuinely change, and it takes time. That is the argument for planning an exit years ahead rather than months.

Read more The 3-Year Exit Plan

Customer concentration is when a large share of a company’s revenue depends on a small number of customers. High customer concentration creates financial risk if those customers reduce their spend or leave altogether.

Companies try to limit this because too much reliance on a small number of customers can make a business vulnerable to a significant loss of revenue and its impact on cash flow. It also hurts the business valuation.

Main Street is a colloquial term used by economists to refer collectively to America’s independent small businesses. It gets its name from a common name for the principal commercial street of small towns across the country.

Buyers perceive Main Street businesses as riskier, which is why they can sell at lower multiples than middle-market businesses. They are considered higher risk, sell at lower multiples, generate less than $1 million in SDE and less than $10 million in revenue and are often dependent on the owner. Common sale multiples are 2x to 3x SDE.

Middle Market, on the other hand, refers to larger businesses that are often considered lower risk, sell at higher multiples, generate at least $1 million in EBITDA or $10 million in revenue, have a strong management team and competitive advantage, have strong documentation, and are generally sophisticated. Common sale multiples are 3x to 8x EBITDA.

The distinction matters because the two attract different buyers, require different financing, and are marketed differently.

A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship between two parties: one that holds sensitive information and the other that will receive that sensitive information. The latter agrees that the information they receive won’t be made available to others.

An NDA is also referred to as a confidentiality agreement. Non-disclosure agreements are common for businesses entering into negotiations with other businesses. They allow the parties to share sensitive information without fear that it will end up in the hands of competitors. It may be called a mutual non-disclosure agreement in this case.

Read more Businesses For Sale

A Confidential Business Review is the document that presents a business to qualified buyers after they sign an NDA: it details the company history, operations, financials, staffing, and growth opportunities. Elsewhere it is called a CIM, or Confidential Information Memorandum.

A letter of intent (LOI) is a document that declares one party’s preliminary commitment to do business with another. The letter outlines core terms of a prospective deal before complete details are negotiated.

Common elements of LOIs include price, stipulations and timelines. A letter of intent is non-binding and often includes confidentiality pacts such as non-disclosure agreements (NDAs).

Read more A $5M Offer Isn't Always Worth $5MFive Misconceptions About Selling a Business

Exclusivity, also known as a no-shop, grants the buyer the sole right to negotiate for a specified period after the LOI is signed.

It’s a common practice in standard M&A transactions for sophisticated buyers to request exclusivity or exclusive dealings at the outset of the potential transaction. Typically, the seller agrees not to negotiate with other potential buyers during this period. Buyers seek exclusivity to ensure the time and expense of due diligence and negotiations are worthwhile, avoid competing offers, and secure financing for the acquisition. While sellers usually resist granting exclusivity, a well-drafted exclusivity agreement can benefit the seller by incentivizing the buyer to complete due diligence, obtain financing, and legally commit to the acquisition promptly.

Due diligence refers to the thorough research and evaluation carried out by a buyer to confirm the accuracy of information and assess any potential risks before committing to a transaction, agreement, or important decision.

Due diligence requires an examination of financial records before entering into a proposed transaction with another party.

Read more Due Diligence: What to Expect As a Seller

A data room is a secure, cloud-based storage center that acts as a repository for sensitive documentation.

Data rooms allow users to share business information with clients, investors, and company leadership in a controlled environment. Virtual data rooms improve collaboration and allow secure contribution with easy remote access to data and data sharing on a real-time basis.

An Asset Purchase Agreement (APA) is a legal contract that contains the terms and conditions under which a buyer agrees to purchase specific assets of a company, such as intellectual property rights, equipment, machinery, businesses, and licenses.

Asset purchase agreements are flexible, which makes them unique for each deal, wherein they can be made to purchase the entire business or specific assets from the seller. The primary purpose of any APA is to clearly define which assets are being transferred, how much the buyer will pay for them, and under what conditions the transaction will close.

In an asset sale, the buyer purchases specific assets of a business, such as equipment, inventory, intellectual property or real estate, rather than acquiring the entire company. The buyer generally assumes only the liabilities associated with the specific assets being sold, while the seller retains responsibility for any remaining liabilities.

A stock sale involves transferring ownership of the company through the sale of shares. The buyer purchases the seller’s stock and, as a result, acquires the company in its entirety—assets, liabilities and all. This means the seller’s ownership stake is completely transferred to the buyer, and the business operates under new ownership.

In a merger and acquisition (M&A) deal, “representations” are factual statements made by one party to another (typically regarding the state of the business or assets being acquired and sold, as well as the legal standing and capacity of each party to enter into and fulfill their obligations related to the transaction).

On the other hand, “warranties” are contractual assurances that those statements are accurate and will remain accurate until the closing of the deal. They define what each party is promising about a transaction, how truth is verified, and how risk is shared if something turns out to be wrong.

Indemnification is a contractual obligation where one party agrees to compensate the other party for specific losses, damages, or legal costs.

This legal agreement effectively shifts the financial burden of certain risks from the indemnified party (the one being protected) to the indemnifying party (the one providing the protection).

Deal structure is how the purchase price is composed and paid: cash at closing, seller financing, earnout, escrow, rollover equity, and what is allocated to a non-compete or consulting agreement. It determines how much of the price the seller actually receives, and when.

Read more A $5M Offer Isn't Always Worth $5M

Seller financing — also called owner financing — is an arrangement where the seller extends financing to a buyer, allowing them to purchase a business without involving a commercial lender.

Often, this type of financing agreement is used when sellers are unable to find buyers who can qualify for traditional business financing. Seller financing arrangements are unique in that the buyer and seller can structure them however they see fit.

An earnout is a portion of the purchase price that the buyer agrees to pay the seller only if the business meets agreed-upon targets after closing.

It serves as a financial arrangement that bridges the gap between the buyer and seller’s differing expectations regarding future performance.

A seller holdback is a contractual agreement where a portion of the purchase price is held in an escrow account or trust after the sale is finalized.

The amount and duration of the holdback are negotiated to suit the transaction’s needs and circumstances. A holdback encourages sellers to accurately represent the business’s condition. Transparency and cooperation foster trust between the buyer and seller, minimizing issues throughout the sale and post-transaction.

Escrow is money held by a neutral third party until the conditions for its release are satisfied. In a business sale it typically holds the holdback and any working-capital adjustment.

Working capital is the difference between a company’s current assets and liabilities, as reflected on its balance sheet.

Current assets encompass cash, accounts receivable, and inventory—essentially, anything that can be converted into cash within a year. On the other hand, current liabilities represent the obligations the business anticipates paying within the same timeframe, including vendor payments, employee wages, and short-term debts.

Net working capital acts as a revealing indicator of a company’s ability to withstand financial challenges. A positive net working capital signifies that a business possesses sufficient resources to invest and expand. Conversely, a negative balance could be a red flag, signaling potential financial distress.

A working capital peg, also called a net working capital peg or NWC peg, is the negotiated target level of operating net working capital that a seller must deliver with the business at closing.

The final adjustment is generally calculated as closing net working capital minus the agreed peg. A shortfall usually reduces purchase price, while a surplus may increase purchase price, subject to the purchase agreement and any collar, cap, or threshold.

Rollover equity, or rolling equity, is a type of M&A deal structure in which founders, other key executives or other shareholders of an acquired company forgo full liquidity from the cash price of a sale and instead take a portion of the sale proceeds in the form of an equity stake in the company post-transaction.

This arrangement is common in M&A deals in which private equity firms acquire the selling business but uncommon in Main Street business sales.

A non-compete agreement in the sale of a business is a contractual clause where the seller agrees to avoid activity that could harm the business’s new owner.

The restrictive covenant can prevent the seller or senior executives from starting a similar business, working for a competitor, or soliciting the business’s customers for a specified period and within a defined geographic area. The legal enforceability of non-competes helps protect the buyer’s investment, secure sensitive information and intellectual property, and reduce the likelihood of legal challenges post-sale.

Net proceeds are the amount a seller keeps after subtracting all costs and expenses from the gross proceeds on a business sale.

These costs can include commissions, closing costs, and taxes, especially in real estate transactions, where such expenses can significantly reduce the final payout. Calculating net proceeds is important for financial planning and for determining capital gains taxes, which are based on the net rather than the gross amount.

Read more A $5M Offer Isn't Always Worth $5M

An SBA 7(a) loan is a government-backed small business loan that provides up to $5 million in flexible funding for working capital, equipment, real estate, and business expansion.

SBA 7(a) loans are often a popular funding choice with small business owners because they balance affordability with flexibility. However, SBA loans require detailed documentation and a structured approval process.

Read more How to Buy a Business

The down payment is the buyer’s own capital contributed at closing. SBA acquisition loans typically require 10% or more down from the buyer.

Read more Buyer Readiness Scorecard

Debt service coverage ratio (DSCR) is a metric used to assess a business’s ability to comfortably make its annual SBA 7(a) loan payment. A higher DSCR indicates a greater surplus after debt service payments, allowing for reinvestment in the business and compensation for owners.

The DSCR is crucial for lenders as it quantifies the risk associated with a loan. Potential business owners should also consider it, as it reflects the risk of purchasing the business. A low DSCR suggests the business may struggle to cover loan payments if profits decline, especially during a recession. This is why the SBA mandates a minimum DSCR for all loans. The SBA requires a minimum DSCR of 1.25 before approving a loan for purchasing a business. This means the business’s cash flow must be 1.25 times its annual loan payment.

While the SBA only requires a DSCR of 1.25, a DSCR of 1.5 or higher is more reassuring. A higher DSCR provides greater security in case of significant losses and allows owners to reinvest more money into the business.

The term pre-qualification refers to an estimate for credit given by a lender based on information provided by a borrower.

Pre-qualifications are conditional and involve the lender reviewing a borrower’s creditworthiness before granting a pre-approval. They can be a valuable tool for a buyer to demonstrate their financial strength to a seller.

Read more Buyer Readiness Scorecard

An individual buyer is a person purchasing a business to own and operate it themselves, usually financed with savings, SBA loans or other funding sources. They are the largest buyer group for owner-operated businesses.

Often these buyers are leaving corporate America in search of business ownership, or may already have a small portfolio of related businesses.

A strategic buyer is a company that acquires another company in the same industry to capture synergies between the two businesses.

The strategic buyer believes that the two companies combined will be greater than the sum of their separate individual parts and aims to integrate the purchased entity for long-term value creation. Because a strategic buyer expects to get more value out of an acquisition than its intrinsic value, and because, in the long run, it is often faster to integrate and cheaper to buy an existing business, it will usually be willing to pay a premium price in order to close the deal.

A financial buyer, typically a private equity firm or family office, buys for a return on investment.

Unlike a strategic buyer, a financial buyer’s goal is to buy businesses for as little as possible, with the hope of selling them at a profit five or ten years down the road. Financial buyers look for potential bargains that can be improved and eventually net their investors a decent return. Often they will be interested in what cash flow the business acquisition will generate, as well as the kind of exit strategies it will offer in the future.

A search fund is an individual or small team backed by investors who fund a full-time search for one business to buy and then run. A search fund buyer is an entrepreneur who raises investor capital to acquire and personally operate a business.

They typically target well-established companies with stable cash flow and clear operational structure. Unlike financial buyers, search fund buyers typically intend to take an active leadership role after acquisition.

Buyer screening is the process of qualifying prospective buyers before they receive confidential information or the seller’s time. Trustmark runs a 12-step screen for this reason.

Read more Our ProcessBuying a Business? Get Serious About How You Appear to Sellers

The closing process is the final step in the sale of the business. After months of negotiations, due diligence, financing and legal prep, this is where ownership is transferred and the transaction is completed.

While the finish line is in sight, the closing process requires careful attention to detail to ensure a smooth and successful transaction.

Many purchase agreements include a transition period where the seller supports the buyer to ensure continuity.

During this period the following may happen:

• Introducing the buyer to key customers, suppliers, and employees.
• Assisting with operational handovers, such as training the buyer or their management team.
• Providing consulting services for a defined period post-sale.

The scope and duration of transition assistance should be clearly outlined in the purchase agreement to avoid misunderstandings.

A consulting agreement is an agreement for the seller to provide help after the sale.

It is a legally binding document that affirms a buyer’s request for assistance from a seller — a contract detailing the terms of service between a seller, now operating as an independent contractor, and the business buyer.

Landlord consent is the landlord’s written approval to assign the lease to the buyer. For a business that relies on its location, it’s a genuine condition of closing, and it’s worth starting early because it’s beyond both parties’ control.

If you’re operating under a business lease, you may need to assign it to the new buyer, and that usually means securing your landlord’s consent first. A landlord can block or delay a business sale even after a buyer and seller have agreed on the price and terms. When a business is sold, the commercial lease usually needs to be assigned to the new owner, and most leases require the landlord’s approval for this. If your lease has unfavorable assignment language, a short remaining term, or a difficult landlord, it can hinder or even kill your deal.