SDE, EBITDA, LOI, holdback, earnout, working-capital peg. The vocabulary of a transaction, defined for first-time sellers. 42 terms, no jargon used to explain jargon.
The vocabulary of what a business earns and what that earning power is worth. Most disagreements about price are really disagreements about one of these.
Seller's Discretionary Earnings is the total financial benefit one full-time owner-operator takes from a business in a year. It starts with net profit and adds back the owner's salary, personal expenses run through the business, interest, taxes, depreciation, and any one-time costs.
SDE is the standard earnings measure for owner-operated businesses, which is most of what changes hands under a few million dollars. It answers the question a buyer is actually asking: if I run this myself, what do I get?
EBITDA is earnings before interest, taxes, depreciation and amortization. Unlike SDE, it does not add back an owner’s salary, so it reflects what the business earns after paying someone a market wage to run it.
Buyers tend to move from SDE to EBITDA as businesses get larger, because at that size the buyer usually intends to hire a manager rather than work in the business. The two measures are not interchangeable, and a multiple quoted on one does not transfer to the other.
An add-back is an expense on the tax return that a new owner would not have to pay, added back to profit to show true earning power. Common examples are the owner’s salary, a personal vehicle, health insurance, or a one-time legal bill.
Every add-back has to be defensible with a document. Add-backs a buyer cannot verify get removed during diligence, and the price comes down with them.
Recasting is the process of rebuilding a set of financial statements to show what the business really earns, by applying add-backs and removing distortions. The result is the earnings figure a valuation is built on.
A multiple is the number that earnings are multiplied by to reach a value. A business with $400,000 of SDE valued at a 3x multiple is worth $1.2 million.
The multiple is not a fixed rate for an industry. It moves with size, growth, owner dependence, customer concentration, recurring revenue, and how clean the books are. Two businesses in the same trade with the same earnings routinely sell at different multiples for those reasons.
Goodwill is the part of the purchase price above the value of the physical and financial assets being bought. It represents reputation, customer relationships, trained staff, and the fact that the business already works.
In most small-business sales goodwill is the largest single component of the price. Sometimes called "blue sky".
Owner dependence is the degree to which a business relies on its owner personally — for sales, for key relationships, for technical work, or for decisions. High owner dependence lowers what buyers will pay, because the thing being sold partly walks out the door at closing.
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.
Customer concentration is the share of revenue that comes from your largest customers. When one customer represents a large percentage of sales, buyers treat that revenue as at risk and discount the price or push for an earnout.
Main Street refers to smaller owner-operated businesses; the Lower Middle Market refers to larger privately held companies that typically have management in place. The distinction matters because the two attract different buyers, different financing, and different earnings measures.
The paperwork of a transaction, roughly in the order a seller encounters it.
An NDA is a signed agreement that a prospective buyer will keep the existence of the sale and the information they receive confidential. Nothing identifying about a listing is released before one is signed.
Confidentiality is not a formality in a business sale. Employees, customers, and competitors learning a business is for sale can damage the business itself, which is why screening happens before information moves.
A Confidential Business Review is the document that presents a business to qualified buyers after they sign an NDA: history, operations, financials, staffing, and growth opportunities. Elsewhere it is called a CIM, or Confidential Information Memorandum.
A Letter of Intent sets out the price and the main terms a buyer proposes, before the binding contract is drafted. Most of it is non-binding; the confidentiality and exclusivity clauses usually are binding.
Signing an LOI is not the end of the negotiation. Terms move during diligence, and what the seller keeps at closing depends on structure as much as on the headline number.
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Exclusivity, sometimes called a no-shop, is the buyer’s right to be the only party negotiating for a defined period after the LOI is signed. It is what a buyer asks for in exchange for spending money on diligence.
Due diligence is the buyer’s verification of everything the seller has represented: financial records, contracts, leases, licences, employment matters, and litigation. It usually runs for several weeks after an LOI is signed.
The single best predictor of a smooth diligence period is whether the records were organized before it started.
A data room is the secure repository where diligence documents are shared with a buyer, with controlled access and a record of what was viewed. It replaces emailing sensitive files around.
An Asset Purchase Agreement is the binding contract for a sale structured as a purchase of assets. It lists exactly which assets and liabilities transfer, and sets out price, conditions to closing, and the parties’ obligations afterward.
In an asset sale the buyer purchases the assets of the business and leaves the legal entity with the seller; in a stock sale the buyer purchases the entity itself, with its history and liabilities. Most small-business transactions are asset sales.
The choice has real tax consequences on both sides, and they usually run in opposite directions. It is a question for your CPA before the LOI, not after.
Representations and warranties are the seller’s formal statements of fact in the purchase agreement — that the financials are accurate, that taxes are paid, that there is no undisclosed litigation. If one turns out to be untrue, the buyer has a claim.
Indemnification is the seller’s agreement to cover the buyer’s losses if a representation proves false or a pre-closing liability surfaces later. It is normally capped in amount and limited in time.
Two offers at the same headline price can be worth very different amounts. This is where that difference lives.
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.
A seller note is the portion of the price the seller finances themselves, paid by the buyer over time with interest. It is common in small-business sales and lenders often require one.
A seller note means the seller carries some risk after closing. The terms of that note — rate, length, security, and what happens if the business struggles — matter as much as the amount.
An earnout is a portion of the price paid only if the business hits agreed targets after closing. It bridges a gap when the buyer and seller disagree about future performance.
Whether an earnout gets paid usually depends on decisions the buyer will be making, not the seller. If one is on the table, the measurement has to be defined precisely and in writing.
A holdback is part of the purchase price kept back at closing, usually in escrow, and released later once agreed conditions are met or a claim window closes. It secures the seller’s indemnification obligations.
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 short-term money a business needs to operate — essentially receivables and inventory less payables. A buyer expects to receive the business with enough of it to keep running from day one.
A working-capital peg is the agreed normal level of working capital the business must have at closing. If actual working capital lands above the peg the price goes up; below it, the price comes down.
The peg is negotiated, usually from a trailing average, and it is one of the last things settled. It is also one of the most common places a seller loses money quietly at the end of a deal.
Rollover equity is the share of the business a seller keeps rather than cashing out, becoming a minority owner alongside the buyer. It is more common with private equity buyers than with individuals.
A non-compete is the seller’s agreement not to start or work for a competing business in a defined area for a defined period after closing. Buyers require one, because without it they are buying a business the seller could immediately rebuild.
Net proceeds are what the seller actually keeps: the purchase price less debt payoff, transaction fees, taxes, and any amount deferred into a note, earnout or escrow. It is the only number that describes the outcome of a sale.
How buyers pay for businesses, and the tests a lender applies.
An SBA 7(a) loan is a bank loan partially guaranteed by the U.S. Small Business Administration, and it is the most common way individual buyers finance an acquisition. The guarantee lets banks lend against business cash flow rather than only against hard collateral.
Whether a business qualifies affects who can afford to buy it, which is why SBA eligibility is worth establishing before going to market rather than discovering mid-deal.
The down payment is the buyer’s own capital contributed at closing. SBA acquisition loans typically require 10% or more down from the buyer.
Debt service coverage ratio compares a business’s cash flow to the loan payments it would have to make. Lenders use it to test whether the business can carry the debt used to buy it, and a ratio below their threshold means the deal does not fund at that price.
A lender prequalification is a written indication from a bank of what a buyer can borrow, based on a review of their finances. It is the clearest way for a buyer to demonstrate they can actually close.
Who actually buys businesses at this size, and what each type wants.
An individual buyer is a person purchasing a business to own and operate it themselves, usually financed with savings plus an SBA loan. They are the largest buyer group for owner-operated businesses.
A strategic buyer is an existing company in the same or an adjacent industry buying for a specific reason — capacity, geography, customers, or capability. Because they can fold the business into an existing operation, they sometimes pay more than a financial buyer would.
A financial buyer, typically a private equity firm or family office, buys for a return on investment rather than to operate the business day to day. They usually expect management to stay, and often ask for rollover equity.
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. In practice they behave like a well-capitalized, professionally advised individual buyer.
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.
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The end of the transaction, and the part that comes after it.
Closing is the day the transaction completes: documents are signed, funds are disbursed, and ownership transfers. Landlord consents, lender conditions, and licence transfers all have to be resolved before it can happen.
The transition period is the time after closing during which the seller trains the new owner and hands over relationships. Its length and whether it is paid are negotiated as part of the deal.
A consulting agreement is a paid arrangement for the seller to stay involved after closing, usually part-time and for a fixed term. It is sometimes used to allocate part of the purchase price, which has tax consequences worth checking.
Landlord consent is the landlord’s written approval to assign the lease to the buyer. For a business that depends on its location it is a genuine condition of closing, and it is worth starting early because it is outside both parties’ control.
If you are working out what your business is worth, start with the calculator. If you are further along than that, a conversation is more useful than a glossary.