M&A Glossary for Business Owners

Add-Backs

Expenses that are added back to net income when calculating Adjusted EBITDA or SDE. Common add-backs include above-market owner salary, personal vehicle expenses, one-time legal fees, and family member salaries for non-working family members. Add-backs increase your earnings figure — and therefore your valuation — but they must be defensible and documented. Learn more about add-backs.

Adjusted EBITDA

EBITDA after adding back one-time expenses, above-market owner compensation, and non-recurring items. This is the normalized, repeatable earnings figure that buyers multiply to arrive at a valuation. Adjusted EBITDA is the number that matters in negotiations — not raw EBITDA.

Asset Sale

A deal structure where the buyer purchases the business’s assets (equipment, contracts, customer relationships, goodwill) but not the legal entity itself. Most pre-close liabilities stay with the seller. Asset sales are the most common structure for small and mid-market transactions. Compare with stock sale. Learn more about deal structures.

Book Value

The value of a business based on its balance sheet — total assets minus total liabilities. Book value rarely reflects what a business will actually sell for, because it doesn’t account for earning power, goodwill, or intangible assets. Most service businesses sell for significantly more than book value.

Business Broker

Also: Intermediary

A professional who helps business owners sell their companies. Brokers typically work on a success fee (8–12% of the sale price) and are most common for businesses under $3M in revenue. For larger businesses, an M&A advisor typically produces better outcomes. How to choose the right advisor.

CIM (Confidential Information Memorandum)

Also: Offering Memorandum, Info Memo

The primary marketing document prepared when taking a business to market. The CIM tells your business’s story — history, operations, financial summary, growth opportunities — to potential buyers. It’s shared only after a buyer signs an NDA.

Customer Concentration

The percentage of revenue that comes from your top customers. If one customer represents 20%+ of revenue, most buyers will discount the price or require an earnout. Ideally, no single customer exceeds 15% of total revenue heading into a sale.

Deal Structure

How the purchase price is paid and organized. This includes whether it’s an asset sale or stock sale, how much is cash at close vs. seller-financed, whether there’s an earnout, and the transition period. The deal structure often matters more than the headline purchase price.

Due Diligence

The investigation process a buyer conducts after signing an LOI to verify everything the seller has represented — financials, customer contracts, employee agreements, equipment condition, legal compliance. Well-prepared sellers treat due diligence as a verification process, not a discovery process. See the full due diligence checklist.

Earnout

A portion of the purchase price paid after closing, contingent on the business meeting agreed-upon performance targets (usually revenue or EBITDA). Earnouts bridge valuation gaps between buyer and seller but are frequently disputed. If you accept an earnout, negotiate for targets you control. Learn more about earnouts.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization

A measure of operating profitability used to value businesses with a management layer in place — typically those with $2M+ in revenue where the owner is not the primary operator. EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Most buyers use Adjusted EBITDA for valuation. EBITDA vs. SDE explained.

Exclusivity Period

Also: No-Shop Period

A clause in an LOI that prevents the seller from negotiating with other buyers for a specified period (usually 30–60 days) while due diligence is conducted. Once you grant exclusivity, you lose negotiating leverage — so make sure the LOI terms are strong before signing.

Fair Market Value (FMV)

The price at which a business would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts, and neither being under compulsion to buy or sell. FMV is a theoretical concept — actual transaction prices depend on negotiation, deal structure, and market conditions.

Goodwill

The intangible value of a business above its tangible asset value — brand reputation, customer relationships, trained workforce, institutional knowledge, and operating systems. In most service business acquisitions, goodwill represents the majority of the purchase price.

Holdback / Escrow

A portion of the purchase price (typically 5–15%) held in escrow after closing to cover potential indemnification claims. If no claims are made during the holdback period (usually 12–18 months), the funds are released to the seller.

Indemnification

A contractual obligation where the seller agrees to compensate the buyer for losses arising from breaches of representations and warranties in the purchase agreement. Indemnification is usually capped at a percentage of the purchase price and subject to time limits.

LOI (Letter of Intent)

Also: Indication of Interest, Term Sheet

A non-binding agreement outlining the key terms of a proposed acquisition — purchase price, deal structure, exclusivity period, and closing conditions. The LOI is not the final agreement, but it sets the framework for everything that follows. What to look for in an LOI.

M&A Advisor

Also: Investment Banker (at larger deal sizes)

A professional who represents sellers (or buyers) in business transactions. M&A advisors typically run more controlled, targeted processes than brokers and are better suited for businesses above $5M in revenue. They focus on identifying strategic buyers who will pay the highest multiple.

Multiple

Also: Valuation Multiple, Earnings Multiple

The factor applied to a business’s earnings (SDE or EBITDA) to estimate its market value. A 3.5x SDE multiple means the business is valued at 3.5 times its annual SDE. Multiples vary by industry, size, growth, and risk profile. What determines your multiple. See multiples for 58 specific industries.

NDA (Non-Disclosure Agreement)

Also: Confidentiality Agreement

A legal agreement signed by prospective buyers before receiving confidential business information (like the CIM). The NDA protects the seller by preventing the buyer from disclosing that the business is for sale or sharing financial details.

Owner Dependency

The degree to which a business relies on the owner for daily operations, customer relationships, key decisions, or specialized knowledge. Owner dependency is the single biggest risk factor buyers evaluate — and the #1 reason multiples get discounted. Reducing owner dependency is the highest-impact improvement most sellers can make.

Purchase Agreement

Also: Definitive Agreement, APA (Asset Purchase Agreement), SPA (Stock Purchase Agreement)

The binding legal document that governs the transaction. It addresses representations and warranties, indemnification, closing conditions, and escrow. Do not review this document without an M&A attorney. Learn about the closing process.

Quality of Earnings (QofE)

A financial analysis performed by a buyer’s accounting firm during due diligence to verify the seller’s reported Adjusted EBITDA. A QofE report identifies whether earnings are sustainable, recurring, and accurately stated. Surprises in a QofE report often lead to price reductions.

Recurring Revenue

Revenue that repeats on a predictable schedule — maintenance contracts, monitoring agreements, subscription services, route-based service. Recurring revenue is the single most important factor in driving higher multiples for service businesses. The higher your recurring revenue percentage, the more a buyer will pay.

Representations and Warranties

Also: Reps

Statements of fact made by the seller (and buyer) in the purchase agreement about the condition of the business — accuracy of financials, ownership of assets, compliance with laws, absence of litigation. If a representation turns out to be inaccurate, the seller may face indemnification claims.

SDE (Seller’s Discretionary Earnings)

The total financial benefit available to a single owner-operator. SDE = Net Income + Owner’s Salary + Owner Benefits + Non-Cash Charges + One-Time Expenses. SDE is the standard metric for valuing businesses under ~$2M in revenue where the owner works in the business. Full SDE explanation and formula.

Seller Financing

Also: Seller Note, Seller Carry

A portion of the purchase price that the seller finances as a loan to the buyer, typically at 5–8% interest over 3–7 years. Seller financing is common in small business transactions (often 10–30% of the purchase price) and can help bridge the gap between what a buyer can finance through an SBA loan and the total purchase price.

Stock Sale

Also: Equity Sale, Membership Interest Sale

A deal structure where the buyer purchases the ownership interest in the company entity itself, including its history, contracts, and liabilities. Stock sales are less common for small businesses because they expose the buyer to pre-close liabilities, but they’re used when transferring licenses, permits, or contracts would be complicated by a change of entity. Compare with asset sale.

Transition Period

A 30–90 day period after closing during which the seller remains available to introduce the buyer to customers, employees, and vendors, and to transfer institutional knowledge. The transition is typically compensated separately from the purchase price. A well-managed transition protects both parties.

Working Capital

Current assets (cash, accounts receivable, inventory) minus current liabilities (accounts payable, accrued expenses). Most purchase agreements include a working capital target — an agreed-upon level of working capital that the seller must deliver at closing. Deviations from the target result in a post-close purchase price adjustment.