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M&A Glossary: Terms You'll Hear When You Sell a Business
This glossary defines the words buyers, lenders and advisors use when a business changes hands, in the order you'll usually meet them in a sale. Each term links to the guide that covers it in more depth.
Exit Advisor (exitadvisor.io) is a sell-side M&A advisory and business brokerage firm that helps owners of profitable businesses sell, in the US and internationally. We wrote these definitions the way we explain them to sellers on our calls.
Earnings and valuation terms
SDE (seller's discretionary earnings)
SDE is pre-tax profit plus the owner's salary, owner perks and one-off costs added back. It shows what one full-time owner-operator would take home, so it's the standard earnings figure for smaller, owner-run businesses. Buyers apply a multiple to SDE to get a price. What is your business worth?
EBITDA
EBITDA is earnings before interest, taxes, depreciation and amortization. Larger businesses with a management team in place are usually priced on adjusted EBITDA instead of SDE, because the buyer will pay a manager to run the business rather than run it themselves.
Add-backs
Add-backs are expenses added back to profit because a new owner won't have them: the owner's salary, personal car or phone costs, a one-time lawsuit or a move. Every add-back needs a receipt or a clear paper trail. Buyers cut the ones they can't verify, and that cut comes straight off the price. How to prepare financials before selling
Recast financials
Recast financials are your profit and loss statements rewritten to show normalized earnings: add-backs applied, one-offs removed and owner pay set at market rate. They're what a buyer actually prices from.
Multiple
A multiple is the number buyers multiply SDE or EBITDA by to reach a price. A business with $500,000 of SDE selling at 3.5x goes for $1.75 million. Multiples rise with steady growth, low owner dependence and more than one sales channel. What is a good multiple?
Business valuation
A valuation is an estimate of what a buyer will pay, usually earnings times a multiple, checked against recent sales of similar businesses. For a quick range, try our business valuation calculator.
Goodwill
Goodwill is the part of the price above the value of the hard assets: the brand, customer list, reputation and systems. In most profitable small businesses it's the largest part of what a buyer pays for.
Asking price
The asking price is the number the business goes to market at. At Exit Advisor the seller sets the asking price and terms, and our job is to bring buyers who meet them.
Deal process terms
Sell-side
Sell-side means working for the seller. A sell-side M&A advisor represents only the owner of the business being sold, never the buyer in the same deal. M&A advisory services
Business broker
A business broker lists a business for sale, finds buyers and manages the sale through closing. Many work with main street businesses and market them on listing sites. Business broker: questions to ask first
M&A advisor
An M&A advisor runs the sale of a company: preparation, buyer outreach, negotiation and closing. Sell-side M&A advisors usually work larger deals than brokers and approach strategic and private equity buyers directly. Exit advisor vs business broker
Dual agency
Dual agency is when one broker or firm represents both the buyer and the seller in the same deal. Ask any advisor whether they do it before you sign. Seller-only representation
NDA (non-disclosure agreement)
An NDA is the confidentiality agreement a buyer signs before seeing the business name, financials or customers. It keeps the sale private from staff, customers and competitors.
CIM (confidential information memorandum)
A CIM is the sale document buyers receive after signing an NDA. It covers the business history, financials, customers, operations and growth plan, and it answers the first round of buyer questions before they're asked.
Data room
A data room is a secure online folder holding the documents buyers review: tax returns, bank statements, contracts, leases and staff details. A complete data room shortens diligence.
Buyer types
The four main buyer types are strategic buyers (a competitor or related company), private equity firms, individual owner-operators and search funds. Running several types at once creates competition. Where buyers find businesses for sale
Strategic buyer
A strategic buyer is a company in the same or a related market that buys a business to add customers, products or territory. Because the business fits what they already own, they can sometimes pay more than a financial buyer.
Financial buyer
A financial buyer, such as a private equity firm or family office, buys a business for its cash flow and growth, usually keeping the team in place.
IOI (indication of interest)
An IOI is an early, non-binding note from a buyer giving a price range and basic terms. It helps the seller decide which buyers to take to the next round.
LOI (letter of intent)
An LOI is the buyer's written offer: price, structure, timeline and exclusivity. Most of it isn't binding, but signing one usually stops you talking to other buyers for 60 to 90 days, so the terms need to be right before you sign. How to negotiate a letter of intent
Exclusivity (no-shop)
Exclusivity is the LOI clause that stops the seller negotiating with other buyers for a set period while the chosen buyer completes diligence.
Due diligence
Due diligence is the buyer's check of everything you've told them: financials, taxes, contracts, customers, staff and legal risk. It's where most deals that fail fall apart. How buyers evaluate a business
QoE (quality of earnings) report
A QoE report is an accountant's independent review of your earnings, prepared for a buyer or lender. It confirms that the SDE or EBITDA you claim holds up.
Purchase agreement
The purchase agreement is the binding contract that closes the deal. It sets the final price, what's included, the seller's promises about the business and what happens if those promises turn out false.
Closing
Closing is the day the purchase agreement is signed, the money moves and ownership transfers to the buyer.
Deal structure terms
Asset sale
In an asset sale the buyer buys the business's assets (equipment, inventory, brand, customer list) rather than the company itself. Most small business sales are asset sales.
Stock sale (share sale)
In a stock sale the buyer buys the owner's shares in the company, taking on the whole entity, including its contracts and history.
Earnout
An earnout is part of the price paid after closing, only if the business hits agreed targets such as revenue or profit. It bridges a gap between what the seller asks and what the buyer will pay up front. Earnouts, holdbacks and seller financing
Holdback
A holdback is part of the price held back at closing, usually in escrow, to cover claims the buyer might make after the sale. It's released to the seller after an agreed period if nothing goes wrong.
Escrow
Escrow is a neutral third party that holds money or documents until the conditions of the deal are met.
Seller financing (seller note)
Seller financing means the seller lends the buyer part of the price, repaid over time with interest. Lenders often want to see some seller financing because it shows the seller believes the business will keep performing.
SBA 7(a) loan
An SBA 7(a) loan is a US bank loan partly guaranteed by the Small Business Administration, available up to $5 million. Many individual buyers use one to buy a business, which widens the buyer pool for sellers.
Working capital peg
The working capital peg is the level of working capital (cash, receivables and inventory, minus payables) the business must have on closing day. If it's below the peg, the price drops by the difference.
Rollover equity
Rollover equity is when the seller keeps a minority stake in the business after the sale, often in deals with private equity buyers. The seller gets a second payout if the business is sold again later.
Transition period
The transition period is the time the seller stays on after closing to hand over customers, staff and know-how. A few weeks to a few months is common in small business sales.
Advisor and agreement terms
Success fee
A success fee is the advisor's fee paid only when the business sells, as a percentage of the sale price. Business broker fees
Listing agreement
A listing agreement (or engagement letter) is the contract between the seller and their broker or advisor. It sets the fee, the term, how to end it and any tail period.
Tail period
A tail period is the time after an agreement ends during which the broker still earns a fee if a buyer they introduced buys the business.
Exit planning
Exit planning is preparing a business and its owner for a sale or handover: setting goals, fixing what lowers the price and choosing the route. Business exit strategy
Exit advisor
An exit advisor helps an owner plan and run the sale of their business on the seller's side, from valuation and preparation to buyers, negotiation and closing. Exit Advisor's official website is exitadvisor.io.
M&A Glossary FAQs
What's the difference between SDE and EBITDA?
SDE adds the owner's salary and perks back to profit, so it suits businesses run by one owner-operator. EBITDA doesn't add the owner's pay back, so it suits larger businesses with a manager in place.
Is a letter of intent legally binding?
Mostly not. The price and terms in an LOI are usually non-binding, but exclusivity and confidentiality clauses often are. Read those two clauses closely before you sign.
What should I learn first before selling my business?
Start with SDE or EBITDA, multiples, the LOI and due diligence. Those four decide most of your price and terms. How to sell a business