Glossary
Plain definitions of the terms you meet when buying a business, from add-backs and SDE to escrow and earn-outs, each with a worked example and why buyers care.
A
- Add-backs
- Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.
- Adjusted EBITDA
- Adjusted EBITDA is EBITDA after normalising adjustments, showing what a business would earn with a paid manager in the owner's seat. Larger small-business deals are usually priced on it.
- Annual recurring revenue (ARR)
- Annual recurring revenue is the yearly value of subscription or contracted revenue expected to repeat, measured at a point in time. Software businesses are often priced as a multiple of it.
- Asking price
- The asking price is the price a seller or broker puts on a business when it is listed. It is an opening position, not a valuation, and what it includes varies from listing to listing.
- Asset sale versus share sale
- In an asset sale you buy selected assets of a business; in a share sale (a stock sale in the US) you buy the company itself, with its full history. The choice shapes risk, tax and what needs consent.
B
- Business broker
- A business broker markets businesses for sale and manages the process on the seller's behalf. The broker is usually paid by the seller, mostly when a deal completes.
C
- Capital expenditure
- Capital expenditure is spending on assets that last more than a year, such as equipment, vehicles and premises. It uses cash but reaches the profit and loss account only gradually, through depreciation.
- Cash-free, debt-free
- Cash-free, debt-free is a pricing basis in which the headline price assumes the business changes hands with no cash and no borrowings. The seller keeps the cash, repays the debt and leaves a normal level of working capital behind.
- Change of control clause
- A change of control clause gives the other party to a contract rights if the business changes owner, such as the right to terminate, renegotiate or refuse consent.
- Churn
- Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.
- Completion accounts
- Completion accounts are a balance sheet drawn up at the date a sale completes, used to adjust the price for the actual cash, debt and working capital the buyer receives.
- Customer acquisition cost
- Customer acquisition cost is the average sales and marketing spend needed to win one new customer over a period. It shows whether growth can be repeated and at what price.
- Customer concentration
- Customer concentration describes how much of a business's revenue comes from a small number of customers. The higher it is, the more the business depends on decisions it does not control.
- Customer lifetime value
- Customer lifetime value estimates the total gross profit a business earns from an average customer over the whole relationship. It is a model built on assumptions, not a record.
D
- Data room
- A data room is a secure online folder where a seller shares documents for due diligence, with access controlled and usually logged.
- Debt service coverage
- Debt service coverage compares the cash a business generates with the loan repayments it must make. Lenders use it to judge whether an acquisition can carry its debt.
- Deferred revenue
- Deferred revenue is money customers have already paid for goods or services the business has not yet delivered. It is a liability until the work is done.
- Depreciation and amortisation
- Depreciation and amortisation spread the cost of long-lived assets over the years they are used. They reduce profit without any cash leaving the business in that year.
- Disclosure letter
- A disclosure letter sets out the seller's exceptions to the warranties in a purchase agreement. Anything fairly disclosed in it generally cannot support a warranty claim later.
- Due diligence
- Due diligence is the investigation a buyer carries out before committing to a purchase, testing the finances, contracts, legal position and operations against what the seller has described.
E
- Earn-out
- An earn-out is part of the purchase price paid only if the business meets agreed targets after the sale. It can bridge a gap between the seller's price and the buyer's view of the evidence.
- EBITDA
- EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.
- Enterprise value
- Enterprise value is the value of a business's operations as a whole, regardless of how it is financed. Adjusting it for cash, debt and working capital gives the equity value the owners receive.
- Equity value
- Equity value is what belongs to a company's owners once debts are deducted and cash is counted. In a share sale it is broadly what the sellers receive for their shares.
- Escrow
- Escrow is an arrangement in which an independent third party holds money until agreed conditions are met. In a business sale it keeps part of the price available to cover claims after completion.
- Exclusivity period
- An exclusivity period is an agreed time during which the seller will not negotiate with other buyers, giving you room to complete due diligence and arrange finance.
F
- Family office
- A family office is a private organisation that manages the wealth of one or more families. Many invest directly in private businesses and can hold them for many years.
G
- Goodwill
- Goodwill is the part of a purchase price above the value of a business's identifiable assets, less its liabilities. It reflects things like reputation, customer relationships and trained staff.
- Gross margin
- Gross margin is revenue minus the direct cost of what a business sells, shown as a percentage of revenue. It shows how much each sale contributes towards overheads and profit.
H
- Heads of terms
- Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
- Holdback
- A holdback is part of the purchase price the buyer keeps back at completion and pays later if no valid claims arise. Unlike escrow, the money stays with the buyer.
I
- Independent sponsor
- An independent sponsor is a dealmaker who finds and negotiates acquisitions without a committed fund, then raises equity from investors one deal at a time.
- Information memorandum
- An information memorandum is a detailed sales document about a business, usually prepared by the seller's broker or adviser and shared after an NDA. It is written to present the business well, not to test it.
- Inventory at cost
- Inventory at cost is stock valued at what the business paid for it, not at the price it expects to sell it for. It is the usual basis when stock is added to a purchase price.
K
- Key person risk
- Key person risk is the risk that a business loses value if one individual leaves or stops performing. In small businesses that person is often the owner.
L
- Letter of intent
- A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.
- Locked box
- A locked box fixes the price using a balance sheet dated before signing, with no adjustment after completion. The seller promises not to take value out of the business in between.
M
- Monthly recurring revenue (MRR)
- Monthly recurring revenue is the subscription revenue a business expects to bill in a normal month. Its monthly movements show where growth comes from and where it leaks away.
N
- Net profit before tax
- Net profit before tax is what a business earns after all its costs, including interest and depreciation, but before tax on its profits. It is the starting point for SDE and EBITDA.
- Net revenue retention
- Net revenue retention compares the recurring revenue from existing customers now with the same customers a year earlier, including upgrades, downgrades and cancellations.
- Non-disclosure agreement (NDA)
- A non-disclosure agreement is a contract in which a potential buyer promises to keep information about a business confidential. Sellers usually ask for one before sharing the business's name or detailed figures.
- Normalised earnings
- Normalised earnings are profits restated to show what a business would earn in a typical year under a new owner, after removing one-off items and correcting costs that are not at market rates.
Q
- Quality of earnings
- A quality of earnings review is an accountant's analysis of whether a business's reported earnings are accurate, sustainable and correctly adjusted. It is not an audit.
R
- Recurring revenue
- Recurring revenue comes back without being won again each time, through subscriptions, retainers or service contracts. Contracted revenue is the part committed for a fixed term.
- Restrictive covenants
- Restrictive covenants are promises that limit what a seller can do after a sale, such as competing with the business or approaching its customers and staff.
- Revenue multiple
- A revenue multiple expresses a price as a number of times annual revenue. Because it ignores costs, it is best used as a cross-check for most businesses rather than as the basis of a price.
- Run rate
- A run rate annualises a recent short period, such as last month's revenue multiplied by twelve. It shows current pace, not what the business actually earned over a year.
S
- SBA 7(a) loan
- An SBA 7(a) loan is a US business loan made by an approved lender and partly guaranteed by the US Small Business Administration. It applies only in the United States and is widely used to buy small businesses.
- Search fund
- A search fund is a way for an individual or pair of entrepreneurs to raise money, find one business to buy and then run it as chief executive.
- Seller finance
- Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest after completion. It is also called vendor finance or a seller note.
- Seller's discretionary earnings (SDE)
- Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
- Senior debt
- Senior debt is borrowing that ranks first for repayment and is usually secured on the business's assets. It is typically the cheapest part of acquisition finance and carries the strictest conditions.
- Strategic acquirer
- A strategic acquirer is a company that buys a business because it fits its existing operations, and can often pay more because it expects savings or extra sales from combining them.
T
- Trailing twelve months (TTM)
- Trailing twelve months means the most recent 12 consecutive months of figures, whatever the financial year. It gives a more current view than the last set of annual accounts.
- Transition period
- A transition period is the agreed time after completion when the seller stays involved to hand over knowledge, relationships and processes to the new owner.
- TUPE
- TUPE is the set of UK rules that protect employees when a business, or part of one, moves to a new employer. Staff transfer automatically to the buyer on their existing terms.
V
- Valuation multiple
- A valuation multiple expresses a price as a number of times a financial measure, such as SDE, adjusted EBITDA or ARR. It only means something once you know what it is applied to.
W
- Warranties and indemnities
- Warranties are the seller's statements of fact about a business in the purchase agreement; indemnities are promises to reimburse specific losses. Together they decide who bears risks that diligence could not rule out.
- Working capital
- Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.
- Working capital peg
- A working capital peg is the agreed level of working capital a business must contain at completion. The price moves up or down by the difference between the actual figure and the peg.