The business sale glossary

Selling a business introduces owners to a vocabulary they may rarely encounter during the normal course of running their company. Below are some of the most common financial, legal, and transaction terms a business owner may hear during the sale process.

1. Add-Back

An expense included in the historical financial statements that a seller argues should be added back to earnings because it is non-recurring, discretionary, or will not continue after the transaction.

2. Add-On Acquisition

An acquisition made by an existing portfolio company, usually to expand geographically, add customers, enter a new market, or gain additional capabilities.

3. Adjusted EBITDA

EBITDA after making agreed-upon adjustments intended to better reflect the ongoing earnings of the business. Common adjustments may include owner compensation above market levels, one-time expenses, personal expenses, or unusual legal or professional fees.

4. Asset Purchase

A transaction in which the buyer purchases selected assets and assumes specified liabilities of the company rather than purchasing the ownership interests of the business itself.

5. Basket

A negotiated dollar threshold that must generally be exceeded before a buyer may recover certain indemnification claims from the seller.

6. Buyer

The individual, company, private equity firm, family office, or other investor acquiring the business.

7. Cash-Like Items

Balance-sheet items that the parties agree should be treated similarly to cash when calculating the seller's final proceeds. The definition varies by transaction.

8. Change of Control

A transaction or event that results in a change in ownership or control of a company. Certain contracts, leases, licenses, and benefit arrangements may require consent or create other consequences upon a change of control.

9. Closing

The point at which the transaction is legally completed, the purchase documents become effective, funds are transferred, and ownership changes hands.

10. Closing Statement

A calculation prepared at or following closing that determines items such as cash, debt, working capital, transaction expenses, and ultimately the final purchase price.

11. Confidential Information Memorandum (CIM)

A detailed marketing document prepared for prospective buyers describing the company, its operations, financial performance, customers, employees, industry, growth opportunities, and other relevant information.

12. Confidentiality Agreement

Also called a Non-Disclosure Agreement or NDA. An agreement restricting a prospective buyer from improperly using or disclosing confidential information received during the sale process.

13. Consent

Approval required from a third party before a transaction can proceed or before a contract can remain in effect following the sale. Common examples include landlord, lender, customer, supplier, and governmental consents.

14. Contingent Consideration

Purchase price that becomes payable only if specified future conditions are met. Earnouts are one common form of contingent consideration.

15. Customer Concentration

The degree to which a company's revenue depends on a relatively small number of customers. Significant customer concentration can affect valuation, buyer interest, financing, and transaction structure.

16. Data Room

A secure electronic repository containing financial statements, contracts, employee information, tax records, legal documents, and other information reviewed by a buyer during due diligence.

17. Deal Team

The group of professionals assisting the owner with the transaction. It may include an M&A advisor or investment banker, transaction attorney, tax advisor, accountant, wealth advisor, and other specialists.

18. Debt-Free, Cash-Free

A common transaction structure under which the seller retains the company's cash and remains responsible for specified indebtedness, while the buyer acquires the underlying operating business.

19. Debt-Like Items

Obligations that may not appear as traditional funded debt but that a buyer argues should reduce the seller's proceeds in a debt-free, cash-free transaction. Examples can include unpaid bonuses, deferred compensation, certain tax obligations, leases, or other liabilities depending on the negotiated definition.

20. Disclosure Schedules

Schedules delivered with the purchase agreement that provide detailed information and exceptions to the seller's representations and warranties. They commonly list contracts, litigation, employees, intellectual property, customers, permits, and other important matters.

21. Due Diligence

The buyer's investigation of the business before closing. Due diligence commonly includes financial, legal, tax, operational, employee, insurance, environmental, technology, and commercial reviews.

22. Earnout

A portion of the purchase price that is paid after closing only if the business achieves specified performance targets or other conditions.

23. EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is frequently used as a measure of operating profitability and as the basis for valuing privately held companies.

24. Enterprise Value

The value assigned to the company's core business operations before adjustments for cash, debt, working capital, and certain other balance-sheet items.

25. Equity Purchase

A transaction in which the buyer purchases the stock, membership interests, or other ownership interests of the company rather than purchasing individual assets.

26. Equity Value

The amount attributable to the company's owners after adjusting enterprise value for items such as debt, cash, and other negotiated amounts.

27. Escrow

Money withheld from the seller's proceeds and deposited with a third party for a specified period to secure certain post-closing obligations or claims.

28. Exclusivity

A period during which the seller agrees not to negotiate with or solicit offers from other potential buyers. Exclusivity often begins after signing a Letter of Intent.

29. Family Office

An investment organization established to manage the wealth and investments of a wealthy individual or family. Family offices are increasingly active buyers of privately held businesses.

30. Financial Buyer

A buyer, commonly a private equity firm or family office, acquiring a company primarily as an investment rather than principally for integration into an existing operating company.

31. Financing Contingency

A condition making a buyer's obligation to close dependent upon obtaining financing. Sellers often prefer offers that are not subject to a financing contingency because financing risk can increase uncertainty.

32. Fundamental Representations

Certain representations and warranties considered especially important and often subject to longer survival periods or higher liability limits. They commonly address matters such as ownership, authority, capitalization, and sometimes taxes or brokers.

33. Holdback

A portion of the purchase price retained temporarily rather than paid to the seller at closing. A holdback may secure post-closing adjustments, indemnification obligations, or other potential claims.

34. Indemnification

A contractual obligation requiring one party to reimburse another for specified losses arising from matters such as breaches of representations, warranties, or covenants.

35. Indemnity Cap

The maximum amount a seller may be required to pay for specified indemnification claims.

36. Indication of Interest (IOI)

A preliminary, typically non-binding proposal from a potential buyer describing an approximate valuation range and sometimes the proposed transaction structure.

37. Letter of Intent (LOI)

A document outlining the principal economic and structural terms under which a buyer proposes to acquire the company. Most provisions of an LOI are generally non-binding, although provisions such as confidentiality and exclusivity may be binding.

38. Management Presentation

A meeting during which the company's owners and management team present the business to prospective buyers and answer questions regarding its operations, performance, strategy, and growth opportunities.

39. Material Adverse Effect

A significant negative event or change affecting the company. Acquisition agreements often contain negotiated provisions addressing what constitutes a Material Adverse Effect.

40. Multiple

The ratio between a company's valuation and a financial metric such as EBITDA or revenue. For example, a $40 million enterprise value for a company generating $5 million of EBITDA represents an 8.0x EBITDA multiple.

41. Net Debt

Generally, a company's debt minus its available cash, although the precise definition is heavily negotiated and can include additional debt-like items.

42. Net Working Capital

Generally, current operating assets minus current operating liabilities. The exact definition varies by transaction and can materially affect the amount received by the seller.

43. Non-Compete

An agreement restricting the seller from competing with the sold business for a specified period and within an agreed geographic or business scope, subject to applicable law.

44. Non-Solicitation Agreement

An agreement restricting a seller from soliciting specified employees, customers, or other business relationships following the transaction.

45. Normalization Adjustment

An adjustment to historical earnings intended to reflect the expected ongoing economics of the business. Examples can include unusual owner compensation, non-recurring expenses, excess rent paid to a related party, or temporary costs.

46. Platform Acquisition

An initial acquisition made by a private equity firm or other investor that is intended to serve as the foundation for future growth and additional acquisitions.

47. Proof of Funds

Evidence demonstrating that a prospective buyer has sufficient financial resources to complete the proposed transaction.

48. Purchase Agreement

The principal definitive agreement governing the sale. Depending on the transaction structure, it may be called an Asset Purchase Agreement, Stock Purchase Agreement, Equity Purchase Agreement, or Membership Interest Purchase Agreement.

49. Purchase Price Adjustment

A post-closing increase or decrease to the purchase price based on items such as actual working capital, cash, debt, or transaction expenses at closing.

50. Purchase Price Allocation

The process of allocating the purchase price among the assets acquired in a transaction. The allocation can have significant tax consequences for both buyer and seller, particularly in an asset sale.

51. Quality of Earnings (QoE)

A financial analysis, typically performed by transaction accountants, evaluating the company's historical earnings and determining how accurately reported EBITDA reflects the company's recurring economic performance.

52. Recasting

The process of adjusting historical financial statements to reflect how the business might perform under a new owner. Recasting frequently includes adjustments to owner compensation, related-party expenses, and non-recurring items.

53. Representation

A statement of fact made by a party in a purchase agreement regarding matters such as financial statements, contracts, taxes, employees, litigation, ownership, or compliance with laws.

54. Representation and Warranty Insurance

Insurance that may cover certain losses resulting from breaches of representations and warranties made in a purchase agreement. It is increasingly used in middle-market transactions.

55. Rollover Equity

A portion of the seller's ownership value that is reinvested into the buyer's company or a new holding company rather than being received entirely in cash at closing.

56. Rollover Percentage

The percentage of a seller's transaction value that is reinvested into the acquiring company or a new holding company rather than received in cash at closing.

57. Section 336(e) Election

A federal tax election that can allow certain sales of corporate stock to receive asset-sale tax treatment for federal income tax purposes. Its availability and consequences depend heavily on the company's structure and the specific transaction.

58. Section 338(h)(10) Election

A federal tax election that may allow a qualifying stock transaction to be treated as an asset sale for tax purposes. It can provide tax benefits to the buyer but may create additional tax cost for the seller, making it an important negotiation point.

59. Seller

The shareholder, member, owner, or group of owners selling the business.

60. Seller Note

A portion of the purchase price financed by the seller, with the buyer agreeing to repay the amount over time according to negotiated terms.

61. Seller's Discretionary Earnings (SDE)

A profitability measure frequently used for smaller owner-operated businesses. SDE generally begins with earnings and adds back certain owner compensation, benefits, interest, taxes, depreciation, amortization, and discretionary expenses.

62. Sponsor

A term commonly used for a private equity firm or other financial investor sponsoring an acquisition.

63. Strategic Buyer

An operating company acquiring another business because of strategic benefits such as geographic expansion, new customers, additional capabilities, cost savings, or competitive positioning.

64. Survival Period

The period following closing during which specified representations, warranties, or contractual obligations remain enforceable.

65. Target Working Capital

The negotiated amount of net working capital the seller is expected to deliver with the business at closing. It is sometimes called the working capital peg.

66. Tax Distribution

A payment made by a pass-through entity to its owners to help them satisfy income tax obligations arising from allocated taxable income.

67. Tax Structure

The way a transaction is structured for federal, state, and local tax purposes. Differences between an asset sale and an equity sale can materially affect the seller's after-tax proceeds and the buyer's future tax benefits.

68. Teaser

A short, usually anonymous marketing document describing the business and investment opportunity without initially identifying the company.

69. Transaction Expenses

Professional fees and other costs associated with completing the sale, potentially including investment banking fees, legal fees, accounting expenses, bonuses, and other deal-related costs.

70. Working Capital Adjustment

An increase or decrease to the purchase price based on the difference between actual closing working capital and the agreed working capital target or peg.

71. Working Capital Peg

The agreed benchmark against which actual closing working capital is compared. If working capital delivered at closing is above or below the peg, the purchase price may be adjusted accordingly.

72. Working Capital True-Up

The post-closing process through which the parties calculate actual working capital as of closing and compare it with the agreed target or peg to determine whether additional money is owed to the buyer or seller.