Reference
Business sale glossary
Plain-English definitions for common terms owners encounter during a business acquisition.
- Add-back
- An expense proposed as non-recurring, discretionary, or owner-specific that may be added back when estimating normalized earnings. Buyers typically verify whether each proposed add-back is supportable.
- Asset purchase
- A transaction in which the buyer purchases specified assets and assumes specified liabilities rather than acquiring the ownership interests of the legal entity.
- Closing
- The point at which the transaction documents become effective, consideration is delivered as required, and ownership transfers under the agreement.
- Customer concentration
- The degree to which revenue depends on a small number of customers. High concentration can increase buyer risk.
- Due diligence
- The buyer’s verification process covering financial, legal, tax, operational, commercial, property, technology, employment, environmental, licensing, and other relevant matters.
- Earnout
- Contingent purchase consideration paid after closing if specified future performance or other conditions are achieved.
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization. It is a commonly used operating-profit measure, but purchase-price analysis may require further normalization.
- Letter of intent (LOI)
- A preliminary document outlining major proposed transaction terms and the framework for diligence and definitive agreements. Some provisions may be binding while others are not.
- Non-compete
- A contractual restriction that may limit specified competitive activity after closing, subject to applicable law.
- Normalized earnings
- An estimate of recurring economic performance after reviewing unusual, non-recurring, owner-specific, or non-operating items.
- Purchase price allocation
- The allocation of transaction consideration among acquired assets or tax categories. The allocation can have important tax consequences.
- Quality of earnings (QoE)
- A financial diligence analysis focused on the sustainability, accuracy, and composition of reported earnings and cash flow.
- Rollover equity
- Equity in the post-transaction business retained or reinvested by a seller rather than receiving all consideration in cash.
- SDE
- Seller’s discretionary earnings, a measure often used for owner-operated businesses that starts with earnings and adjusts for certain owner compensation, benefits, interest, taxes, depreciation, amortization, and other qualifying items.
- Seller financing
- A structure in which the seller receives a note or other deferred payment obligation from the buyer for part of the purchase price.
- Stock / equity purchase
- A transaction in which the buyer acquires ownership interests in the legal entity rather than purchasing selected assets individually.
- Transition period
- The agreed period in which the seller helps transfer relationships, knowledge, management duties, licenses, processes, or other operational responsibilities.
- Working capital
- Short-term operating assets minus short-term operating liabilities. Business purchase agreements may establish a target or methodology for working capital delivered at closing.
- Working-capital peg
- A negotiated target for normalized working capital that is used to determine whether a closing adjustment is required.
Definitions are educational and may vary by transaction, contract, accounting method, tax treatment, and applicable law.