Learning Center
M&A Glossary
Selling a business comes with its own vocabulary, and most of it gets used as though you already know it. Here is what each term actually means, with a worked example and what it means for you on either side of the table.
Looking for answers rather than definitions? The FAQ covers the questions owners ask most.
Earnings and add-backs
What the business actually earns, once the owner's choices are taken out of the numbers.
Adjusted EBITDA
EBITDA after removing one-time, non-operating and owner-specific costs, so the number reflects what the business would earn for a new owner.
Discretionary earnings add-backs
Expenses added back to earnings because they are one-time, personal to the owner, or would not continue under new ownership.
EBITDA
Earnings before interest, taxes, depreciation and amortization. A measure of what a business earns from operating, before financing and accounting choices.
Owner compensation adjustment
Correcting what the owner pays themselves to what the job would actually cost, so earnings reflect the business rather than the owner's tax planning.
Quality of Earnings (QoE)
An independent accounting review that tests whether reported earnings are real, sustainable and correctly adjusted.
Seller's Discretionary Earnings (SDE)
Seller's Discretionary Earnings. Adjusted EBITDA plus one owner's total compensation. The standard earnings measure for owner-operated businesses.
Valuation
How those earnings become a price, and why two similar businesses sell for different money.
Business and Market Analysis (BAMA)
DealCoach's premium report. Everything in the Estimate of Value plus industry benchmarking and a readiness assessment.
Capitalization of historical earnings
Valuing a business by taking one normalized earnings figure and applying a rate that reflects its risk. It is what a multiple actually is, expressed the other way round.
Discounted cash flow (DCF)
Valuing a business by projecting its future cash flows and discounting them back to what they are worth today.
Estimate of Value (EOV)
DealCoach's entry-level valuation report. An analyst-prepared estimate of what your business would sell for in today's market.
Multiple
The factor applied to earnings to arrive at a value. A business at $500,000 of SDE and a 3x multiple is valued around $1.5 million.
Unsolicited offer
An approach from a buyer you were not marketing to. Flattering, and usually the lowest price you will ever be offered.
The sale process
The documents and stages, from an anonymous teaser through to diligence.
Confidential Information Memorandum (CIM)
The full written presentation of a business for sale, shared with buyers only after they sign a confidentiality agreement.
Data room
A secure repository where a seller shares deal documents with buyers who have signed a confidentiality agreement.
Due diligence
The buyer's detailed verification of the business after an LOI is signed: financial, legal, operational and commercial.
Indication of Interest (IOI)
A non-binding written expression of a buyer's interest, usually including a value range and the broad shape of a deal.
Letter of Intent (LOI)
A mostly non-binding document setting out the agreed price and key terms, which starts exclusive due diligence.
Non-Disclosure Agreement (NDA)
A confidentiality agreement a buyer signs before receiving identifying information about a business for sale.
Teaser
A one to two page anonymous summary of a business for sale. It tells a buyer what the company is without revealing who it is.
Deal terms
What an offer is actually made of. The headline price is rarely the number that matters.
Cash at close
The portion of the price actually wired to the seller on closing day, as opposed to paid later through a note, an earnout or rolled equity.
Earnout
Part of the price paid later, only if the business hits agreed targets after closing. It bridges a gap between what a seller wants and what a buyer will pay today.
Rollover equity
When a seller keeps a minority stake in the business rather than cashing out entirely, and sells it later alongside the new owner.
Seller financing
When the seller accepts part of the price over time rather than all cash at closing, effectively lending to the buyer.
Working capital
The money tied up in running the business day to day: receivables plus inventory, less what you owe suppliers. Not the same as cash in the bank.
Working capital peg
The normal level of working capital a deal assumes will be left in the business at closing. Delivering above or below it adjusts the price.
Getting ready
The things buyers discount for, and which of them you still have time to fix.
Customer concentration
How much of a business's revenue comes from its largest customers. High concentration lowers value because it concentrates risk.
Exit readiness
How prepared a business is to be sold well, as distinct from how much it is worth today. The two are related but they are not the same thing.
Readiness Scorecard
DealCoach's assessment of how prepared a business is to sell, scored across nine drivers and delivered with the Business and Market Analysis.