Business Sale Glossary
Plain-English definitions of every term you'll encounter when selling a business — from first broker meeting to closing day.
Asset Sale
Buying specific assets of the business, not the legal entity.
In an asset sale, the buyer acquires named assets: equipment, customer contracts, goodwill, trade name, and inventory. The seller retains the legal entity (corporation or LLC) and is responsible for settling pre-close liabilities. Most small business transactions are asset sales. Buyers strongly prefer them because they avoid inheriting unknown liabilities and get a step-up in tax basis.
Add-Back (Normalization)
Expenses added back to net income to show true cash flow.
Add-backs are owner-specific or non-recurring expenses that inflate reported costs but won't exist under new ownership. Common add-backs: owner salary above market, personal vehicle lease, family member payroll, non-recurring legal or consulting fees, one-time equipment purchases. Each add-back must be documented with receipts or bank statements — unsupported add-backs get rejected during buyer diligence.
Business Broker
A professional who represents business owners in the sale of their company.
Business brokers manage the full sale process: valuation, CIM preparation, buyer outreach, NDA management, negotiation, due diligence coordination, and close. Commissions range from 5–12% of the sale price (or the Lehman Formula for larger deals). IBBA-member brokers adhere to a professional code of ethics. BizBrokerMatch maintains a database of 3,142 IBBA-member brokers and matches sellers with the right specialist.
Confidential Information Memorandum (CIM)
The deal book a broker prepares to market your business to buyers.
A 20–60 page document summarizing the business opportunity for qualified buyers. Includes: financial summaries (3 years), business description, products/services, customer base, management team, growth opportunities, and reason for sale. Distributed only after a buyer signs an NDA. A well-crafted CIM is the most important marketing document in a business sale.
CBI (Certified Business Intermediary)
The IBBA's primary professional designation for business brokers.
A CBI is awarded by the International Business Brokers Association to members who have completed a qualifying number of transactions, passed IBBA coursework, and agreed to the IBBA Code of Ethics. Approximately 20% of IBBA-member brokers hold a CBI. It's the most common credential in the business brokerage industry and a reliable signal of professional experience.
Due Diligence
The buyer's verification process before committing to close.
After an LOI is signed, the buyer has 30–90 days to verify every material fact about the business. Due diligence covers: financial records and tax returns, legal documents (contracts, leases, litigation), HR and employment records, operations, real estate, intellectual property, and regulatory compliance. The seller's preparation determines how smoothly this goes.
Debt-Free, Cash-Free
Standard deal convention: buyer gets no debt, seller keeps cash.
Most business sales are structured on a debt-free, cash-free (DFCF) basis. The buyer receives the business with zero financial debt, and the seller retains any cash balances in the business accounts at close. The enterprise value (EV) calculated from EBITDA multiples is an EV — it's adjusted to equity value at closing by subtracting debt and adding back cash.
Data Room
The organized digital repository of all due diligence documents.
A data room is a secure, structured file system containing every document a buyer will need during diligence: tax returns, P&Ls, contracts, leases, employee records, licenses, equipment lists, and legal documents. Professional sellers prepare the data room before going to market. A well-organized data room signals a serious seller and can reduce due diligence time by weeks.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization.
The standard valuation metric for mid-market businesses (typically $2M+ deal size). Unlike SDE, EBITDA excludes the owner's salary — it assumes professional management will replace the owner post-close. PE buyers and institutional acquirers use EBITDA multiples. A business generating $1M EBITDA in the home services sector might sell at 5–8× EBITDA to a roll-up buyer.
Earnout
Deferred payment tied to future business performance.
An earnout makes part of the purchase price conditional on the business hitting post-close revenue or EBITDA targets, typically over 1–3 years. Buyers propose earnouts to reduce risk when historical performance may not continue under new ownership. Research suggests 50–60% of earnouts are never fully paid. Sellers should negotiate for hard metrics, short measurement periods, and buyer non-interference provisions.
Exclusivity Period
The window after LOI when the seller can't negotiate with other buyers.
After signing an LOI, sellers typically grant 30–60 days of exclusivity — agreeing not to entertain other offers while the buyer completes diligence and arranges financing. Exclusivity is given in exchange for a good-faith deposit (typically $25K–$100K). If the buyer doesn't close, exclusivity ends and the deposit may be forfeited depending on the reason.
Goodwill
The intangible value of a business above its hard assets.
Goodwill represents the economic value of brand reputation, customer relationships, location advantage, trained workforce, and operating systems. In service businesses, goodwill is often 80–90%+ of the total purchase price — there are few hard assets. In manufacturing or equipment-heavy businesses, the hard asset floor is higher. Goodwill is typically allocated to the buyer in an asset sale and amortized over 15 years.
IBBA
International Business Brokers Association — the industry's professional body.
The IBBA is the largest professional organization for business brokers and M&A advisors in the United States, with thousands of members across all 50 states. It issues the CBI and M&AMI designations, publishes industry research (including the quarterly Market Pulse report on valuation multiples), and maintains a member code of ethics. IBBA membership is the primary qualification signal for brokers in the BizBrokerMatch database.
Letter of Intent (LOI)
The non-binding term sheet that kicks off formal due diligence.
An LOI outlines: purchase price, deal structure (asset vs. stock), payment terms (cash at close, seller note, earnout), exclusivity period, and key conditions. It is generally non-binding on price but binding on exclusivity and confidentiality. Signing an LOI is a major milestone — it marks the transition from marketing to closing.
Listing Agreement
The contract between seller and broker formalizing the engagement.
A listing agreement specifies: the broker's commission rate, exclusivity period (usually 6–18 months), asking price, broker's responsibilities, and termination conditions. Most listing agreements are exclusive — you cannot work with other brokers simultaneously. Read the tail provision carefully: if the broker introduces a buyer and the deal closes after the listing expires, you may still owe the commission.
M&AMI (Merger & Acquisition Master Intermediary)
The IBBA's senior designation for mid-market practitioners.
The M&AMI designation is awarded to IBBA members with significant transaction history in deals typically above $5M. It signals a practitioner who works in the lower-middle-market rather than Main Street. Approximately 4% of IBBA-member brokers hold an M&AMI. If your business is likely to sell above $5M, an M&AMI-credentialed advisor may be more appropriate than a generalist broker.
Non-Disclosure Agreement (NDA)
The confidentiality agreement signed before a CIM is shared.
An NDA prevents prospective buyers from sharing your business's financial data, customer names, or operational details with third parties — including competitors. NDAs are standard before any meaningful information is disclosed. Violations are enforceable but rare; the primary purpose is to establish a legal paper trail and filter out non-serious inquirers.
Non-Compete Agreement
Post-close restriction preventing the seller from competing.
A non-compete prohibits the seller from starting or joining a competing business in the same industry and geography for a defined period — typically 2–5 years, within a specified radius. Non-competes are standard in virtually every business sale and are required by SBA lenders. The reasonableness of the geographic radius and duration is sometimes negotiated.
Private Equity (PE)
Investment firms that acquire businesses using equity + debt.
PE buyers target businesses with $1M+ EBITDA, use leveraged buyouts to acquire them, implement operational improvements, and sell within 3–7 years at a higher multiple. PE roll-ups are a significant buyer category in home services (HVAC, pest control, landscaping, plumbing). PE buyers typically pay higher multiples than individual buyers but impose more stringent diligence and deal structure requirements.
Quality of Earnings (QoE)
Third-party verification of a business's reported earnings.
A QoE report is an independent financial analysis — typically conducted by a CPA firm — that verifies the accuracy of the seller's stated EBITDA or SDE. QoE reports are standard on transactions above $2–3M and increasingly common below that threshold. A clean QoE dramatically accelerates buyer confidence and reduces diligence friction. Sellers can commission a sell-side QoE to get ahead of potential challenges.
Roll-Up
A buy-and-build strategy combining many small businesses into one platform.
A PE firm or strategic acquirer buys a 'platform' company and adds smaller 'add-on' acquisitions in the same industry. The combined entity is worth more than the sum of parts at exit. Roll-up buyers are very active in home services, pest control, landscaping, HVAC, and plumbing. They often pay higher multiples than individual buyers because the math works at scale.
Recasting
Restating financials to show normalized owner earnings.
Recasting (also called normalization) is the process of adjusting reported financial statements to reflect the true economic performance of the business — removing owner-personal expenses, one-time items, and non-recurring costs. The output is a recast P&L showing adjusted SDE or EBITDA. Buyers will scrutinize every line of a recast; every adjustment needs documentation.
Seller's Discretionary Earnings (SDE)
The standard valuation metric for small businesses.
SDE equals net profit plus owner salary, owner benefits, non-recurring expenses, and depreciation/amortization. It represents the total economic benefit available to a single owner-operator. Most small businesses (under $2M purchase price) are valued as a multiple of SDE — typically 2–4× for Main Street businesses and 3–6× for stronger performers.
Stock Sale
Buying the seller's ownership interest in the legal entity.
The buyer acquires the shares (C-corp) or membership interests (LLC) — the entire legal entity transfers, including all contracts, liabilities, and legal history. Sellers often prefer stock sales because proceeds are taxed at capital gains rates rather than ordinary income. Some deal structures require stock sales: where customer contracts prohibit assignment, or the entity holds licenses that can't be transferred.
Seller Note (Seller Financing)
The seller loans the buyer part of the purchase price.
Instead of receiving 100% cash at close, the seller accepts a promissory note for a portion of the price — typically 10–20% — paid back with interest over 2–5 years. Seller notes reduce the buyer's financing gap and signal seller confidence in the business. SBA lenders sometimes require a seller note on standby to qualify the deal.
SBA 7(a) Loan
The most common financing tool for business acquisitions under $5M.
SBA 7(a) loans are partially guaranteed by the U.S. Small Business Administration, allowing lenders to accept 10–15% down payments and offer 10-year amortization. The maximum loan amount is $5M. The SBA process adds 30–60 days to a deal timeline. Businesses must demonstrate sufficient cash flow to service the debt — typically a 1.25× debt service coverage ratio.
Trailing Twelve Months (TTM)
The most recent 12 months of financial performance.
TTM financials are the standard basis for valuation in most business sales. Because calendar-year financials can be 1–18 months stale, buyers prefer TTM as a more current representation of earnings. If the business has been growing, TTM will show higher earnings than the prior calendar year and support a higher asking price.
Valuation Multiple
The number applied to SDE or EBITDA to set a purchase price.
A business with $500K SDE selling at 3× SDE has an enterprise value of $1.5M. Multiples vary by industry (restaurants: 1.5–2.5×; pest control: 4–8×; SaaS: 4–10×), business size, growth trajectory, customer concentration, and recurring revenue percentage. The broker's job is to justify the highest defensible multiple.
Working Capital
The operating liquidity left in the business at close.
Working capital = current assets − current liabilities. Most purchase agreements include a working capital peg — a minimum amount of working capital that must be in the business at close. If actual working capital at close is below the peg, the price is adjusted down. Disputes over working capital calculations are one of the most common sources of post-close conflict.
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