Business Brokerage and Business Valuation Glossary

Buying or selling a privately held business comes with its own vocabulary: SDE, add-backs, seller notes, working-capital pegs, letters of intent. These are the terms we explain most often to owners and buyers, in plain English, with links to the articles and tools that go deeper.

Definitions are general educational information, not legal, tax or accounting advice. Talk with your attorney or CPA about your own transaction.

A

Add-Backs #

Business expenses shown on the financial statements that may be added back to reported profit when calculating the normalized earnings available to a buyer. Common examples may include an owner’s compensation, personal expenses, nonrecurring costs, depreciation, amortization and interest. Every add-back should be documented and reasonably supported.

Related terms: Seller’s Discretionary Earnings (SDE), Recast Financial Statements, Normalized Earnings

Add-On Acquisition #

A smaller business purchased and combined with an existing company or investment platform. Buyers frequently pursue add-on acquisitions to expand territory, add employees, obtain equipment, increase customers or introduce additional services.

Related terms: Platform Acquisition, Private Equity

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B

Buyer Profile #

A description of a prospective buyer’s experience, financial capacity, desired industries, geographic preferences, purchase-price range and acquisition objectives.

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C

Capital Expenditures #

Money spent to purchase, replace or improve long-term assets such as equipment, vehicles, machinery, buildings or technology.

Related terms: Free Cash Flow

Cash Flow #

The amount of cash generated or used by a business during a particular period. Cash flow is different from accounting profit because it considers the timing of money received and paid.

Related terms: Free Cash Flow, Net Cash Flow

Cash-Free, Debt-Free Transaction #

A transaction structure in which the seller generally retains the company’s cash and remains responsible for its interest-bearing debt, subject to the final purchase agreement.

Related terms: Working-Capital Adjustment, Enterprise Value

Customer Concentration #

The degree to which a company depends upon one customer or a small group of customers. High customer concentration may increase acquisition risk and affect financing, valuation or deal structure.

Related terms: Quality of Earnings, Deal Structure

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D

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E

Enterprise Value #

The value of the business’s operating activities before considering excess cash, interest-bearing debt and certain other balance-sheet adjustments.

Related terms: Equity Value, Cash-Free, Debt-Free Transaction

Equity Value #

The value attributable to the company’s ownership interests after considering debt, cash and other agreed adjustments.

Related terms: Enterprise Value

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F

Family Office #

An organization that manages the investments and financial affairs of a wealthy family. Some family offices purchase privately held businesses as long-term investments.

Related terms: Financial Buyer

Financial Buyer #

A buyer primarily interested in the business’s financial return. Private-equity firms, family offices and some independent sponsors are examples of financial buyers.

Related terms: Strategic Buyer, Private Equity, Family Office

Free Cash Flow #

Cash remaining after operating expenses and necessary capital expenditures. Depending on the calculation, debt payments, taxes and working-capital changes may also be considered.

Related terms: Cash Flow, Capital Expenditures

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G

Goodwill #

The intangible value associated with a company’s reputation, customer relationships, workforce, operating systems, trade name and ability to generate earnings beyond the value of its identifiable tangible assets.

Related terms: Tangible Assets, Purchase-Price Allocation

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H

Hold-Back #

A portion of the purchase price temporarily withheld after closing to cover possible claims, working-capital adjustments or other obligations described in the purchase agreement.

Related terms: Deal Structure, Representations and Warranties

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I

Independent Sponsor #

An acquisition professional who identifies a business before assembling the investors and financing needed to complete the purchase.

Related terms: Search Fund, Financial Buyer

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L

Liquidity #

The ability of a business or individual to meet financial obligations using available cash or assets that can readily be converted into cash.

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M

Material Adverse Change #

A significant negative development affecting a business between signing and closing. Purchase agreements frequently define how such a change could affect the buyer’s obligation to close.

Mediation #

A dispute-resolution process in which a neutral third party helps the parties attempt to reach a voluntary settlement.

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N

Net Cash Flow #

The difference between cash received and cash paid during a particular period.

Related terms: Cash Flow

Net Working Capital #

Generally, operating current assets minus operating current liabilities. The exact assets and liabilities included should be defined in the purchase agreement.

Related terms: Working Capital, Working-Capital Adjustment

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O

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P

Platform Acquisition #

An initial company acquired as the foundation for future growth and additional acquisitions within a particular industry or market.

Related terms: Add-On Acquisition, Private Equity

Prepayment Penalty #

A fee that may be charged when a borrower pays off a loan before its scheduled maturity date.

Private Equity #

Investment capital used to acquire ownership interests in privately held companies. Private-equity groups may acquire platform companies and then complete add-on acquisitions.

Related terms: Financial Buyer, Platform Acquisition, Rollover Equity

Purchase-Price Allocation #

The division of an acquisition price among the assets being purchased, including inventory, equipment, real estate, customer-related assets, restrictive covenants and goodwill.

Related terms: Goodwill, Asset Purchase Agreement

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Q

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R

Representations and Warranties #

Statements made by the buyer and seller concerning the company, transaction and authority of the parties. The purchase agreement describes the accuracy required and the remedies for an incorrect statement.

Related terms: Asset Purchase Agreement, Hold-Back

Rollover Equity #

A portion of the seller’s ownership value reinvested into the acquiring company or a newly formed parent company instead of being paid entirely in cash at closing.

Related terms: Private Equity, Deal Structure

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S

S Corporation #

A corporation that has elected to pass qualifying income, deductions, gains and losses through to its shareholders for federal income-tax purposes.

Search Fund #

An investment vehicle formed to identify, acquire and operate a privately held business. Search-fund entrepreneurs commonly seek established companies with reliable cash flow and growth potential.

Related terms: Independent Sponsor, Financial Buyer

Security Agreement #

An agreement giving a lender or seller a security interest in specified business assets to support repayment of an obligation.

Related terms: UCC Financing Statement, Seller Note

Seller’s Discretionary Earnings (SDE) #

A measure commonly used to evaluate owner-operated businesses. SDE generally begins with pretax business earnings and adds back allowable interest, depreciation, amortization, owner compensation and documented discretionary or nonrecurring expenses.

Related terms: Add-Backs, Adjusted SDE, EBITDA, Multiple

Stock Sale #

A transaction in which the buyer purchases ownership shares or membership interests in the company rather than purchasing selected business assets.

Related terms: Asset Purchase Agreement

Strategic Acquisition #

An acquisition intended to produce operational benefits such as geographic expansion, new customers, additional employees, specialized capabilities or entry into another market.

Related terms: Strategic Buyer, Synergy

Strategic Buyer #

A company that acquires another business because of the operational or competitive benefits the combination may produce.

Related terms: Financial Buyer, Synergy

Synergy #

A financial or operational benefit expected from combining two companies. Examples include reduced overhead, shared equipment, broader services and increased purchasing power.

Related terms: Strategic Buyer

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T

Tangible Assets #

Physical business assets such as inventory, equipment, vehicles, furniture, buildings and land.

Related terms: Goodwill

Term Sheet #

A preliminary summary of proposed transaction or financing terms. It may be binding, nonbinding or contain a combination of binding and nonbinding provisions.

Related terms: Letter of Intent

Transaction Value #

The total economic value associated with an acquisition. Depending on its use, it may include cash, assumed debt, seller financing, earn-outs and rollover equity.

Related terms: Enterprise Value, Deal Structure

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U

UCC Financing Statement #

A public filing used to give notice that a creditor claims a security interest in specified personal property.

Related terms: Security Agreement

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V

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W

Working Capital #

The short-term operating assets and liabilities needed to run a business. The parties should define exactly which accounts are included in the transaction.

Related terms: Net Working Capital, Working-Capital Adjustment

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