The M&A Glossary for Owners Considering a Sale
Every term you’ll hear from your broker, your buyer’s diligence team, your attorney, and your CPA — explained in plain English by people who close lower-middle-market transactions every week. ~50 terms below, with deeper guides for the ones that most often confuse first-time sellers.
Add-back
An adjustment to reported earnings (net income or EBITDA) for expenses that the new owner won’t incur or that aren’t part of normal operations — owner salary, personal expenses, one-time costs. Used to arrive at SDE or Adjusted EBITDA.
Asset Purchase Agreement (APA)
The definitive contract for an asset-sale transaction. Specifies which assets are being purchased, which liabilities transfer, the purchase price, reps and warranties, and closing conditions.
Asset Sale
A deal structure where the buyer purchases specific assets (and assumes specific liabilities) rather than buying the company entity itself. Common for smaller deals; usually preferred by buyers for tax and liability reasons.
Basket and Cap
Limits on how a buyer can claim indemnification from a seller for breaches of reps and warranties. The basket is a minimum threshold; the cap is the maximum the seller can be required to pay. Heavily negotiated.
Bring-down Certificate
A certificate signed at closing confirming that the seller’s reps and warranties are still true as of the closing date (not just as of signing the LOI or purchase agreement).
Buyer Diligence Period
The window after LOI during which the buyer investigates the business in depth — reviews financials, contracts, legal, operations. Typically 60–120 days for lower-middle-market deals.
Capital Gains Tax
Federal (and sometimes state) tax owed on the gain from selling a business. Long-term federal rates are typically 15–20% for most sellers. State rates range from 0% (TX, FL, TN, NV, WA) to 13.3% (CA).
CIM (Confidential Information Memorandum)
A formal marketing document prepared by your broker that summarizes your business for qualified buyers — financials, operations, growth opportunities, deal structure. Shared after a buyer signs an NDA.
Closing
The day the transaction is finalized and the buyer wires funds. Title to the assets (or equity) transfers; you sign the final documents; old bank accounts get drained and new ones funded.
Confidentiality Agreement (NDA)
The first document a prospective buyer signs in a sale process. Binds them to keep your identity and financials confidential. Standard in every brokered sale.
Data Room
A secure online repository where the seller uploads diligence documents (financials, contracts, leases, employee data, legal) for the buyer to review. Modern deals use cloud-based virtual data rooms (VDRs) like DealRoom, Datasite, or Box.
Definitive Agreement
The final binding contract for the sale. Either an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA) depending on structure. Replaces the LOI; signed at or just before closing.
Discounted Cash Flow (DCF)
A valuation method that projects future cash flows and discounts them to present value using a required rate of return. More common in larger deals; less common than multiple-based valuation for lower-middle-market businesses.
Earnout
A portion of the purchase price paid over time, contingent on the business hitting specified performance targets (revenue, EBITDA, customer retention). Bridges valuation gaps between buyer and seller; risky for sellers.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. The standard profitability metric for lower-middle-market businesses ($1M+ EBITDA). Buyers value businesses as a multiple of (Adjusted) EBITDA.
Equity Rollover
When the seller takes a portion of the sale price as equity in the buyer’s company (or a new holding company), rather than 100% cash. Common in PE deals; can deliver significant additional upside if the buyer’s platform sells up the chain.
Escrow
A portion of the sale price held by a third party (the escrow agent) at closing, used to satisfy any post-closing indemnification claims or adjustments. Typically 5–15% of the deal value, held for 12–24 months.
Exclusivity
A provision in the LOI that prevents the seller from negotiating with other buyers during the diligence period. Standard term; usually 60–120 days. Without it, a buyer won’t invest in diligence.
Free Cash Flow
Cash a business generates after capital expenditures. Different from EBITDA in that it accounts for required reinvestment. Sometimes used by buyers (especially for asset-heavy businesses) as a sanity check on the EBITDA-based valuation.
Goodwill
The portion of the purchase price above the fair market value of tangible assets — reflects brand value, customer relationships, key employees, etc. Important for tax allocation in asset sales.
Holdback
A portion of the purchase price the buyer holds back at closing, to be released later based on conditions (often working capital true-up or post-closing milestones). Similar in spirit to escrow but typically a smaller amount.
Indemnification
The seller’s commitment to reimburse the buyer for losses arising from breaches of reps and warranties or specified pre-closing matters. Tied to the basket, cap, and escrow. One of the most negotiated parts of any deal.
Investment Banker / Broker
The advisor who manages the sale process for the seller — valuation, marketing, buyer outreach, negotiation, diligence coordination, closing. Investment banks typically handle larger deals; brokers handle lower-middle-market.
IOI (Indication of Interest)
A non-binding preliminary offer from a buyer expressing interest in acquiring the business at a stated valuation range. Comes before the LOI; less detailed and less committed.
Letter of Intent (LOI)
A largely non-binding document that outlines the basic terms of a proposed deal — price, structure, conditions, timeline, exclusivity. Signed before formal diligence. Binding sections typically include exclusivity and confidentiality.
Leveraged Buyout (LBO)
A transaction where the buyer uses borrowed money (debt) to fund a large portion of the purchase price. Common structure for PE acquisitions of lower-middle-market businesses.
MAC (Material Adverse Change)
A clause in the purchase agreement that allows the buyer to walk away (or renegotiate) if something materially negative happens to the business between signing and closing. Definition is heavily negotiated.
Management Buyout (MBO)
A transaction where the current management team (often with PE or debt backing) buys the business from the owner. Less common in lower-middle-market but can be a path for owner-operators with deep management bench.
Multiple (EBITDA Multiple)
The ratio at which a business is valued, expressed as a multiple of its EBITDA (or sometimes SDE). A business with $2M EBITDA selling at 6x is valued at $12M enterprise value. Multiples vary widely by industry, size, and quality.
Net Working Capital (NWC)
Current assets minus current liabilities — the operating capital required to run the business day-to-day. Typically transferred with the business at closing; a working capital target/peg is set during diligence.
Non-Compete
A clause in the sale agreement preventing the seller from competing with the business for a specified period (usually 3–5 years) and geography after closing. Standard term; enforceability varies by state.
Platform Investment
The first investment in an industry that a PE firm uses as the ‘platform’ for follow-on acquisitions (‘add-ons’ or ‘tuck-ins’). Platforms typically need $5M+ EBITDA and earn premium multiples vs. tuck-ins.
Private Equity (PE)
Investment firms that buy private companies (or take public companies private) using investor capital + debt. The dominant buyer category in lower-middle-market M&A for the past decade.
Purchase Price Allocation
How the purchase price is divided across asset categories (inventory, equipment, goodwill, etc.) in an asset sale. Has significant tax consequences for both buyer and seller; negotiated as part of the deal.
Qualified Small Business Stock (QSBS)
A federal tax provision (Section 1202) that allows owners of qualifying C-Corp stock held for 5+ years to exclude up to $10M (or 10x basis) of capital gains from federal tax. Significant planning opportunity for some sellers.
Quality of Earnings (QofE)
A buyer-commissioned financial analysis performed by an accounting firm during diligence. Verifies the reported EBITDA, validates add-backs, and identifies any earnings quality issues. Often produces ‘diligence discoveries’ that reduce the agreed price.
Recapitalization
A transaction where some (but not all) of the owner’s equity is sold to a buyer (usually PE), and the owner retains a meaningful stake. ‘Take some chips off the table’ while keeping operational involvement and future upside.
Rep & Warranty Insurance (RWI)
Insurance purchased to cover losses from breach of reps and warranties — replaces or supplements seller indemnification and escrow. Increasingly common in deals above ~$15M; cost typically 2–4% of coverage limit.
Reps and Warranties
Statements by the seller (and buyer) about the condition of the business, made in the purchase agreement — financial accuracy, no undisclosed liabilities, employee matters, etc. Breach triggers indemnification.
SBA Loan
Small Business Administration-guaranteed financing for business acquisitions. The 7(a) program is the most common; up to $5M loan size; widely used by individual buyers and search funds to acquire businesses with $1M–$5M+ purchase prices.
SDE (Seller’s Discretionary Earnings)
EBITDA plus the owner’s salary, benefits, and personal expenses run through the business. Used to value smaller, owner-operated businesses (typically under ~$1M EBITDA). The metric SBA buyers and search funds typically use.
Search Fund
An individual operator (often a recent MBA) who raises capital to fund a search for a single business to acquire, then runs it as CEO. Active and growing buyer category for businesses with $1.5M+ EBITDA.
Seller Financing
When the seller agrees to be paid a portion of the purchase price over time, like a loan. Bridges valuation gaps; signals seller confidence; sometimes required by SBA lenders (typically 10%+ of price held for 24+ months).
Stock Purchase Agreement (SPA)
The definitive agreement for a stock-sale transaction. Specifies the equity being sold, the purchase price, reps and warranties, and closing conditions.
Stock Sale
A deal structure where the buyer purchases the equity of the company itself (rather than its individual assets). Liabilities, contracts, and licenses transfer automatically. Usually preferred by sellers for tax reasons.
Strategic Buyer
A buyer who already operates in your industry and is acquiring you for strategic reasons — market expansion, capability addition, vertical integration. Often pays premium multiples compared to financial (PE) buyers when synergies are real.
Tail Period
A period (often 12–24 months) after your broker engagement ends during which they’re still entitled to a fee if a buyer they introduced eventually closes the deal.
Teaser
A one- or two-page anonymous summary of your business prepared by your broker, sent to prospective buyers to gauge interest. Buyer signs an NDA before receiving the full CIM.
Term Sheet
Similar to an LOI — a non-binding outline of proposed deal terms. Some buyers use a term sheet earlier in the process to signal serious interest before drafting a full LOI.
Transition Services Agreement (TSA)
An agreement specifying what services the seller will continue to provide post-closing (and for how long). Common when the buyer needs the seller’s help to transfer customer relationships, train staff, or run shared back-office functions.
Working Capital Adjustment
An adjustment to the purchase price at closing based on whether the actual net working capital delivered is above or below an agreed target. Often a source of contention; the target is heavily negotiated.
The 10 Terms That Cause the Most Confusion in First Sales
These get their own dedicated guides — with worked examples, common pitfalls, and the buyer-vs-seller dynamics on each.
Reading About M&A Because You’re Thinking About Selling?
Skip the search results. 15-minute valuation call. Defensible range, honest discussion of where your business sits, no obligation.