Walk into any deal uneducated and you'll get taken advantage of. Sellers, brokers, attorneys, and lenders all speak a language. Know these terms and you'll hold your own in any conversation.
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Valuation Terms
SDE (Seller's Discretionary Earnings)
The total financial benefit to a single owner-operator. Calculated as: Net Profit + Owner's Salary + Owner's Perks + Non-Recurring Expenses
This is the most important number in any small business sale. Buyers pay a multiple of SDE.
EBITDA
Earnings Before Interest, Taxes, Depreciation, Amortization. Similar to SDE but used for larger businesses with professional management.
Multiple
The factor applied to SDE or EBITDA to determine business value. Example: $100K SDE at 2.5x = $250,000 asking price.
Multiples range from 1.5x to 5x+ depending on industry, size, and growth.
Add-Backs
Expenses added back to net profit when calculating SDE. Common: owner salary, health insurance, personal vehicle, one-time expenses.
Blue Sky
The intangible value of a business (goodwill, reputation, customer relationships). As opposed to hard assets.
Deal Structure Terms
Asset Sale
Buyer purchases the business's assets (equipment, inventory, customer lists, goodwill) but not the legal entity. Most small business sales are asset sales.
Stock Sale
Buyer purchases ownership shares of the company, taking over the legal entity including all assets AND liabilities.
Letter of Intent (LOI)
Non-binding document outlining basic terms of a proposed deal (price, structure, timeline). Signals serious intent.
Earnout
A portion of the purchase price contingent on future performance. Example: "$300K at close, plus $50K if revenue exceeds $500K in year one."
Seller Note
When the seller finances a portion of the purchase price. Buyer makes payments to seller over time, with interest.
Non-Compete Agreement
Contract preventing the seller from starting or working for a competing business for a defined period and geography.
Escrow
Neutral third party that holds funds during the transaction. Protects both buyer and seller.
Financing Terms
SBA Loan
Government-backed loans for business acquisitions. Typically 10-20% down, 10-year terms, competitive rates. Requires personal guarantee.
Personal Guarantee
Your commitment to repay a loan personally if the business cannot. Nearly universal in small business lending.
Debt Service Coverage Ratio (DSCR)
How well the business's cash flow covers loan payments. Formula: Cash Flow / Annual Debt Payments. Lenders want 1.25x or higher.
Working Capital
Cash needed to operate the business day-to-day. Often negotiated separately from purchase price.