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.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value · SDE Add Backs. Selling an Aurora Janitorial Supply Distributor Before Retirement: SDE Add-Back Review Before Valuation
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
Adjusted EBITDA #
EBITDA after reasonable adjustments for unusual, nonrecurring, discretionary or owner-related expenses. Adjusted EBITDA is frequently used when valuing larger privately held companies.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value
Related terms: EBITDA, Add-Backs
Adjusted SDE #
Seller’s Discretionary Earnings after reviewing and normalizing the company’s income, expenses, owner compensation and legitimate add-backs.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value · SDE Add Backs. Selling an Aurora Janitorial Supply Distributor Before Retirement: SDE Add-Back Review Before Valuation
Related terms: Seller’s Discretionary Earnings (SDE), Add-Backs
Asset Purchase Agreement #
The definitive contract documenting the assets, liabilities, payment terms, representations, warranties and other conditions involved in an asset sale.
Related terms: Stock Sale, Purchase-Price Allocation, Representations and Warranties
Auction Process #
A structured sale process in which multiple qualified buyers are invited to review a business and submit competing indications of interest or offers.
Learn more: How Can a Business Broker Service Maximize the Sale Price of Your Company?
Related terms: Letter of Intent
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B
Blind Business Profile #
A short, confidential advertisement that describes a business opportunity without revealing the company’s name or other identifying information.
Learn more: Current Businesses for Sale
Related terms: Confidential Business Summary, Non-Disclosure Agreement
Buy-Side Representation #
Professional assistance provided specifically to a buyer seeking to identify, evaluate, negotiate and acquire a business.
Learn more: Buy a Business with Tangent Brokerage
Related terms: Off-Market Acquisition
Buyer Financing #
The combination of buyer cash, bank financing, SBA financing, seller financing or outside investment used to complete a business acquisition.
Learn more: Selling Your Illinois Business to an SBA-Financed Buyer: How to Keep the Deal Moving · Buying a Business in Kane County with Seller Financing: Terms Buyers and Sellers Should Nail Down
Related terms: SBA 7(a) Loan, Seller Financing
Buyer Profile #
A description of a prospective buyer’s experience, financial capacity, desired industries, geographic preferences, purchase-price range and acquisition objectives.
Learn more: Buy a Business with Tangent Brokerage
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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
Capitalization Rate #
A rate used to convert a company’s expected economic benefit into an estimated value. The appropriate rate depends upon risk, growth, stability and other company-specific factors.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value
Related terms: Multiple, Valuation
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
Confidential Business Summary #
A document provided to qualified buyers after confidentiality requirements have been satisfied. It normally summarizes the company’s history, operations, employees, customers, financial performance and growth opportunities.
Learn more: Buying a business: NDA and Data Room Steps Before LOI, Bank loan, Due Diligence and Contract preparation
Related terms: Blind Business Profile, Non-Disclosure Agreement
Confidentiality Agreement #
An agreement requiring a prospective buyer and other recipients to protect confidential information concerning a business and its potential sale.
Learn more: Buying a business: NDA and Data Room Steps Before LOI, Bank loan, Due Diligence and Contract preparation
Related terms: Non-Disclosure Agreement
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.
Learn more: Selling a 3PL Warehouse Business in Chicagoland: WMS Data, Lease Control, Labor, and Customer Concentration Buyers Review · Selling a Staffing Agency in Chicagoland: Client Concentration, Workers’ Comp, and Temp Workforce Risk Buyers Review
Related terms: Quality of Earnings, Deal Structure
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D
Data Room #
A secure electronic location used to organize and share financial statements, tax returns, contracts, leases, employee information and other documents during due diligence.
Learn more: Buying a business: NDA and Data Room Steps Before LOI, Bank loan, Due Diligence and Contract preparation
Related terms: Due Diligence
Deal Structure #
The combination of price, cash paid at closing, financing, assumed liabilities, seller notes, earn-outs, retained equity and other terms used to complete an acquisition.
Learn more: Buying a Business in Kane County with Seller Financing: Terms Buyers and Sellers Should Nail Down
Related terms: Seller Financing, Rollover Equity, Hold-Back
Debt Service #
The scheduled principal and interest payments required on money borrowed to acquire or operate a business.
Learn more: Selling Your Illinois Business to an SBA-Financed Buyer: How to Keep the Deal Moving
Related terms: Debt-Service Coverage Ratio
Debt-Service Coverage Ratio #
A measurement comparing available business cash flow with required loan payments. Lenders use this calculation to evaluate whether a business generates enough cash to support its acquisition debt.
Learn more: Selling Your Illinois Business to an SBA-Financed Buyer: How to Keep the Deal Moving
Related terms: Debt Service, SBA 7(a) Loan
Due Diligence #
The buyer’s detailed investigation of a business before closing. It may include financial, operational, legal, tax, customer, employee, environmental, technology and commercial reviews.
Learn more: Buy a Business with Tangent Brokerage · Buying a business: NDA and Data Room Steps Before LOI, Bank loan, Due Diligence and Contract preparation · Buying a Business in DuPage County: What to Verify Before You Sign the LOI
Related terms: Data Room, Quality of Earnings
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F
Fair Market Value #
The price at which property would change hands between a willing buyer and willing seller when neither is under compulsion and both have reasonable knowledge of the relevant facts.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value
Related terms: Valuation
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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P
Personal Guarantee #
An individual’s agreement to become personally responsible for a business or acquisition loan if the borrowing entity fails to pay.
Learn more: Selling Your Illinois Business to an SBA-Financed Buyer: How to Keep the Deal Moving
Related terms: SBA 7(a) Loan
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
Promissory Note #
A written promise to repay a specified amount under stated terms, including the interest rate, payment schedule, maturity date and consequences of default.
Learn more: Buying a Business in Kane County with Seller Financing: Terms Buyers and Sellers Should Nail Down
Related terms: Seller Note, Security Agreement
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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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.
SBA 7(a) Loan #
A loan made by an approved lender and partially guaranteed by the U.S. Small Business Administration. SBA 7(a) financing is frequently used for qualifying small-business acquisitions.
Learn more: Selling Your Illinois Business to an SBA-Financed Buyer: How to Keep the Deal Moving
Related terms: Buyer Financing, Debt-Service Coverage Ratio, Personal Guarantee
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 Financing #
A transaction in which the seller accepts scheduled payments for a portion of the purchase price rather than receiving the entire amount at closing.
Learn more: Buying a Business in Kane County with Seller Financing: Terms Buyers and Sellers Should Nail Down
Related terms: Seller Note, Owner Financing, Deal Structure
Seller Note #
A promissory note issued by the buyer to the seller for the financed portion of the purchase price.
Learn more: Buying a Business in Kane County with Seller Financing: Terms Buyers and Sellers Should Nail Down
Related terms: Seller Financing, Promissory 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.
Learn more: Business Valuation Calculator · Free Broker’s Opinion of Value · SDE Add Backs. Selling an Aurora Janitorial Supply Distributor Before Retirement: SDE Add-Back Review Before Valuation · What Factors Impact the Valuation When I Calculate My Business Value to Sell?
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
Succession Planning #
The process of preparing for the future transfer of a company’s ownership, management responsibilities and important relationships.
Learn more: Sell My Business · Exit Planning Services: How to Sell Your Business Without Regrets
Related terms: Management Buyout, Transition Period
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
Transition Period #
The agreed period after closing during which the seller assists the buyer with employees, customers, vendors, systems and operational knowledge.
Learn more: Steps to selling a business in Illinois, Indiana and Wisconsin
Related terms: Succession Planning
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