Nick Ringling
Founder, ClearView QoE · About Nick
Published:
The language of small business acquisitions is precise, and getting it wrong creates real risk. If a seller or broker uses a term you don't fully understand, that's a gap worth closing before you negotiate. These definitions cover the financial, legal, and process vocabulary you'll run into from first look through close.
A – D
Financial
Add-Back
An expense the seller says won't continue under new ownership, like a personal cost or a one-time charge. Add-backs get added back to net income to calculate adjusted EBITDA or SDE. They only count if they can be verified with documentation.
Financial
Adjusted EBITDA
Earnings before interest, taxes, depreciation, and amortization, adjusted for owner expenses, one-time items, and related-party deals. This is the main number used to value businesses above $2M in revenue. The seller's version of this number hasn't been independently verified. Yours should be.
Legal
Asset Sale
A deal where the buyer purchases the business's assets, not the legal entity itself. The buyer starts clean, with no inherited liabilities, and gets a tax benefit called a stepped-up basis. This is the most common structure in small business deals. Buyers prefer it. Sellers often prefer the opposite, for tax reasons.
Financial
Accounts Receivable (AR)
Money customers owe the business for goods or services already delivered. AR aging shows how long an invoice has gone unpaid. Current, collectible AR from reliable customers counts as a real asset. Old or uncollectable AR does not.
Process
Broker Package / CIM
Short for Confidential Information Memorandum. This is the marketing document the seller's broker puts together, covering financial history, operations, and growth story. The financials in it are the seller's version, not independently verified. Use it as a starting point, not as the basis for your price.
Financial
Capital Expenditure (CapEx)
Cash spent on long-term assets like equipment, vehicles, technology, or building improvements. Maintenance CapEx replaces worn-out assets. It's a real, ongoing cost that should be subtracted from EBITDA to see true earnings. Growth CapEx expands capacity. It's optional, not required to keep the business running.
Financial
Cash Conversion Cycle
The number of days between when a business spends cash and when it collects cash from customers. Short cycles mean fast-paying customers and low inventory. They need less working capital. Long cycles need more working capital, and can cause cash flow problems even in a profitable business.
Financial
COGS (Cost of Goods Sold)
The direct costs of producing or delivering a product or service, like materials, labor, and subcontractors. Revenue minus COGS equals gross profit. Gross profit divided by revenue equals gross margin. A shrinking gross margin over time is a sign of pricing pressure or rising costs.
Financial
Debt Service Coverage Ratio (DSCR)
Verified adjusted EBITDA divided by total annual loan payments. SBA lenders usually require a DSCR of at least 1.25x. That means the business needs to generate $1.25 in verified earnings for every $1.00 it owes each year. Below 1.0x, the business can't cover its own debt from operations alone.
Process
Due Diligence
The structured investigation a buyer runs before finalizing a purchase. It covers four areas: financial (QoE report, tax returns, bank statements), legal (contracts, liens, litigation), operational (processes, employees, systems), and commercial (customers, competition, market). Always start with financial verification.
E – L
Financial
EBITDA
Earnings before interest, taxes, depreciation, and amortization. It's a stand-in for operating cash flow, before financing costs and non-cash items are factored in. It's the standard earnings metric for businesses above $2M to $3M in revenue. It is not the same as cash flow. It doesn't account for CapEx or debt payments.
Legal
Earnout
Extra payment to the seller after close, but only if the business hits agreed targets, usually revenue or EBITDA. It bridges the gap when buyer and seller disagree about future performance. It protects buyers if the QoE report flagged risk, and rewards sellers if their optimism turns out to be right.
Legal
Escrow Holdback
A portion of the purchase price held back in escrow after close. It's released once specific conditions are met, like no undisclosed claims coming up. It gives the buyer a way to recover money if problems surface that should have been disclosed. Typical holdback period: 12 to 24 months.
Legal
Exclusivity Period
A binding clause in the LOI that stops the seller from talking to other buyers for a set period, usually 30 to 60 days. It gives the buyer protected time to do due diligence. Even though most of an LOI is non-binding, this part almost always is.
Financial
Free Cash Flow (FCF)
Operating cash flow minus capital expenditures. It's the cash a business actually generates after maintaining its assets. It's more useful than EBITDA for judging debt capacity and real owner returns. The formula: EBITDA minus taxes, minus CapEx, minus debt payments, equals owner free cash flow.
Financial
Goodwill
The amount you pay above the fair market value of tangible assets. It represents intangible value, like customer relationships, brand, a trained workforce, and systems. In an asset sale, it can be written off over 15 years for tax purposes. It's only worth what transfers to you. Personal goodwill, tied to the seller as an individual, doesn't transfer.
Financial
Gross Margin
Gross profit divided by revenue, shown as a percentage. It measures how profitable the core business is, before overhead. Benchmarks vary a lot by industry. A shrinking gross margin over time is a red flag. It can mean pricing pressure, rising costs, or a shift toward lower-margin customers or products.
Legal
Indemnification
A legal obligation, usually the seller's, to pay the other party back for losses caused by a broken promise in the deal. It's what makes reps and warranties actually enforceable. The scope, dollar caps, minimum thresholds, and time limits are all negotiated in the purchase agreement.
Legal
Letter of Intent (LOI)
A mostly non-binding document that lays out the proposed deal terms before the purchase agreement is written. It covers purchase price, deal structure, due diligence period, exclusivity, and key conditions. The exclusivity and confidentiality sections are binding, even though the rest isn't. It sets the framework for everything that follows.
Legal
Lien Search (UCC)
A search of public UCC filings to find any claims other creditors have on the business's assets. It confirms the seller can actually transfer clear ownership. Any liens found need to be resolved at close. Skip this step, and you could inherit a creditor's claim against assets you just bought.
M – R
Financial
Multiple
The number you multiply adjusted earnings by to get the business's value. A 4x multiple on $300K EBITDA equals a $1.2M valuation. Multiples vary by industry, business quality, growth rate, and market conditions. For small business deals, they typically run 2x to 6x. Stronger businesses, with recurring revenue, diverse customers, and solid systems, command higher multiples.
Legal
Non-Compete Agreement
A clause that stops the seller from competing with the business for a set period, typically 2 to 5 years, in a defined area. It protects the goodwill you paid for. Without it, a seller could sell you their customer relationships, then go win those same customers back. This matters most in service businesses and professional practices.
Financial
Normalized Earnings
Earnings adjusted to remove owner-specific items, one-time events, and accounting quirks. The result shows what the business would earn in a typical year under new ownership. This is another name for adjusted EBITDA or adjusted SDE, depending on which metric applies. It's the basis for valuation.
Process
Purchase Price Allocation (PPA)
How the total purchase price gets divided among specific asset categories for tax and accounting purposes. This split, between tangible assets, specific intangibles like customer lists or trade names, and leftover goodwill, has real tax consequences for both sides. It requires your attorney and accountant to coordinate.
Process
Quality of Earnings (QoE) Report
An independent financial analysis, done by a CPA or advisory firm, that verifies a business's adjusted earnings using source documents. It tests every add-back against bank statements, tax returns, and payroll records. The result is a verified adjusted EBITDA, a revenue quality analysis, and a working capital assessment. This is the standard tool for financial due diligence in acquisitions.
Legal
Representations and Warranties (Reps & Warranties)
Factual statements the seller makes in the purchase agreement about the business's condition, like confirming the financials are accurate or that there's no undisclosed litigation. If any of these turn out to be false, it triggers indemnification rights. QoE findings can be the basis for requiring specific promises about earnings accuracy.
Financial
Revenue Concentration
How dependent the business's revenue is on a small number of customers. High concentration, meaning one customer above 25 to 30% of revenue, is a real risk. It typically lowers the valuation multiple and may justify an earnout or escrow. A QoE report's revenue quality section identifies and measures this.
Financial
Recurring Revenue
Revenue that repeats predictably, without having to re-win the customer each time. Subscriptions, annual service contracts, retainers, and maintenance agreements are all examples. It's higher quality than project or one-time revenue, because it lowers risk and makes earnings more predictable. That directly supports a higher valuation multiple.
S – Z
Process
SBA 7(a) Loan
The most common way small business acquisitions get financed. It's a federal government-guaranteed loan, up to $5M, issued by approved private lenders. It typically requires the buyer to put in 10% or more equity, sign a personal guarantee, and hit a DSCR of 1.25x or higher based on QoE-verified earnings. PLP lenders can approve the loan without SBA review, which saves 2 to 4 weeks.
Financial
SDE (Seller's Discretionary Earnings)
An earnings metric used for smaller, owner-operated businesses, typically under $2M in revenue. It adds back all owner compensation, salary, benefits, and perks, to show the total financial benefit to one owner-operator. It produces a higher number than adjusted EBITDA for the same business. Use it when you plan to personally run the business.
Legal
Seller Note
A portion of the purchase price the seller carries as debt, which the buyer repays after close. It's typically 5 to 20% of deal value, at 5 to 8% interest, over 3 to 7 years. It aligns the seller's interests with the buyer's success, since the seller only gets paid if the business performs. SBA standby rules may require payments to be delayed for the first 24 months.
Process
Sell-Side QoE
A Quality of Earnings report the seller commissions before going to market. It lets the seller find and fix issues before buyers do, present a professionally verified earnings figure, and shorten the due diligence timeline. Sellers who do this typically get higher offers and face fewer renegotiations.
Legal
Stock/Entity Sale
A deal where the buyer purchases the legal entity itself, meaning shares in a corporation or membership interests in an LLC, rather than just its assets. The buyer inherits the entity's full history, including liabilities and claims not yet known. Sellers usually prefer this, for tax reasons. Buyers usually prefer asset sales instead, to avoid inheriting liabilities.
Financial
Trailing Twelve Months (TTM)
The most recent 12 months of financial performance, regardless of fiscal year. It's used because it reflects the most current operating conditions. Sellers can cherry-pick the window to include strong months and exclude weak ones. Always compare TTM to prior full fiscal years, to catch the real trend and spot anything unusual.
Financial
Working Capital
Current assets minus current liabilities. It's the short-term cash available to fund day-to-day operations. The purchase agreement usually sets a working capital peg, with an adjustment after close if the actual number is different from the target. A shortfall at close can create immediate cash flow problems for the new owner.
Legal
Working Capital Peg
The level of net working capital the seller agrees to deliver at close. It's typically set as the trailing 12-month average. If actual working capital at close comes in below the peg, the purchase price drops, or the seller covers the gap from escrow. If it comes in above, the price goes up. This stops sellers from draining cash out of the business right before close.
Keep this page bookmarked
Deal vocabulary evolves, and brokers and attorneys sometimes use terms loosely. When a term gets used imprecisely in a negotiation, the buyer who knows the precise definition has a real advantage. This glossary covers the terms that matter most. If you run into something not listed here, your transaction attorney is the right first call.
Ready to put this vocabulary to work? The QoE report is where most of these terms get applied in a real deal context. ClearView QoE's CPA-reviewed reports are written in plain language — every finding explained, every term defined. Get a free consultation to discuss your deal →