Nick Ringling
Founder, ClearView QoE · About Nick
Published:
The language of small business acquisitions is specific, and using terms imprecisely in a deal context — or not understanding them when a seller or broker uses them — creates real risk. These 40 definitions cover the financial, legal, and process vocabulary you'll encounter from first look through close.
A – D
Financial
Add-Back
An expense claimed by the seller as non-recurring, owner-personal, or otherwise not representative of the business under new ownership. Added back to net income when calculating adjusted EBITDA or SDE. Only legitimate when independently documented and verifiable.
Financial
Adjusted EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization, normalized for owner-specific expenses, non-recurring items, and related-party transactions. The primary earnings metric used to value businesses above $2M revenue. Different from the seller's represented adjusted EBITDA, which has not been independently verified.
Legal
Asset Sale
A deal structure where the buyer purchases the business's assets rather than the legal entity. Buyer gets a clean start with no inherited liabilities and a stepped-up tax basis on acquired assets. Most common structure for small business acquisitions. Preferred by buyers; sellers often prefer entity sales for tax reasons.
Financial
Accounts Receivable (AR)
Money owed to the business by customers for goods or services already delivered. AR aging refers to how long outstanding invoices have been unpaid. Quality AR (current, collectible, from creditworthy customers) is a working capital asset; aged or uncollectable AR is not.
Process
Broker Package / CIM
Confidential Information Memorandum — the marketing document prepared by the seller's broker presenting the business's financial history, operations, and growth narrative. Contains the seller's represented financials, which have not been independently verified. Starting point for evaluation, not the basis for pricing.
Financial
Capital Expenditure (CapEx)
Cash spent on long-term assets — equipment, vehicles, technology, leasehold improvements. Maintenance CapEx (replacing worn assets) is a real ongoing cash cost that should be deducted from EBITDA when calculating true earnings. Growth CapEx (expanding capacity) is discretionary.
Financial
Cash Conversion Cycle
The time (in days) between when a business spends cash on operations and when it collects cash from customers. Short cycles (fast-paying customers, low inventory) require less working capital. Long cycles consume more working capital and can create cash flow problems even in profitable businesses.
Financial
COGS (Cost of Goods Sold)
Direct costs to produce or deliver a product or service — materials, direct labor, subcontractors. Revenue minus COGS equals gross profit. Gross profit divided by revenue equals gross margin. A declining gross margin over time signals pricing pressure or rising input costs.
Financial
Debt Service Coverage Ratio (DSCR)
Verified adjusted EBITDA divided by total annual debt service (loan payments). SBA lenders typically require minimum 1.25x DSCR — the business must generate $1.25 in verified earnings for every $1.00 in annual debt service. Below 1.0x means the business can't service its own acquisition debt from operations alone.
Process
Due Diligence
The structured investigation a buyer conducts before finalizing a purchase. Encompasses financial (QoE report, tax returns, bank statements), legal (contracts, liens, litigation), operational (processes, employees, systems), and commercial (customers, competition, market) review. Should always begin with financial verification.
E – L
Financial
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow before financing and non-cash items. The standard earnings metric for businesses with revenue above $2M–$3M. Not the same as cash flow; doesn't reflect CapEx or debt service.
Legal
Earnout
Contingent consideration paid to the seller post-close if the business achieves specified performance targets (usually revenue or EBITDA). Bridges the gap between buyer and seller valuation when there's disagreement about future performance. Protects buyers if QoE findings reveal risk; rewards sellers if their optimism proves correct.
Legal
Escrow Holdback
A portion of the purchase price held in escrow post-close, released only when specific conditions are met (no undisclosed claims arising, representations confirmed). Provides buyer recourse if post-close issues surface that should have been disclosed. Typical duration: 12–24 months.
Legal
Exclusivity Period
A binding LOI provision preventing the seller from soliciting or entertaining other offers for a defined period — typically 30–60 days. Gives the buyer protected time to conduct due diligence. The most reliably binding component of an otherwise non-binding LOI.
Financial
Free Cash Flow (FCF)
Operating cash flow minus capital expenditures. Represents the cash a business actually generates after maintaining its asset base. More relevant than EBITDA for evaluating debt service capacity and true owner returns. EBITDA minus taxes minus CapEx minus debt service equals owner free cash flow.
Financial
Goodwill
The excess of purchase price over the fair market value of tangible assets. Represents intangible value: customer relationships, brand, trained workforce, systems. Amortizable over 15 years in an asset sale for tax purposes. Valuable only to the extent it transfers to a new owner — personal goodwill (tied to the seller individually) does not transfer.
Financial
Gross Margin
Gross profit divided by revenue, expressed as a percentage. Measures the profitability of the core business activity before overhead. Industry benchmarks vary widely. Declining gross margin over time is a red flag signaling pricing pressure, rising costs, or revenue mix shift toward lower-margin products or customers.
Legal
Indemnification
A legal obligation by one party (usually the seller) to compensate the other for losses arising from breaches of representations and warranties. The mechanism that makes reps and warranties legally meaningful. Scope, caps, baskets, and survival periods are all negotiated in the purchase agreement.
Legal
Letter of Intent (LOI)
A non-binding (with exceptions) document setting out proposed deal terms before the purchase agreement is drafted. Establishes purchase price, deal structure, due diligence period, exclusivity, and key conditions. The exclusivity and confidentiality provisions are binding. Sets the framework for all subsequent negotiations.
Legal
Lien Search (UCC)
A search of public records (Uniform Commercial Code filings) to identify any security interests in the business's assets. Ensures the seller has clear title to transfer. Any existing liens must be satisfied at close. Missing this step in an asset sale can result in inheriting a creditor's claim against assets you just purchased.
M – R
Financial
Multiple
The number by which adjusted earnings are multiplied to arrive at enterprise value. A 4x multiple applied to $300K EBITDA = $1.2M valuation. Multiples vary by industry, business quality, growth rate, and market conditions. Typically 2x–6x for small business acquisitions. Higher-quality businesses (recurring revenue, diversified customers, strong systems) command higher multiples.
Legal
Non-Compete Agreement
A contractual provision preventing the seller from competing with the business for a defined period (typically 2–5 years) within a defined geography. Protects the goodwill you purchased. Without it, a seller can sell you their customer relationships and then go re-solicit those same customers. Critical in service businesses and professional practices.
Financial
Normalized Earnings
Earnings that have been adjusted to remove owner-specific items, non-recurring events, and accounting anomalies — producing a representation of what the business would earn in a typical year under new ownership. Synonymous with adjusted EBITDA or adjusted SDE depending on the metric used. The basis for valuation.
Process
Purchase Price Allocation (PPA)
The assignment of the total purchase price to specific asset categories for tax and accounting purposes. How value is allocated between tangible assets, specific intangibles (customer lists, non-competes, trade names), and residual goodwill has significant tax implications for both buyer and seller. Requires coordination between transaction attorney and accountant.
Process
Quality of Earnings (QoE) Report
An independent financial analysis performed by a CPA or transaction advisory firm that verifies a business's adjusted earnings from source documents. Tests each add-back against bank statements, tax returns, and payroll records. Provides independently verified adjusted EBITDA, revenue quality analysis, and working capital assessment. The standard financial due diligence tool for acquisitions.
Legal
Representations and Warranties (Reps & Warranties)
Factual statements made by the seller in the purchase agreement about the condition of the business — that financials are accurate, no undisclosed litigation exists, licenses are current, etc. Breaches of reps and warranties trigger indemnification rights. QoE findings can form the basis for requiring specific representations about earnings accuracy.
Financial
Revenue Concentration
The degree to which revenue is dependent on a small number of customers. High concentration (single customer above 25–30% of revenue) is a material risk that typically reduces the applicable valuation multiple and may support earnout or escrow provisions. Identified and quantified in the revenue quality section of a QoE report.
Financial
Recurring Revenue
Revenue that happens predictably and automatically without re-winning the customer each cycle. Subscriptions, annual service contracts, retainers, and maintenance agreements are examples. Higher-quality than project or one-time revenue because it reduces execution risk and improves earnings predictability. Directly supports higher valuation multiples.
S – Z
Process
SBA 7(a) Loan
The most common financing vehicle for small business acquisitions. A federal government-guaranteed loan (up to $5M) issued by approved private lenders. Typically requires 10%+ equity injection from the buyer, personal guarantee, and DSCR of 1.25x or higher based on QoE-verified earnings. PLP lenders can approve without SBA review, saving 2–4 weeks in timeline.
Financial
SDE (Seller's Discretionary Earnings)
Earnings metric used for smaller, owner-operated businesses (typically under $2M revenue). Adds back all owner compensation — salary, benefits, perks — to show the total financial benefit to a single owner-operator. Produces a higher number than adjusted EBITDA for the same business. Appropriate when the buyer will personally operate the business.
Legal
Seller Note
A portion of the purchase price the seller carries as debt, repaid by the buyer post-close. Typically 5–20% of deal value, at 5–8% interest, over 3–7 years. Aligns seller incentives with buyer success (seller gets paid only if the business performs). SBA standby rules may require payments to be deferred for the first 24 months.
Process
Sell-Side QoE
A Quality of Earnings report commissioned by the seller before going to market. Allows the seller to identify and address issues before buyers find them, present a professionally verified earnings figure, and compress due diligence timelines. Sellers who provide sell-side QoE reports typically receive higher offers and experience fewer renegotiations.
Legal
Stock/Entity Sale
A deal structure where the buyer purchases the legal entity (shares in a corporation or membership interests in an LLC) rather than just its assets. The buyer inherits all of the entity's history, liabilities, and any claims — including those not yet known. Preferred by sellers for tax reasons. Buyers typically prefer asset sales to avoid inherited liabilities.
Financial
Trailing Twelve Months (TTM)
The most recent 12-month period of financial performance, regardless of fiscal year. Used because it reflects the most current operating conditions. Can be cherry-picked by sellers to include strong periods or exclude weak ones. Always compare TTM to prior full fiscal years to identify trend direction and any anomalies in the most recent period.
Financial
Working Capital
Current assets minus current liabilities. The short-term liquidity available to fund day-to-day operations. Typically set by a working capital peg in the purchase agreement, with post-close adjustment if actual working capital at close differs from the target. A working capital shortfall at close can create immediate cash flow problems for new owners.
Legal
Working Capital Peg
The contractually agreed level of net working capital the seller must deliver at close. Typically set at the trailing 12-month average of monthly working capital. If actual working capital at close is below the peg, the purchase price decreases (or seller funds the shortfall from escrow). If above, purchase price increases. Prevents sellers from draining working capital before close.
Keep this page bookmarked
Deal vocabulary evolves, and brokers and attorneys sometimes use terms loosely. When a term is being used imprecisely in a negotiation, the buyer who knows the precise definition has a significant advantage. This glossary covers the 40 terms that matter most — if you encounter 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 →