Glossary
Glossary
The vocabulary of a small-business acquisition, defined plainly and with the trap each term hides.
- GlossaryAdd-backsAdd-backs are expenses added back to profit when calculating SDE or adjusted EBITDA because a new owner would not incur them. Each needs documentation.
- GlossaryAsset purchase vs. stock purchaseIn an asset purchase the buyer acquires selected assets of a business; in a stock or share purchase the buyer acquires the company itself, including its liabilities.
- GlossaryCustomer concentrationCustomer concentration is the share of a business's revenue that comes from its largest customers. High concentration increases risk and usually lowers value.
- GlossaryDebt service coverage ratio (DSCR)DSCR compares cash flow with debt payments. Learn the 1.25× initial-acquisition requirement and why a calculator estimate differs from lender underwriting.
- GlossaryEarnoutAn earnout makes part of a business's purchase price depend on future performance, such as revenue or key customers staying after the sale.
- GlossaryEBITDAEBITDA is earnings before interest, taxes, depreciation and amortization. Unlike SDE, it does not add back an owner's salary, so it suits businesses run by managers.
- GlossaryLetter of intent (LOI)A letter of intent sets out the main terms of a business purchase before due diligence. It is mostly non-binding, except for clauses such as exclusivity and confidentiality.
- GlossaryQuality of earnings reviewA quality of earnings review is an independent accountant's analysis of a business's reported revenue, expenses and add-backs to confirm how much it really earns.
- GlossarySeller noteA seller note is a loan from the seller to the buyer for part of the purchase price, repaid over time. In SBA deals it may need to be on full standby.
- GlossarySeller's discretionary earnings (SDE)SDE is pre-tax profit plus the owner's salary and benefits, interest, depreciation and legitimate one-time expenses: the cash one owner-operator takes from a business.
- GlossaryWorking capitalWorking capital is the cash a business needs to operate day to day: current assets such as receivables and inventory minus current liabilities such as payables.