M&A Glossary: Business Acquisition Terms Defined

Every term you'll encounter when buying or selling a small business — defined in plain English, with deal examples. Use this alongside the AcquireCalc deal calculator to model your specific transaction.

This glossary is organized around how acquisition terms affect the buyer's model. Some terms change valuation, such as SDE, EBITDA, add-backs, and goodwill. Some change cash at closing, such as seller financing, earnouts, working capital, and assumed debt. Others change legal or operating risk, such as reps and warranties, non-competes, UCC filings, customer concentration, and key man risk. Read the definitions as part of a deal workflow, not as isolated vocabulary.

If you are reviewing a broker listing, start with the valuation and earnings terms. If you are drafting an LOI, move to deal structure and legal documentation. If you are already in diligence, focus on risk terms and the documents that prove whether the seller's claims are supportable.

Valuation & Earnings

• SDE (Seller's Discretionary Earnings) — the primary earnings metric for small business valuation
• EBITDA vs. SDE — when EBITDA is used instead of SDE, and why it matters
• Add-backs — adjustments that normalize a seller's P&L for valuation
• Recasting financial statements — the process of normalizing reported earnings
• Goodwill — the premium paid above the fair market value of tangible assets
• Enterprise value — total acquisition cost including assumed debt
• Working capital — the operating cash left in the business at closing

Deal Structure

• Deal stack — the layered combination of funding sources in an acquisition
• Seller financing — when the seller acts as lender for part of the purchase price
• Seller note — the promissory note documenting seller-financed debt
• Earnout — performance-based deferred payment tied to future results
• Equity rollover — when a seller retains a minority stake post-close
• Management buyout (MBO) — acquisition by the existing management team
• Asset-based lending — financing secured by the business's own assets

Financing

• SBA 7(a) loan — government-guaranteed loan program used in most financed acquisitions
• DSCR (Debt Service Coverage Ratio) — the lender's primary measure of deal affordability
• Promissory note — legal document recording debt terms between buyer and seller

Legal & Documentation

• Representations and warranties — seller's legally binding factual statements about the business
• Non-compete agreement — prevents the seller from opening a competing business after closing
• No-shop clause (exclusivity) — LOI provision that stops the seller from negotiating with other buyers
• Bulk sale escrow — creditor-notification process required in some states for asset purchases
• UCC filing — public lien record buyers check during due diligence

Due Diligence & Risk

• Due diligence — the buyer's investigation period to verify everything about the business
• Customer concentration — the risk of revenue depending on a small number of customers
• Key man risk — the risk that the business depends on one person to function

People & Process

• Business broker — the intermediary who represents sellers in the sale process
• Search fund — a vehicle for finding, funding, and acquiring a single business

How to Use These Terms in a Deal Model

A practical acquisition model starts with earnings, then adjusts for risk and structure. Use the SDE and EBITDA terms to decide which earnings base applies. Use add-backs, recasting, working capital, and customer concentration to decide whether that earnings base is dependable. Then use deal stack, seller financing, seller notes, earnouts, asset-based lending, and SBA debt to determine how much of the price can be financed without weakening the company after closing.

When you encounter a term in a listing or LOI, ask what line of the model it changes. A no-shop clause does not change valuation, but it changes process control. A UCC filing does not change earnings, but it can block clean title to assets. Goodwill does not produce cash by itself, but it affects tax allocation and the amount of debt that is secured mostly by future earnings. This is the lens AcquireCalc uses throughout the glossary.

Documents That Connect to the Glossary

• Tax returns and P&Ls: support SDE, EBITDA, add-backs, recasting, margins, and debt-service capacity.
• Balance sheets and aging reports: support working capital, receivables, inventory, UCC liens, and asset-based lending assumptions.
• LOI and purchase agreement: define seller financing, earnouts, reps and warranties, non-competes, no-shop clauses, escrow, and closing conditions.
• Customer, vendor, lease, and employee files: reveal customer concentration, key man risk, assignability, recurring revenue, and transition risk.

Recommended Reading Path

For first-time buyers, read SDE, add-backs, business broker, seller financing, deal stack, DSCR, and due diligence. Those terms cover the path from a listing price to an underwritten, documented offer. Sellers should focus on SDE, add-backs, goodwill, working capital, seller notes, earnouts, and reps and warranties because those are the terms most likely to affect price, cash at closing, and post-close liability.

How to Turn Definitions Into Decisions

Definitions become useful only when they change an action. When you read a term in this glossary, connect it to one of five decisions: valuation, financing, diligence, legal protection, or transition planning. If a term changes valuation, update the model. If it changes financing, test DSCR and cash at closing. If it changes diligence, request the document that proves the seller's claim.

This approach keeps the glossary from becoming passive reading. Each definition should help a buyer ask a sharper question, challenge an unsupported assumption, or understand why a lawyer, lender, broker, or seller is focused on a particular clause.