Glossary

Mergers & Acquisitions Terms

Acquisition

Definition: The process of purchasing all or a significant portion of a company’s ownership or assets to take control of its operations. Acquisitions can involve buying stock, assets, or merging the company into another entity.

Types of Acquisitions:

Asset Purchase: Buyer acquires selected assets, not liabilities.
Stock Purchase: Buyer acquires ownership shares and assumes all liabilities.
Merger: Two companies combine to form one entity.

Why It’s Done:

Expand into new markets or geographies
Gain new customers, products, or technologies
Increase revenue and profitability
Achieve strategic or competitive advantages

Example: A healthcare company acquires a smaller competitor to expand its services in a new region, purchasing the competitor’s stock and assuming control of all operations.

Adjusted EBITDA

Definition: Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a normalized measure of a business’s cash flow that excludes one-time, non-operational, or non-recurring expenses. It’s commonly used in business acquisitions to evaluate a company’s true earning potential.

Why It’s Used:

Provides a clearer picture of ongoing profitability.
Helps buyers and lenders assess the business without distortions from unusual events.
Often used to determine valuation multiples.

Common Adjustments:

Owner’s compensation (if above market rate)
One-time legal or consulting fees
Non-business-related travel or personal expenses
Non-recurring repairs or upgrades

Example: A business reports $500K in EBITDA. After adjusting for a one-time $50K legal settlement and $30K in above-market owner salary, the Adjusted EBITDA is $580K.

Acquisition Loan

Definition: A loan specifically used to finance the purchase of a business. It can come from banks, SBA-backed programs, private lenders, or seller financing.

Common Lenders: SBA 7(a), SBA 504, conventional banks, alternative lenders, and seller-financed loans.

Example: A buyer purchases a $1.5 million manufacturing business using an SBA 7(a) loan for 80% of the purchase price and a $300,000 down payment.

Amortization

Definition: Amortization refers to the process of gradually paying off a loan over a fixed period through scheduled payments that include both principal and interest. This results in a predictable repayment structure where the borrower knows exactly how much they need to pay each period.

Key Features:
- Payments are fixed or variable depending on the loan terms.
- Early payments mostly cover interest, while later payments reduce more principal.
- Common in SBA loans, seller financing, and bank loans.

Example (SBA 7(a) Loan Amortization Schedule): A buyer secures an SBA 7(a) loan of $1M at 7% interest over 10 years.

Year

Payment

Principal Paid

Interest Paid

Remaining Balance

$11,610

$4,943

$6,667

$955,057

$11,610

$7,468

$4,142

$651,039

$11,610

Example (Seller Financing with Amortization): A seller agrees to finance $500K at 6% interest over 5 years. The buyer pays $9,667 per month, and by year 3, the principal balance drops to $226K.

Asset Purchase Agreement

Definition: A legal contract used in a business sale where the buyer agrees to purchase specific assets of the business, rather than acquiring ownership of the company itself. This agreement outlines the terms, conditions, and structure of the transaction.

Key Features:

Identifies which assets are included (e.g., equipment, inventory, customer lists).
Often excludes liabilities unless specifically assumed.
Specifies purchase price, payment terms, and any seller obligations post-closing.

Why It’s Used:

Allows buyers to avoid unknown liabilities or debts.
Provides flexibility in structuring the deal for tax or operational reasons.
Common in small business and franchise sales.

Example: A buyer enters into an asset purchase agreement to acquire the equipment, leasehold rights, and goodwill of a coffee shop, while leaving behind any debts or legal obligations owed by the seller’s corporation.

Assets

Definition: Assets are anything of value owned by a business that can be used to generate revenue. In the context of a business acquisition, assets may be tangible or intangible and are often the focus of an asset purchase transaction.

Types of Assets:

Tangible: Equipment, inventory, furniture, real estate
Intangible: Trademarks, customer lists, goodwill, intellectual property
Financial: Cash, accounts receivable, prepaid expenses

Why They Matter:

Help determine the purchase price and structure of a deal
Can serve as collateral for financing
Influence tax treatment depending on how they are categorized

Example: In a salon acquisition, the assets may include hair styling chairs, product inventory, client database, and the business’s brand name, but not the seller’s liabilities or legal entity.

Asset-Based Lending (ABL)

Definition: A financing method where a loan is secured by business assets, such as inventory, equipment, or accounts receivable, rather than cash flow or credit history.

Key Features:

Collateral-backed loan, reducing lender risk.
Higher loan amounts based on asset value
Often used by businesses with low credit or limited cash flow.

Example: A buyer wants to purchase a manufacturing business for $2M but lacks cash for a down payment. Instead, they secure an $800K asset-based loan using $500K in receivables and $300K in equipment.

Asset Sale

Definition: A transaction where the buyer purchases specific assets (e.g., equipment, inventory, customer lists) rather than acquiring the company’s stock or ownership interests.

Key Considerations:

Buyer avoids taking on seller’s liabilities.
Tax treatment is often better for buyers (assets can be depreciated).
Sellers may face higher taxes since goodwill is taxed as “ordinary income”.

Example: A buyer purchases a bakery’s equipment, recipes, and brand name, but not its outstanding debts or liabilities.

Balance Sheet

Definition: A financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows what the business owns (assets), what it owes (liabilities), and the owner’s equity.

Key Components:

Assets: What the company owns (e.g., cash, inventory, equipment)
Liabilities: What the company owes (e.g., loans, accounts payable)
Equity: The owner’s interest in the business (Assets - Liabilities)

Why It’s Important in M&A:

Helps buyers assess the financial health of the business
Used to calculate working capital adjustments
Critical for lenders reviewing business loan applications

Example: A buyer reviews the balance sheet of a manufacturing company and sees $2M in assets, $1.2M in liabilities, and $800K in equity, helping evaluate the company’s solvency and deal structure.

Balloon Payment

Definition: A large final payment due at the end of a loan term, commonly used in seller financing.

Why It’s Used: Keeps monthly payments lower for the buyer while allowing the seller to receive most of the payment later.

Example: A $500,000 seller-financed deal requires the buyer to pay $3,000 per month for five years, with a final $250,000 balloon payment due at the end.

Basket

Definition: In M&A transactions, a basket is a threshold amount that must be met before one party (usually the buyer) can make a claim for indemnification against the other party (usually the seller). It protects the seller from small, minor claims.

Key Features:

Acts like a deductible in insurance — the buyer absorbs losses up to the basket amount.
Two common types:
Deductible Basket: Buyer can only recover losses that exceed the basket amount.
Tipping Basket: Once the basket is exceeded, the buyer can recover the full amount of all claims (not just the amount over the threshold).
Often paired with a cap (maximum liability for seller).

Why It’s Used:

Prevents the seller from being liable for immaterial issues.
Encourages resolution of minor problems without legal claims.

Example: A purchase agreement includes a $50,000 deductible basket. If the buyer discovers post-closing issues totaling $40,000, no claim is made. If the total losses reach $60,000, the buyer may recover only $10,000.

Break-up-fee

Definition: A financial penalty paid by one party (typically the seller) to the other party (typically the buyer) if the transaction is terminated under certain conditions. It compensates the buyer for time, effort, and expenses incurred during due diligence and negotiation.

Key Features:

Common in competitive or high-value deals
Usually triggered if the seller accepts a better offer or backs out without cause
Acts as a deterrent against last-minute deal changes

Why It’s Used:

Protects buyers from wasted time and costs
Encourages both parties to close the deal once agreed

Example: A buyer spends $100,000 on legal and financial due diligence for a $5M acquisition. The seller backs out to accept a higher offer. A $150,000 break-up fee is paid to the buyer per the agreement.

Bridge Loan

Definition: A short-term loan used to finance a business purchase while waiting for permanent financing.

Common Situations:

The buyer needs to close quickly but is still securing an SBA loan.
The buyer is waiting for a property sale to fund the purchase.

Example: A private lender provides a six-month bridge loan so the buyer can acquire a printing company, later refinanced with an SBA 7(a) loan.

Business Valuation

Definition: The process of determining the economic value of a business, typically used in preparation for a sale, merger, or acquisition. Valuation helps buyers and sellers agree on a fair price based on financial performance, assets, market conditions, and future potential.

Common Valuation Methods:

EBITDA Multiple: Applies a multiplier to earnings before interest, taxes, depreciation, and amortization
Discounted Cash Flow (DCF): Values the business based on projected future cash flow
Asset-Based Valuation: Calculates value based on the company’s assets minus liabilities
Comparable Sales: Compares the business to recent sales of similar companies

Why It’s Important:

Sets expectations for purchase price
Helps secure financing (e.g., SBA loans)
Useful for tax planning and negotiations

Example: A business with $500K in EBITDA is valued at $2M using a 4x EBITDA multiple, based on industry norms and recent comparable sales.

Burnout Provision

Definition: A clause in seller financing agreements that reduces the buyer’s payment obligations if the business underperforms after the sale. This helps buyers mitigate risk if revenue or profits decline.

Key Features:

Tied to business performance (e.g., revenue or EBITDA).
Protects buyers from overpaying if the business declines post-sale.
Can be structured as a partial loan forgiveness or payment reduction.

Example: A buyer agrees to pay the seller $500K over five years but negotiates a burnout provision that reduces payments by 20% if revenue drops below $1M per year.

Buyout

Definition: The acquisition of a business by an individual, group, or financial institution, often leading to a change in control.

Types of Buyouts:

Leveraged Buyout (LBO): Purchase funded mostly with borrowed money, repaid using business cash flow.
Management Buyout (MBO): Existing managers purchase the company from the owner.
Equity Buyout: Private equity firms or investors acquire a controlling stake.

- Example: A private equity firm buys 80% of a logistics company for $10M, using $2M in cash and $8M in debt financing.

Cap

Definition: A cap is the maximum amount a party (typically the seller) can be held liable for under an indemnification clause in a purchase agreement. It limits the seller’s financial exposure after the deal closes.

Key Features:

Usually expressed as a percentage of the purchase price (e.g., 10%-20%)
Often applies only to certain types of claims (e.g., breaches of reps & warranties)
Can exclude fraud, willful misconduct, or fundamental reps (which may be uncapped)

Why It’s Used:

Provides certainty and protection for sellers
Helps buyers assess overall deal risk and liability exposure

Example: In a $3M business sale, the agreement includes a 15% cap. If the buyer later discovers a $600K issue, the seller’s liability is limited to $450K.

Cash-Free, Debt Free

Definition: A common deal structure where the buyer acquires the business without taking on its existing cash or debt. The purchase price is based on the business's enterprise value, assuming that the seller retains all cash and pays off all debt before or at closing.

Key Features:

The seller keeps any cash in the business accounts.
The seller is responsible for repaying all loans, credit lines, and other debt obligations.
The buyer typically expects a normalized level of working capital to remain in the business.

Why It’s Used:

Simplifies valuation by focusing on operational value
Avoids complications from assuming existing financial obligations
Ensures a clean break from prior liabilities

Example: A buyer agrees to purchase a company for $2M on a cash-free, debt-free basis. The seller uses company funds to pay off a $300K line of credit and withdraws $100K in excess cash before closing.

Cash Flow Loan

Definition: A loan based on a company’s expected revenue and profits rather than its tangible assets.

Best For: Service-based businesses with strong revenue but limited assets (e.g., law firms, consulting firms).

Example: A digital marketing agency with $2M in annual revenue gets a $500,000 cash flow loan to acquire a competitor.

Closing

Definition: The final stage in a business sale where all legal documents are signed, funds are transferred, and ownership officially changes hands. Closing marks the legal completion of the transaction.

Key Features:

Signing of the purchase agreement and related documents
Payment of the purchase price (or initial installment)
Transfer of ownership, assets, and operational control
May occur in person or virtually via e-signature and wire transfer

Why It’s Important:

Finalizes all negotiated terms and obligations
Triggers post-closing obligations like holdbacks, earnouts, or seller transition services

Example: After completing due diligence and securing SBA financing, the buyer and seller sign closing documents and the buyer wires $1.2M. The seller hands over business keys, logins, and customer lists the same day.

Closing Conditions

Definition: Specific requirements that must be met by the buyer, seller, or both parties before a business sale can officially close. These conditions are typically outlined in the purchase agreement and ensure that all aspects of the deal are in order.

Common Examples:

Buyer obtains financing or SBA loan approval
All required third-party consents are received (e.g., landlord or franchisor approval)
No material adverse changes to the business
Accuracy of representations and warranties at closing
Completion of due diligence

Why It’s Important:

Protects both parties from closing under unfavorable or incomplete circumstances
Ensures critical deal components are addressed before funds and ownership change hands

Example: A buyer agrees to acquire a restaurant chain, but the deal is contingent on receiving landlord consent to assign the leases. The closing cannot proceed until those consents are obtained.

Collateral

Definition: An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender has the right to seize and sell the collateral to recover the outstanding debt. In business acquisitions, collateral is often required for SBA loans, bank loans, and seller financing.

Common Types of Collateral:

Business assets (e.g., equipment, inventory, receivables)
Real estate
Personal assets (in some cases)
Ownership interests in the business

Why It’s Used:

Reduces risk for lenders and sellers
Can improve loan terms or approval chances
Required for most secured financing options

Example: A buyer obtains an $800K SBA loan to acquire a logistics business. As collateral, the buyer pledges the business’s trucks, warehouse inventory, and personal residence.

Convertible Note

Definition: A form of seller financing where the debt converts into equity if not repaid within a set period.

Why It’s Used:

Helps buyers secure a low-interest loan.
Sellers gain partial ownership if the buyer defaults.

Example: A seller finances $300,000 at 5% interest for 5 years, but if the buyer fails to repay, the seller takes a 25% equity stake in the business instead.

Conventional Loan

Definition: A traditional business loan provided by a bank or credit union without government backing (such as SBA support). These loans are based on the borrower’s creditworthiness, business performance, and available collateral.

Key Features:

Typically requires a larger down payment (20%-30%)
Shorter repayment terms than SBA loans (often 3-7 years)
Competitive interest rates for qualified borrowers
Less paperwork than SBA loans, but stricter underwriting

Why It’s Used:

Faster processing than SBA loans
Ideal for well-established buyers with strong credit and assets
Can be used for acquisitions, equipment, or working capital

Example: A buyer secures a $500K conventional loan from a local bank to help acquire a retail business, putting down $200K and using the business’s assets as collateral.

Confidentiality Agreement

Definition: A legally binding contract in which one or both parties agree not to disclose or misuse sensitive information shared during the business sale process. Also known as a Non-Disclosure Agreement (NDA).

Key Features:

Protects financial statements, customer data, trade secrets, and deal terms
Can be one-way (only one party discloses info) or mutual (both parties share)
Often signed before the seller shares confidential details with a potential buyer

Why It’s Used:

Prevents competitors, employees, or vendors from learning about a potential sale
Encourages open and honest communication during due diligence

Example: Before reviewing the financials of a digital marketing agency, the buyer signs a confidentiality agreement agreeing not to share or use the information for any purpose other than evaluating the acquisition.

Consideration

Definition: The total value given by the buyer to the seller in exchange for the business. It can include cash, promissory notes, stock, earnouts, assumption of debt, or a combination of these elements.

Key Features:

May be paid at closing or over time (e.g., seller financing or deferred payments)
Can include non-cash components like equity or performance-based earnouts
Must be clearly defined in the purchase agreement

Why It’s Important:

Forms the basis of the transaction and is essential for a legally binding contract
Impacts tax treatment and deal structure for both parties

Example: A buyer agrees to pay $1.5M in total consideration: $1M in cash at closing, a $250K seller note, and a $250K earnout based on future revenue performance.

Covenants

Definition: Covenants are promises or obligations made by one or both parties in a purchase agreement. They outline specific actions the buyer or seller must (or must not) take before or after closing.

Types of Covenants:

Affirmative Covenants: Require a party to do something (e.g., operate the business normally until closing)
Negative Covenants: Prevent a party from doing something (e.g., taking on new debt or selling assets before closing)
Post-Closing Covenants: Cover obligations after the deal closes (e.g., transition support, non-compete agreements)

Why They’re Important:

Protect the integrity of the business before transfer
Ensure a smooth transition and reduce post-closing risk
Help enforce negotiated deal terms

Example: The seller agrees in the purchase agreement not to hire any employees away from the business for two years after closing and to provide 30 days of post-sale transition assistance.

Credit Enhancement

Definition: Strategies or tools used to improve a borrower’s credit profile and increase the likelihood of loan approval. In business acquisitions, credit enhancements help reduce lender risk and make financing more accessible.

Common Types:

Personal guarantees from business owners or third parties
Additional collateral (e.g., real estate, savings accounts)
Subordination agreements from seller-financiers
SBA loan guarantees

Why It’s Used:

Helps buyers with limited credit history or collateral qualify for loans
Reduces risk for lenders and can result in better loan terms
Often required for SBA loans or deals involving seller financing

Example: A buyer with minimal assets obtains a $700K SBA loan by offering a personal guarantee and pledging their home as additional collateral, satisfying the lender’s credit enhancement requirements.

Deal Structure

Definition: The framework that outlines how a business acquisition will be completed, including payment terms, financing sources, tax treatment, and whether the deal is an asset or stock sale.

Key Components:

Type of sale (asset vs. stock)
Purchase price and form of consideration (cash, financing, earnout, etc.)
Allocation of liabilities and assets
Timeline and closing conditions

Why It’s Important:

Determines legal, tax, and financial implications for both parties
Affects lender approval and due diligence scope
Helps align expectations and responsibilities post-closing

Example: A buyer agrees to purchase a company in an asset sale for $1.5M — $1M paid through an SBA loan, $250K in seller financing, and $250K as an earnout tied to future revenue.

Debt Financing

Definition: The process of raising capital by borrowing funds to acquire a business. The buyer agrees to repay the loan over time with interest, typically using business cash flow to service the debt.

Common Sources:

SBA loans (7(a) or 504)
Bank or credit union loans
Seller financing (promissory note)
Private or alternative lenders

Why It’s Used:

Allows buyers to acquire businesses with limited upfront capital
Preserves ownership equity
Can be combined with equity financing or earnouts

Example: A buyer acquires a cleaning services company for $800K using a $600K SBA loan, $100K in seller financing, and $100K in cash as a down payment.

Debt Service Coverage Ratio (DSCR)

Definition: A ratio used by lenders to measure a business’s ability to repay debt. Formula:

DSCR = Debt Payments/Net Operating Income

Lender Requirements: SBA typically requires 1.25 DSCR, meaning a business must generate $1.25 in income for every $1 in debt payments.

Example: A buyer purchases a plumbing business that generates $200,000 in cash flow and has $160,000 in loan payments, giving a DSCR of 1.25 (approval threshold met).

Deferred Payment

Definition: A portion of the purchase price paid after closing, often in installments.

Why It’s Used:

Reduces upfront capital required from the buyer.
Ensures seller receives full value over time.

Example: The buyer pays $700,000 upfront and $300,000 over five years with interest.

Down Payment

Definition: The upfront cash portion paid by the buyer toward the total purchase price of a business. The remaining balance is usually financed through loans, seller notes, or other payment structures.

Key Features:

Typically ranges from 10% to 30% of the purchase price
Required by most lenders, including SBA and conventional banks
Shows the buyer’s commitment and financial capacity

Why It’s Important:

Reduces lender risk and improves loan approval chances
Affects overall deal structure and financing terms
Impacts buyer’s return on investment

Example: A buyer agrees to purchase a dental practice for $1M and puts down $200K in cash as a 20% down payment, financing the remaining $800K with an SBA 7(a) loan.

Due Diligence

Definition: The process of investigating and verifying the details of a business before completing an acquisition. It helps the buyer assess risks, validate financial performance, and confirm that the business is as represented.

Key Areas Reviewed:

Financials (tax returns, P&Ls, balance sheets)
Legal (contracts, leases, licenses, litigation)
Operations (employees, systems, vendors)
Customers (top clients, retention, satisfaction)
Compliance (permits, regulations, HR practices)

Why It’s Important:

Uncovers hidden risks or liabilities
Informs purchase price and deal structure
Allows buyer to negotiate protections (e.g., holdbacks or price adjustments)

Example: Before closing on a restaurant acquisition, the buyer reviews 3 years of tax returns, verifies health permits, interviews the staff, and confirms that key vendors are under contract.

Due on Sale Clause

Definition: A contract provision—usually found in loan or lease agreements—that requires full repayment of a loan or termination of an agreement if the business is sold or ownership changes.

Key Features:

Common in commercial loan documents and equipment leases
May require lender or landlord consent before transferring the business
Can impact deal timing and structure if not addressed early

Why It’s Important:

Failure to address it may trigger loan default or lease termination
Often requires negotiation or formal consent before closing
Should be identified during due diligence

Example: A seller has a $400K loan with a due on sale clause. Before the business can be sold, the buyer must either pay off the loan at closing or get lender approval to assume or refinance it.

Earnout

Definition: A performance-based payment structure where the seller gets additional payments if the business meets certain financial targets after closing.

Common Structure:

Base Purchase Price: $1M upfront.
Earnout: An extra $500,000 if revenue reaches $2M within 2 years.

Example: A buyer acquires a software company with a base price of $2M plus an earnout of $1M if the company grows by 20% within three years.

EBITDA

Definition: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a commonly used measure of a business’s operating performance and cash flow, excluding non-operating and non-cash expenses.

Key Features:

Focuses on core business profitability
Excludes financing costs and accounting choices (like depreciation)
Often used in business valuations and loan underwriting

Why It’s Used:

Provides a clearer view of operating income
Standardizes performance for comparison across businesses
Basis for valuation multiples (e.g., 4x EBITDA)

Example: A business has $1.2M in revenue, $300K in operating expenses, $50K in depreciation, and $20K in interest payments. EBITDA is $900K ($1.2M - $300K).

Enterprise Value (EV)

Definition: A measure of a company’s total value, often used in valuations to assess what it would cost to acquire the entire business, including debt. EV includes equity, debt, and excludes cash.

Formula:
EV = Equity Value + Total Debt − Cash

Key Features:

Provides a comprehensive view of a company’s value
Accounts for the buyer assuming the seller’s debt
Used in calculating valuation multiples (e.g., EV/EBITDA)

Why It’s Used:

More accurate than just looking at the equity price alone
Useful for comparing companies with different capital structures

Example: A business is valued at $3M with $500K in debt and $200K in cash. Its Enterprise Value is $3.3M ($3M + $500K − $200K).

Escrow

Definition: A secure, third-party account used to hold funds or documents during a transaction until all conditions of the deal are met. In business acquisitions, escrow is commonly used to protect both the buyer and seller.

Key Uses:

Hold part of the purchase price to cover potential post-closing claims
Ensure funds are released only when all deal terms are satisfied
Facilitate earnest money deposits or regulatory filings

Why It’s Important:

Reduces risk for both parties during closing
Ensures compliance with agreed-upon conditions
Often administered by an escrow agent, attorney, or title company

Example: In a $2M business sale, $200K is placed in escrow to cover any potential indemnification claims. The funds are held for 12 months post-closing and then released to the seller if no claims are made.

Escrow Holdback

Definition: A portion of the purchase price that is withheld in escrow for a set period after closing to cover potential claims, liabilities, or adjustments. If no issues arise, the funds are released to the seller.

Key Features:

Usually held for 6 to 24 months post-closing
Protects the buyer against breaches of representations and warranties
Often tied to indemnification obligations

Why It’s Used:

Provides a financial buffer for the buyer in case of post-sale surprises
Encourages the seller to disclose all material issues
Common in deals involving closely held businesses

Example: In a $1.5M deal, $150K is held back in escrow for 12 months. If a tax liability surfaces during that time, the buyer can make a claim against the holdback to cover the cost.

Equity Financing

Definition: A method of raising capital by selling ownership (equity) in a business instead of taking on debt. This can involve private investors, venture capital, private equity firms, or selling shares.

Key Features:
- No repayment obligations (unlike loans).
- Investors share profits and may influence business decisions.
- Common in high-growth businesses or acquisitions where debt financing isn't ideal.

Example: A buyer wants to acquire a tech startup for $5M but doesn’t want debt. Instead, they sell 40% of the company to investors for $5M in exchange for equity.

Exclusivity

Definition: A provision in a Letter of Intent (LOI) or purchase agreement that prevents the seller from negotiating with other potential buyers for a defined period. It allows the buyer to conduct due diligence without competition.

Key Features:

Also known as a “no-shop” clause
Typically lasts 30 to 90 days
May include penalties for breach or allow for termination if violated

Why It’s Used:

Gives the buyer confidence to invest time and money in due diligence
Reduces the risk of being outbid or having the deal disrupted
Helps move the transaction forward in good faith

Example: A buyer signs an LOI with a 60-day exclusivity period, during which the seller agrees not to entertain other offers while the buyer secures financing and completes due diligence.

Fair Market Value (FMV)

Definition: The price at which a business, asset, or service would sell between a willing buyer and seller, both having reasonable knowledge of the relevant facts and neither being under compulsion to buy or sell.

Key Features:

Based on market conditions and comparable sales
Used in valuations, tax planning, and purchase price allocations
Different from book value or liquidation value

Why It’s Important:

Sets a baseline for negotiation in business sales
Determines tax treatment for asset allocation
Often required in SBA lending and appraisals

Example: A seller believes their business is worth $1.5M, but based on recent comparable sales, industry multiples, and cash flow, the fair market value is determined to be $1.2M.

Financial Statements

Definition: Formal records that show the financial performance and position of a business. They are critical during the due diligence process and are used by buyers, lenders, and advisors to evaluate the health and value of the business.

Key Types:

Profit & Loss Statement (P&L): Shows revenue, expenses, and net income over a period
Balance Sheet: Lists assets, liabilities, and equity at a specific point in time
Cash Flow Statement: Tracks how cash enters and exits the business
Tax Returns: Official records of income reported to the IRS

Why They’re Important:

Help validate revenue, expenses, and profitability
Required for securing financing (e.g., SBA loans)
Identify trends, risks, and opportunities

Example: A buyer reviews three years of P&Ls and tax returns to confirm that a retail business has consistently generated $300K in annual net profit.

Fixed vs. Variable Interest Rate

Definition: Loans can have either a fixed interest rate (remains the same) or a variable rate (fluctuates over time).

Best For:

Fixed Rates: SBA loans (10 years, 6%-8%).
Variable Rates: Private lender loans (fluctuate with market conditions).

Example: A buyer chooses an SBA 7(a) loan at a fixed 6.5% interest over a variable rate starting at 5% but subject to change.

Forward Looking Statements

Definition: Projections or estimates about a company’s future performance, including expected revenue, growth, expenses, or profitability. These statements are based on assumptions and are not guarantees of future results.

Key Features:

Often included in offering memorandums, pitch decks, or financial models
Typically labeled with disclaimers noting that actual results may differ
Can be optimistic and based on best-case scenarios

Why They’re Important:

Help buyers evaluate growth potential and future earnings
Used to justify valuation, earnouts, or investment decisions
Must be assessed carefully during due diligence

Example: A seller presents a 3-year financial projection showing 20% annual revenue growth based on the launch of a new product line — a forward-looking statement that the buyer must evaluate for realism.

Funding Contingency

Definition: A clause in a purchase agreement stating that the deal is contingent on the buyer securing financing. If financing is not obtained, the buyer can back out without penalties.

Key Features:
- Protects buyers from being forced to close without funding.
- Common in SBA, bank, and private lender-financed deals.
- Typically includes a deadline for securing financing.

Example: A buyer agrees to purchase a restaurant for $1.2M but includes a funding contingency requiring SBA loan approval within 60 days. If the loan is denied, they can cancel the deal without losing their deposit.

Goodwill

Definition: The intangible value of a business that exceeds the fair market value of its identifiable assets and liabilities. Goodwill reflects elements like brand reputation, customer loyalty, trained employees, and business relationships.

Key Features:

Not a physical asset, but still part of the purchase price
Common in asset sales where buyers pay more than the book value
Typically amortized over 15 years for tax purposes in U.S. acquisitions

Why It’s Important:

Explains the premium a buyer pays beyond tangible assets
Influences valuation and financing (e.g., SBA loans often fund goodwill)
Must be carefully documented and allocated in asset purchases

Example: A buyer purchases a service business for $1M. The value of its assets is $600K. The remaining $400K is attributed to goodwill, covering the company’s strong reputation and loyal customer base.

Goodwill Financing

Definition: A loan used to finance the intangible value of a business (brand reputation, customer base, etc.)

Key Features:

Covers the premium being paid above tangible asset value.
Common in SBA 7(a) loans for business acquisitions.
Lenders focus on cash flow and business performance rather than collateral.
Lenders often require strong cash flow or seller financing to secure the loan.
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Example: An SBA 7(a) loan funds $250,000 to cover goodwill in the purchase of a chiropractic practice.

Gross Revenue

Definition: The total income generated by a business from its operations before any expenses are deducted. It includes sales of products or services and is often used as a top-line measure of business performance.

Key Features:

Does not account for costs like labor, materials, rent, or taxes
Often used to analyze trends and set benchmarks
Important for determining valuation multiples (e.g., revenue-based valuation)

Why It’s Important:

Shows overall business activity and market reach
Lenders and buyers use it to assess growth and potential
Can be compared across periods or industries for benchmarking

Example: A landscaping company reports $1.2M in gross revenue for the year, even though its net profit after expenses is $250K.

Guarantor

Definition: A person or entity that agrees to be responsible for loan repayment if the borrower defaults.

Key Features:

Provides additional security for lenders.
Can be a business owner, investor, or third party.
SBA 7(a) loans require personal guarantees from owners with 20%+ ownership.
Guarantors are often required in SBA loans, seller financing, and bank loans to reduce lender risk.

Example: A buyer secures a $1M SBA loan to purchase a medical practice, but the bank requires their spouse to sign as a guarantor to ensure repayment if the business struggles.

Guarantor Fee (SBA Loan)

Definition: A fee charged by the Small Business Administration (SBA) to guarantee a portion of a loan made by a bank or lender. This fee is typically passed on to the borrower and is based on the guaranteed portion of the loan.

Key Features:

One-time fee paid at loan origination
Fee amount depends on loan size and term
Can often be financed as part of the loan

Why It’s Important:

Helps reduce lender risk, making SBA loans more accessible
Impacts total cost of borrowing
Must be factored into closing costs and deal structure

Example: A buyer obtains a $1M SBA 7(a) loan, with 75% guaranteed by the SBA. The SBA charges a guaranty fee of 3.5% on the guaranteed portion ($750K), resulting in a $26,250 fee added to the loan.

Holdback

Definition: A portion of seller financing that is withheld (held back) until specific conditions are met after closing. This protects the buyer by ensuring the business meets agreed-upon performance targets or that the seller fulfills certain obligations.

Key Features:

Protects buyers from undisclosed liabilities.
Ensures seller cooperation post-sale (e.g., transition assistance, financial accuracy).
Often tied to revenue, profitability, or other business metrics.

Example: A buyer agrees to purchase a retail store for $2M, with $400K in seller financing. However, $100K is held back for one year to ensure customer retention stays above 85%. If the business underperforms, the holdback amount is reduced.

Indemnification

Definition: A contractual obligation in which one party agrees to compensate the other for certain losses, damages, or legal liabilities that arise after the transaction—usually related to breaches of representations, warranties, or covenants.

Key Features:

Often includes time limits (survival periods) and financial limits (caps and baskets)
May be backed by an escrow or holdback to secure payment
Covers issues like undisclosed liabilities, tax problems, or legal disputes

Why It’s Important:

Protects the buyer from hidden risks
Encourages full disclosure by the seller
Critical part of M&A risk allocation and negotiation

Example: After buying a business, the buyer discovers the seller failed to disclose a pending lawsuit. Under the indemnification clause, the seller must cover legal costs and any resulting damages.

Installment Sale

Definition: A deal structure where the buyer pays the purchase price over time through scheduled payments, rather than paying the full amount upfront. It is a common form of seller financing.

Key Features:

Payments may be monthly, quarterly, or annually
May include interest, similar to a loan
Typically documented with a promissory note
Often used when SBA or bank financing is limited

Why It’s Used:

Reduces the buyer’s need for upfront capital
Allows the seller to receive income over time, which may spread out tax liability
Helps facilitate deals when external financing is unavailable or limited

Example: A buyer agrees to purchase a plumbing business for $750K. Instead of paying in full at closing, the buyer pays $150K upfront and $10K per month for 5 years, with 6% interest on the unpaid balance.

Integration

Definition: The process of combining the operations, systems, and teams of the acquired business with those of the buyer after closing. Integration is critical for realizing the expected benefits and synergies of the acquisition.

Key Areas of Focus:

Operational systems (accounting, CRM, POS, etc.)
Employee onboarding and training
Branding, marketing, and customer communications
Cultural alignment and management structure

Why It’s Important:

Impacts how quickly the buyer can take control and generate value
Poor integration can lead to employee turnover, customer loss, or financial underperformance
Often requires a detailed post-closing transition plan

Example: After acquiring a small chain of fitness studios, the buyer integrates scheduling software, rebrands locations, and trains staff on new membership policies within the first 60 days post-closing.

Intellectual Property (IP)

Definition: Intangible assets that are legally protected and provide a competitive advantage to a business. In an acquisition, IP can be a major component of the business’s value and must be clearly identified and transferred.

Types of IP:

Trademarks (business name, logo, branding)
Copyrights (content, software, marketing materials)
Patents (inventions or proprietary processes)
Trade secrets (formulas, client lists, processes)

Why It’s Important:

May represent a significant portion of a business’s value
Must be properly transferred and recorded in the sale
Requires due diligence to confirm ownership and legal protection

Example: A buyer acquiring a software company ensures that all copyrights to the codebase and trademarks for the brand are legally transferred as part of the asset purchase agreement.

Intercreditor Agreement

Definition: A legal agreement between two or more lenders that outlines the rights, priorities, and obligations of each party in relation to a borrower’s debt. It is commonly used in deals involving multiple layers of financing, such as SBA loans and seller notes.

Key Features:

Defines which lender gets repaid first in the event of default
Often required when both a senior lender (e.g., SBA) and a junior lender (e.g., seller) are involved
May restrict junior lenders from enforcing collection rights until senior debt is repaid

Why It’s Important:

Reduces conflict between lenders
Protects the senior lender’s position
Facilitates deal approval and funding

Example: In a $2M acquisition, a buyer uses an SBA loan for $1.5M and a $500K seller note. The SBA lender requires an intercreditor agreement to ensure they are repaid in full before the seller receives any payments in the event of a default.

Joint Venture

Definition: A business arrangement in which two or more parties collaborate to operate a business or pursue a specific project, sharing profits, losses, resources, and decision-making authority.

Key Features:

Can be structured as a separate legal entity or a contractual partnership
Parties typically contribute capital, expertise, or assets
Often used for strategic alliances, market expansion, or testing new ventures

Why It’s Used:

Allows companies to combine strengths without a full merger or acquisition
Reduces risk by sharing costs and responsibilities
Useful for entering new markets or industries

Example: A U.S.-based logistics company forms a joint venture with a European firm to expand services into the EU, with both parties contributing capital and staff to operate the new entity.

Junior Debt

Definition: A type of financing that is subordinate to senior debt, meaning it is repaid after senior loans in the event of a default or liquidation. Junior debt carries more risk for the lender but often comes with higher interest rates.

Key Features:

Also called subordinated debt
Typically used to fill financing gaps in acquisitions
Often includes seller financing, mezzanine loans, or investor notes
May be subject to intercreditor or subordination agreements

Why It’s Used:

Enables buyers to complete deals with less equity
Provides flexible financing when senior lenders won’t cover the full amount
Common in leveraged buyouts and layered deal structures

Example: A buyer uses a $700K bank loan and a $300K seller-financed note to purchase a business for $1M. The seller note is considered junior debt and is repaid only after the bank loan is satisfied.

Key Employees

Definition: Individuals whose roles, experience, or relationships are critical to the success of a business. In a sale, retaining key employees can be essential for ensuring continuity, customer retention, and operational stability.

Key Features:

Often include managers, lead technicians, salespeople, or subject matter experts
May be offered retention bonuses or employment agreements during the sale
Can influence buyer confidence and business valuation

Why They’re Important:

Help maintain day-to-day operations during transition
Carry institutional knowledge and customer relationships
May be needed to support post-closing performance (especially in earnouts)

Example: In the sale of a medical clinic, the lead nurse practitioner is considered a key employee. The buyer includes a retention agreement to ensure she stays on board for at least 12 months post-closing.

Key Person Insurance

Definition: A life or disability insurance policy taken out by a business on a key employee or owner whose loss would have a significant negative impact on the company. In M&A, it can protect against unexpected disruptions during or after the transition.

Key Features:

The business is the policy owner and beneficiary
Can cover founders, executives, or top-performing employees
Payout can be used to cover losses, hire replacements, or stabilize operations

Why It’s Used:

Protects business value and continuity in case of death or disability
Reassures buyers and lenders about the business’s stability
May be required by lenders as part of loan terms (especially SBA loans)

Example: A buyer acquiring a marketing firm purchases key person insurance on the founder, who plays a major role in client relationships. The policy provides a $500K payout if the founder unexpectedly passes away during the transition period.

Key Performance Indicators (KPI)

Definition: Quantifiable metrics used to evaluate the performance and success of a business. KPIs help both buyers and sellers understand how well the business is operating and identify areas of strength or concern.

Common KPIs in M&A:

Revenue growth rate
Gross and net profit margins
Customer acquisition cost (CAC)
Customer retention or churn rate
Average order value or recurring revenue

Why They’re Important:

Provide insight into financial health and operational efficiency
Support valuation and deal justification
Help set performance targets for earnouts or post-closing milestones

Example: A SaaS business highlights its KPIs during negotiations: 90% customer retention, 25% annual revenue growth, and a 70% gross margin—figures that help justify a higher valuation multiple.

Letter of Intent (LOI)

Definition: A non-binding document that outlines the preliminary terms and intentions of a business sale before the final purchase agreement is drafted. It sets the framework for the transaction and typically marks the beginning of formal due diligence.

Key Features:

Includes proposed purchase price, payment structure, and deal timeline
Often includes exclusivity, confidentiality, and non-compete provisions
Non-binding for most terms, but certain clauses (like exclusivity) may be binding

Why It’s Used:

Aligns expectations between buyer and seller
Provides a roadmap for attorneys and advisors to draft final agreements
Helps secure financing and begin formal due diligence

Example: A buyer submits a Letter of Intent to purchase a manufacturing business for $2M, including 70% SBA financing, 20% seller financing, and 10% cash down, with a 60-day exclusivity period for due diligence.

Leveraged Buyout (LBO)

Definition: A type of acquisition in which the buyer uses a significant amount of borrowed funds to finance the purchase of a business. The business’s own assets and future cash flow are typically used as collateral for the debt.

Key Features:

Involves a mix of debt and equity (often 70–90% debt)
Buyer repays debt using the acquired company’s cash flow
Commonly used by private equity firms and financial buyers

Why It’s Used:

Allows buyers to acquire larger businesses with less upfront capital
Can generate high returns on equity if the business performs well
Maximizes leverage while spreading risk across lenders and investors

Example: A private equity firm acquires a logistics company for $10M by using $2M in equity and $8M in debt. The company’s cash flow is used to service the debt over time.

Liabilities

Definition: Financial obligations or debts owed by a business to external parties, such as lenders, vendors, landlords, or tax authorities. In a business sale, understanding and allocating liabilities is critical to structuring the deal.

Types of Liabilities:

Short-term: Accounts payable, credit cards, payroll taxes
Long-term: Loans, leases, deferred taxes, legal claims
Contingent: Potential future obligations (e.g., pending lawsuits)

Why They’re Important:

Affect the value and risk profile of a business
Influence whether a deal is structured as an asset or stock sale
Must be disclosed and properly addressed during due diligence

Example: During due diligence, a buyer discovers the business has $200K in outstanding vendor debt and a $500K term loan. In an asset sale, the seller retains these liabilities unless the buyer agrees to assume them.

Lien

Definition: A legal right or claim against a business’s assets, typically granted to a lender or creditor as security for a debt. Liens must be cleared or addressed before a business can be sold free and clear of encumbrances.

Key Features:

Can apply to real estate, equipment, inventory, or receivables
Filed publicly (e.g., UCC filings) to give notice of creditor rights
Must be released or subordinated before closing in most asset sales

Why It’s Important:

Impacts the buyer’s ability to obtain financing
May delay or complicate closing if not resolved
Requires legal documentation to remove or transfer

Example: A seller has a $300K loan secured by a lien on their business equipment. Before closing, the lien must be paid off and released to transfer the equipment to the buyer.

Loan-to-Value (LVT) Ratio

Loan-to-Value (LTV) Ratio

Definition: A financial metric used by lenders to assess the risk of a loan by comparing the loan amount to the appraised value or purchase price of the business or asset being financed.

Formula:
LTV = (Loan Amount ÷ Business or Asset Value) × 100

Key Features:

Lower LTV means less risk for lenders and may result in better loan terms
Higher LTV may require additional collateral or personal guarantees
Common benchmark for SBA and conventional loans is 70%–90%

Why It’s Important:

Determines the required down payment or equity contribution
Used by lenders to assess loan eligibility and structure
Impacts interest rates, loan terms, and approval speed

Example: A buyer seeks to acquire a business for $1M and is approved for an $800K loan. The LTV ratio is 80%, meaning the buyer must contribute a $200K down payment.

Locked-Box Mechanism

Definition: A pricing structure used in business acquisitions where the purchase price is fixed based on a historical balance sheet date (the “locked-box date”). Any value generated or depleted after that date belongs to the buyer, with no post-closing adjustments for working capital or cash.

Key Features:

Purchase price is based on financials as of a specific date
Seller is restricted from extracting value after that date (e.g., through dividends)
Simpler than post-closing adjustment mechanisms like working capital true-ups

Why It’s Used:

Provides pricing certainty for both parties
Reduces post-closing disputes and complexity
Speeds up closing and simplifies documentation

Example: A buyer and seller agree on a $5M price based on the company’s balance sheet as of December 31. The seller cannot withdraw funds or incur new liabilities after that date without buyer approval.

Material Adverse Effect (MAE)

Definition: A legal term used in purchase agreements to describe a significant negative change in the business that could impact its value, operations, or ability to meet obligations. It is often used as a condition that allows a buyer to back out of a deal before closing.

Key Features:

Defined in the agreement and may include exceptions (e.g., general economic downturns)
Typically applies to events between signing and closing
Can trigger termination rights or renegotiation of terms

Why It’s Important:

Protects buyers from closing on a business that suffers unexpected harm
Common in deals with a long timeline between signing and closing
May be contested if used to justify walking away from a deal

Example: A buyer agrees to acquire a retail chain, but before closing, a fire destroys two key locations. The buyer invokes the MAE clause to renegotiate or cancel the transactions

Merger

Definition: A transaction in which two businesses legally combine to form a single entity. One company may absorb the other, or both may dissolve to form a new company. Mergers can be strategic, financial, or operational in nature.

Key Types:

Statutory Merger: One company survives and absorbs the other
Consolidation: Both companies combine into a new legal entity
Horizontal Merger: Between competitors in the same industry
Vertical Merger: Between companies at different stages of the supply chain

Why It’s Used:

Achieve economies of scale or market expansion
Combine complementary strengths (e.g., product lines, talent, or locations)
Improve competitiveness or financial performance

Example: Two regional IT firms merge to form a larger company with national reach. The new entity retains both customer bases and eliminates redundant overhead costs.

Mezzanine Financing

Definition: A hybrid form of financing that combines elements of debt and equity. It is typically used to fill the gap between senior debt and equity in a business acquisition. Mezzanine lenders receive higher interest rates and may also get equity or warrants as part of the deal.

Key Features:

Subordinate to senior debt but senior to equity
Higher risk, higher return structure
Often unsecured and based on the business’s cash flow
May include conversion rights or profit-sharing components

Why It’s Used:

Helps buyers complete deals with less equity
Flexible terms compared to traditional loans
Common in private equity-backed or leveraged buyout transactions

Example: A buyer needs $3M to acquire a company. After securing $2M in bank financing and contributing $500K in equity, they raise the remaining $500K through mezzanine financing, offering 12% interest and equity warrants.

Minimum Equity Requirement

Definition: The minimum amount of cash or unborrowed funds a buyer must contribute to a business acquisition. Lenders, especially SBA and conventional banks, often impose this requirement to ensure the buyer has sufficient “skin in the game.”

Key Features:

Usually expressed as a percentage of the total purchase price (e.g., 10%–30%)
Cannot be borrowed or come from seller financing unless expressly allowed
Shows the buyer’s financial commitment and reduces lender risk

Why It’s Important:

Affects loan approval and deal structure
Ensures the buyer has a vested interest in the success of the business
May determine whether seller notes can count as equity

Example: A buyer is acquiring a business for $1M. The lender requires a 20% minimum equity injection, meaning the buyer must contribute at least $200K in cash from personal or investor funds.

Multiple

Definition: A valuation metric used to estimate a business’s worth by multiplying a financial figure—typically EBITDA, revenue, or seller discretionary earnings (SDE)—by an industry-standard or deal-specific factor.

Common Types of Multiples:

EBITDA Multiple (e.g., 4× EBITDA)
Revenue Multiple (e.g., 1.5× revenue)
SDE Multiple (commonly used in small business sales)

Why It’s Important:

Provides a quick benchmark for business valuation
Reflects industry norms, growth potential, and risk profile
Used in negotiations and financial modeling

Example: A service company with $400K in EBITDA is valued at 4× EBITDA, resulting in a purchase price of $1.6M.

Multiple Financing Sources

Definition: A funding strategy that combines different types of capital—such as SBA loans, seller financing, private investors, and mezzanine debt—to finance a business acquisition. This approach helps buyers structure deals when one funding source alone isn't sufficient.

Common Sources Combined:

SBA 7(a) or 504 loans
Seller notes or carryback financing
Investor equity
Mezzanine or bridge loans
Personal funds

Why It’s Used:

Increases deal flexibility and financing capacity
Reduces reliance on a single lender or investor
Helps buyers close larger or more complex transactions

Example: A buyer uses $500K in SBA financing, $200K in seller financing, $150K in investor equity, and $150K in personal cash to acquire a business for $1M.

Net-Working Capital

Definition: A measure of a business’s short-term liquidity, calculated as current assets minus current liabilities. In M&A deals, it’s used to assess whether the business has enough cash and assets to continue normal operations post-closing.

Formula:
Net Working Capital = Current Assets − Current Liabilities

Key Features:

Includes items like cash, accounts receivable, inventory, and accounts payable
Often tied to a target or peg in the purchase agreement
Post-closing adjustments may apply if actual working capital deviates from the target

Why It’s Important:

Ensures the buyer receives a business that can operate day-to-day
Affects purchase price adjustments at or after closing
Helps uncover potential cash flow issues during due diligence

Example: A business has $300K in current assets and $200K in current liabilities. Its net working capital is $100K, which meets the agreed-upon target in the purchase agreement.

Non-Compete Agreement

Definition: A contractual provision that prohibits the seller from starting or working for a competing business for a specified period of time and within a defined geographic area after the sale of a business.

Key Features:

Duration typically ranges from 1 to 5 years
Scope must be reasonable to be enforceable
Included in most asset and stock purchase agreements

Why It’s Important:

Protects the buyer’s investment and goodwill
Prevents the seller from taking back customers, employees, or trade secrets
Increases the likelihood of business continuity and customer retention

Example: After selling their HVAC business, the seller agrees not to start or work for another HVAC company within 50 miles for 3 years as part of the non-compete agreement.

Non-Disclosure Agreement (NDA)

Definition: A legally binding agreement that requires one or both parties to keep certain information confidential. In business sales, NDAs are commonly used before sharing sensitive business details with potential buyers.

Key Features:

Can be one-way (only one party discloses info) or mutual (both parties do)
Covers financials, customer lists, trade secrets, and deal terms
Usually includes limitations on use, duration, and permitted disclosures

Why It’s Important:

Protects the seller’s confidential information during negotiations
Prevents buyers from using proprietary data for competitive purposes
Builds trust and transparency early in the deal process

Example: Before receiving tax returns and a customer list, a buyer signs an NDA agreeing not to share or use the information outside of evaluating the potential acquisition.

Non-Recourse Loan

Definition: A type of loan in which the lender’s only remedy in case of default is to seize the specified collateral. The borrower is not personally liable beyond the pledged assets, and the lender cannot pursue additional repayment.

Key Features:

Commonly secured by specific assets (e.g., real estate, equipment)
Limits the borrower’s financial exposure
Higher risk for lenders, often resulting in stricter terms or higher interest

Why It’s Used:

Protects the borrower’s personal assets
May be attractive in deals where collateral is strong and borrower risk is higher
Rare in small business acquisitions unless collateral value is significant

Example: A buyer takes out a $500K non-recourse loan secured only by the business’s delivery trucks. If the business defaults, the lender can repossess the trucks but cannot go after the buyer’s personal assets.

Offering Memorandum (OM)

Definition: A detailed marketing document prepared by the seller (or their broker/advisor) that provides an overview of the business for sale. It is shared with qualified buyers under confidentiality to help them evaluate the opportunity.

Key Contents:

Executive summary and business overview
Financial statements and performance trends
Market and industry analysis
Customer, vendor, and employee information
Deal structure and asking price

Why It’s Important:

Helps attract serious, qualified buyers
Streamlines the due diligence and screening process
Sets expectations for the business’s value and potential

Example: A broker prepares an OM for a manufacturing company that includes five years of financials, growth opportunities, and a suggested price of $3.5M, which is shared with vetted buyers who have signed an NDA.

Owner Financing

Definition: A deal structure in which the seller finances part or all of the purchase price, allowing the buyer to pay over time. Also referred to as seller financing or a seller carryback.

Key Features:

Structured with a promissory note outlining interest, term, and payment schedule
May be secured by business assets or subordinated to other loans (e.g., SBA)
Often includes a balloon payment or amortized terms

Why It’s Used:

Makes deals more accessible to buyers with limited capital
Provides the seller with interest income and potential tax deferral
Can help close deals faster if traditional financing is unavailable

Example: A buyer agrees to pay $1M for a business. They contribute $200K in cash, secure a $500K SBA loan, and the seller finances the remaining $300K over 5 years at 6% interest.

Owner Carryback

Definition: A form of seller financing where the seller "carries back" a portion of the purchase price as a loan to the buyer. Instead of receiving full payment at closing, the seller receives installment payments over time under agreed-upon terms.

Key Features:

Formalized through a promissory note
Typically includes interest and fixed monthly payments
May be secured by a lien on business assets
Often subordinated to senior loans (e.g., SBA or bank financing)

Why It’s Used:

Helps buyers bridge financing gaps
Offers flexibility in structuring the deal
Provides sellers with ongoing income and potential tax advantages

Example: In a $1.2M business sale, the seller agrees to a $300K owner carryback loan, payable over 7 years at 5% interest, while the buyer covers the rest with an SBA loan and cash down payment.

Partial Buyout

Definition: A transaction in which the buyer acquires only a portion of the business ownership, with the potential to acquire additional shares over time. Partial buyouts are often used in succession planning, partnerships, or phased exits.

Key Features:

Buyer and seller become co-owners post-closing
Can involve an upfront purchase plus future buyout terms
May include performance milestones or fixed timelines for future purchases
Requires clear agreements on management, profit sharing, and decision-making

Why It’s Used:

Allows for a gradual transition of ownership and control
Enables sellers to stay involved while cashing out part of their equity
Gives buyers time to understand the business before full acquisition

Example: A buyer purchases 60% of a digital marketing agency with a plan to acquire the remaining 40% in 3 years, based on a predetermined valuation formula tied to revenue growth.

Post-Closing Adjustments

Definition: Changes made to the final purchase price after the deal closes, based on agreed-upon financial metrics such as working capital, cash, or debt levels at closing. These adjustments ensure the buyer receives the business in the condition expected at the time of agreement.

Key Features:

Common metrics include net working capital, cash on hand, and outstanding liabilities
Based on a comparison between estimated and actual figures at closing
May result in additional payments to the seller or refunds to the buyer
Typically finalized within 30–90 days post-closing

Why It’s Important:

Aligns the final price with the business’s true financial condition
Protects buyers from value erosion prior to handoff
Encourages sellers to maintain business stability through closing

Example: A deal includes a $50K working capital target. After closing, actual working capital is $40K. The buyer receives a $10K price reduction as a post-closing adjustment.

Prepayment Penalty

Definition: A fee charged to the borrower for paying off a loan before the end of its term. This clause compensates the lender for lost interest income and is often included in seller financing or certain private loans.

Key Features:

Can be a flat fee or a percentage of the remaining balance
May apply only within a set period (e.g., first 2–3 years)
Not allowed on most SBA loans, but common in private or seller notes

Why It’s Important:

Affects the buyer’s ability to refinance or pay off debt early
Helps sellers or lenders ensure a minimum return on financing
Should be negotiated and clearly disclosed in the promissory note

Example: A seller finances $400K of a business sale and includes a 3% prepayment penalty if the buyer pays off the loan in the first 24 months. If the buyer pays off the balance in year one, they owe a $12K penalty.

Promissory Note

Definition: A legally binding document that outlines the terms under which a borrower agrees to repay a loan. In business acquisitions, it is commonly used to document seller financing or any deferred payment obligations.

Key Features:

Specifies the principal amount, interest rate, repayment schedule, and maturity date
Includes provisions for prepayment, late fees, and default
May be secured (with collateral) or unsecured
Often subordinated to senior debt (e.g., SBA or bank loans)

Why It’s Important:

Protects both buyer and seller by clearly outlining repayment terms
Serves as enforceable evidence of the debt
Critical to closing when seller financing is involved

Example: As part of a $1M business sale, the seller finances $250K. The buyer signs a promissory note agreeing to repay it over 5 years at 6% interest, with monthly payments of $4,833.

Purchase Price Allocation (PPA)

Definition: The process of assigning portions of the total purchase price in a business sale to various asset categories for tax and accounting purposes. The allocation affects how both the buyer and seller report the transaction to the IRS.

Key Asset Categories:

Tangible assets (e.g., equipment, inventory, furniture)
Intangible assets (e.g., goodwill, trademarks, customer lists)
Real estate (if applicable)
Non-compete agreements

Why It’s Important:

Determines tax treatment for depreciation, amortization, and capital gains
Must be reported consistently by both parties on IRS Form 8594
Can impact the effective tax rate and timing of deductions

Example: In a $2M asset sale, the buyer and seller agree to allocate $500K to equipment, $300K to inventory, $200K to a non-compete, and $1M to goodwill. This allocation is reported to the IRS as part of the closing process.

Purchase Agreement (PA)

Definition: The final, legally binding contract that outlines the full terms and conditions of a business sale. It replaces the Letter of Intent (LOI) and governs the transaction from signing through and beyond closing.

Key Components:

Purchase price and payment terms
Description of assets or stock being sold
Representations and warranties from both parties
Covenants, indemnification, and closing conditions
Post-closing obligations (e.g., transition support, escrow terms)

Why It’s Important:

Serves as the legal foundation of the transaction
Protects both parties by clearly defining rights and responsibilities
Addresses what happens in the event of disputes or unexpected issues

Example: A buyer and seller sign a Purchase Agreement to transfer ownership of a retail business for $1.2M, including terms for a $200K earnout, seller financing, and a 12-month non-compete clause.

Quality of Earnings Report (QoE)

Definition: A financial due diligence report that analyzes the accuracy, sustainability, and reliability of a company’s earnings. It helps buyers understand the true cash flow and financial health of the business before finalizing a deal.

Key Focus Areas:

Normalized EBITDA (removing one-time or non-operating items)
Revenue trends and customer concentration
Expense analysis and margin consistency
Working capital and cash flow quality

Why It’s Important:

Provides deeper insights than basic financial statements
Uncovers red flags or deal risks (e.g., inflated profits or inconsistent revenue)
Helps validate or challenge the seller’s valuation

Example: A buyer commissions a QoE report before acquiring a $5M tech firm. The report adjusts EBITDA down by $150K due to non-recurring bonuses and overestimated revenue, influencing renegotiation of the purchase price.

Qualified Buyer

Definition: A prospective buyer who meets certain financial, operational, and experiential criteria to be considered a serious and capable purchaser of a business. Sellers and brokers use these criteria to screen potential buyers and protect confidential information.

Key Characteristics:

Sufficient funds or financing ability (cash, SBA pre-approval, etc.)
Relevant business or industry experience
Willingness to sign an NDA and provide proof of funds if requested
Ability to close within a reasonable timeframe

Why It’s Important:

Saves time by focusing on serious, ready buyers
Reduces the risk of exposing sensitive business information
Improves deal execution and closing certainty

Example: Before sharing financials, a broker asks a buyer to show $300K in liquid assets and sign an NDA. The buyer meets the criteria and is deemed a qualified buyer for a $1.2M business opportunity.

Representations and Warranties

Definition: Statements of fact and assurances made by the buyer and seller in a purchase agreement. These cover the condition of the business, legal compliance, financial accuracy, and more. If a rep or warranty turns out to be false, it can trigger indemnification or legal action.

Key Features:

Can be mutual, but usually more extensive on the seller’s side
Cover areas like financial statements, taxes, contracts, litigation, and employee matters
Subject to survival periods (how long they remain enforceable)
May be backed by escrow or holdback provisions

Why It’s Important:

Protects the buyer by holding the seller accountable for disclosures
Encourages full transparency and honest dealmaking
Provides a legal basis for post-closing claims or disputes

Example: A seller represents that there are no pending lawsuits against the business. After closing, the buyer discovers an undisclosed legal claim. The buyer may seek damages under the indemnification clause for breach of warranty.

Restrictive Covenants

Definition: Contractual obligations that limit a party’s actions after the sale of a business. These covenants are designed to protect the buyer’s investment by preventing the seller from competing, soliciting clients or employees, or disclosing confidential information.

Common Types:

Non-Compete: Prohibits the seller from starting or joining a competing business
Non-Solicitation: Prevents the seller from soliciting clients or employees
Confidentiality: Requires the seller to keep sensitive information private

Why It’s Important:

Preserves the business’s customer base and workforce
Protects trade secrets and goodwill
Helps ensure a smooth transition post-closing

Example: After selling a consulting firm, the seller agrees to a 3-year non-compete within a 50-mile radius and a 2-year non-solicitation of former clients and employees.

Revenue Based Financing

Definition: A type of funding where the lender or investor is repaid through a fixed percentage of the business’s ongoing revenue, rather than traditional fixed monthly payments. Payments fluctuate with sales, making it flexible for businesses with variable cash flow.

Key Features:

No fixed payment schedule — payments scale with revenue
No loss of equity, but often higher effective interest than traditional loans
Common in e-commerce, SaaS, and service businesses with recurring income
Typically used for growth capital, not full business acquisitions

Why It’s Used:

Aligns repayment with business performance
Reduces financial pressure during slow months
Attractive to businesses that may not qualify for traditional loans

Example: A business receives $200K in revenue-based financing and agrees to repay 6% of monthly revenue until $260K is paid back. If the business grows faster, the loan is repaid sooner; if revenue drops, payments adjust accordingly.

Rollover Equity

Definition: When a seller retains a portion of ownership in the business after the sale by converting part of their proceeds into equity in the new or acquiring company. It allows the seller to stay invested and benefit from future growth.

Key Features:

Common in private equity and partial buyout deals
Seller typically rolls 10%–40% of the purchase price into equity
Aligns seller’s interests with the buyer post-closing
Can be structured through a holding company or new operating entity

Why It’s Used:

Keeps the seller engaged in the business’s future success
Reduces cash needed upfront by the buyer
Offers potential for a “second bite of the apple” when the business is resold

Example: A private equity firm acquires 80% of a healthcare business. The seller rolls 20% of their sale proceeds into the new company and stays on as a board member, benefiting from future upside.

Royalty-Based Financing

Definition: A funding model where the investor or lender receives regular payments based on a percentage of the business’s revenue — similar to revenue-based financing, but typically structured with a capped return and no equity exchanged.

Key Features:

Repayments are tied to revenue performance
Total repayment is usually capped at a multiple (e.g., 1.5x or 2x the original investment)
No loss of ownership or board control
Often used by growing companies that want flexible, non-dilutive capital

Why It’s Used:

Reduces pressure from fixed loan payments
Aligns repayment with business success
Ideal for businesses with predictable monthly or recurring revenue

Example: A company receives $100K in royalty-based financing and agrees to pay 5% of monthly revenue until $150K is repaid. The faster the business grows, the sooner the obligation ends.

Synergies

Definition: The financial or strategic benefits that result when two businesses combine, leading to increased efficiency, revenue, or profitability. In M&A, synergies are often used to justify the purchase price and forecast post-deal growth.

Types of Synergies:

Cost Synergies: Savings from eliminating duplicate roles, consolidating operations, or improving purchasing power
Revenue Synergies: Increased sales through cross-selling, new markets, or stronger branding
Operational Synergies: Improved processes, shared technology, or better resource allocation

Why They’re Important:

Help buyers project return on investment (ROI)
Often drive deal structure, pricing, and integration strategy
Can be used to support financing or valuation multiples

Example: A marketing agency acquires a smaller competitor. By combining teams and software platforms, they cut overlapping costs and upsell services to each other’s client bases — achieving both cost and revenue synergies.

Seller Discretionary Earnings

Definition: A measure of a business’s total financial benefit to a single owner-operator. It starts with net income and adds back one-time expenses, owner’s salary, personal expenses, interest, taxes, and non-cash expenses like depreciation.

Formula:
SDE = Net Income + Owner’s Salary + Interest + Taxes + Depreciation + Discretionary/One-Time Expenses

Key Features:

Commonly used in small business valuations (especially under $5M)
Reflects the earning potential for an owner-operator
Used by brokers, buyers, and lenders to determine pricing and affordability

Why It’s Important:

Shows the total cash flow available to a new owner
Helps buyers understand how much they could take home or reinvest
Forms the basis for valuation multiples (e.g., 2.5x SDE)

Example: A business reports $100K in net income, plus $80K in owner’s salary, $10K in one-time legal fees, and $10K in depreciation. The SDE is $200K.

Seller Financing

Definition: A deal structure where the seller acts as the lender, allowing the buyer to pay part of the purchase price over time. The buyer signs a promissory note and makes regular payments, typically with interest.

Key Features:

Usually covers 10%–50% of the total deal value
Terms may include interest, amortization, and balloon payments
Often subordinate to SBA or bank loans
May be secured by a lien on business assets or a personal guarantee

Why It’s Used:

Makes deals more accessible when buyers lack full cash or financing
Shows the seller’s confidence in the business and the buyer
Helps close deals faster and may offer the seller favorable tax treatment

Example: A business is sold for $1M. The buyer pays $700K through an SBA loan, puts $100K down in cash, and the seller finances the remaining $200K over 5 years at 6% interest.

SBA 7(a) Loan

Definition: The most popular Small Business Administration loan used to acquire businesses, fund working capital, or refinance debt. It offers long repayment terms, competitive interest rates, and low down payment requirements.

Key Features:

Loan amounts up to $5 million
Terms: Up to 10 years for business acquisitions; up to 25 years if real estate is included
Down payment: Typically 10%–20% (can include seller financing)
Interest rates: Usually variable, tied to the Prime rate (e.g., Prime + 2%–3%)

Why It’s Used:

Ideal for business acquisitions, especially when collateral is limited
Allows buyers to finance up to 90% of the purchase price
Can include working capital, equipment, or goodwill

Example: A buyer purchases a plumbing company for $1.2M. The SBA 7(a) loan covers $1M, with the buyer contributing $120K in equity and the seller financing the remaining $80K.

SBA 504 Loan

Definition: An SBA-backed loan program primarily used to finance the purchase of fixed assets like commercial real estate, heavy equipment, or large facility upgrades. It’s structured as a partnership between a conventional lender and a Certified Development Company (CDC).

Key Features:

Typically structured as:
50% from a bank or lender (first position)
40% from a CDC backed by the SBA
10% buyer down payment (may be 15%–20% for special-use properties or startups)
Fixed interest rates on the SBA portion
Long terms: 10, 20, or 25 years for real estate

Why It’s Used:

Ideal for buyers purchasing a business that includes real estate or large fixed assets
Offers lower interest rates and longer repayment terms than SBA 7(a)
Helps preserve working capital with lower equity requirements

Example: A buyer acquires a manufacturing company for $3M, including a warehouse. They use a 504 loan: $1.5M from a bank, $1.2M from a CDC, and a $300K down payment.

Seller Financing (Owner Carryback)

Definition: A deal structure where the seller acts as the lender, financing part or all of the purchase price by allowing the buyer to pay in installments over time. This is also commonly referred to as a carryback, since the seller “carries back” a portion of the price in the form of a loan.

Key Features:

Documented with a promissory note outlining interest, term, and payment schedule
May include a balloon payment or be fully amortized
Often subordinated to SBA or bank financing
Can be secured with business assets or guaranteed personally by the buyer

Why It’s Used:

Helps buyers bridge financing gaps and reduce upfront capital needs
Makes deals easier to finance and close
Provides the seller with interest income and potential tax deferral

Example: A business is sold for $1.5M. The buyer contributes $150K, secures a $1M SBA loan, and the seller carries back $350K over 7 years at 6% interest, paid monthly.

Seller Note (Promissory Note)

Definition: A legal agreement in which the buyer promises to repay the seller-financed portion of the purchase price over time. It formalizes the terms of the seller’s loan and is a key component of many small business acquisitions.

Key Features:

Details repayment schedule, interest rate, maturity date, and default provisions
May include a balloon payment or be fully amortized
Often subordinate to senior financing (e.g., SBA loans)
May be secured with business assets or backed by a personal guarantee

Why It’s Important:

Protects both parties by clearly documenting the loan terms
Gives the seller legal recourse in the event of non-payment
Frequently used in deals where traditional financing doesn’t cover the full price

Example: In a $1M business sale, the seller finances $250K. The buyer signs a promissory note agreeing to repay it over 5 years at 7% interest, with monthly payments of $4,950.

Stock Sale

Definition: A deal structure where the buyer purchases the seller’s ownership interest (stock or membership units) in the company, rather than just its assets. The business entity remains intact, and all assets, liabilities, and contracts transfer with the ownership.

Key Features:

Buyer assumes all known and unknown liabilities
Simpler transition for contracts, licenses, and employees (no need to retitle)
May offer tax advantages to the seller (capital gains treatment)
Common in deals involving C corporations or when the business has valuable contracts that are hard to assign

Why It’s Used:

Preserves continuity of operations and existing legal structure
May be required when contracts or licenses are non-transferable
Often preferred by sellers for tax efficiency

Example: A buyer acquires 100% of the shares in a software company. The company itself doesn’t change, but ownership transfers. All existing vendor contracts, employees, and client agreements remain in place under the same legal entity.

Subordination Agreement

Definition: A legal document in which a lender or creditor agrees that their claim on repayment is secondary (or “subordinate”) to another lender’s. This is commonly required when a deal involves both senior financing (e.g., SBA or bank loan) and junior debt (e.g., seller financing).

Key Features:

Establishes repayment priority in the event of default
Often required by SBA or bank lenders to protect their position
May restrict payments to the subordinate lender until senior debt is satisfied
Can apply to seller notes, mezzanine debt, or investor loans

Why It’s Important:

Ensures clarity among lenders and prevents disputes
Helps buyers secure financing from multiple sources
Reduces risk for senior lenders, improving loan terms or approval chances

Example: In a $1.2M business sale, the buyer secures a $900K SBA loan and a $300K seller note. The SBA lender requires the seller to sign a subordination agreement, ensuring the SBA loan is paid first in the event of default.

Sweat Equity

Definition: Ownership or value earned in a business through labor, time, or expertise instead of a cash investment. In acquisitions or partnerships, sweat equity is often granted when someone contributes significant effort to grow or operate the business.

Key Features:

Typically used when a buyer or partner lacks cash but brings operational value
May be formalized through equity grants, vesting schedules, or earn-in agreements
Often seen in management buyouts, startups, or seller-financed deals

Why It’s Used:

Allows deals to move forward when the buyer has limited capital
Keeps key individuals motivated and invested in business performance
Can be used in lieu of salary or in combination with performance milestones

Example: A buyer wants to purchase a fitness studio but lacks capital. The seller agrees to a sweat equity deal: the buyer runs the business for 3 years and earns 40% ownership by hitting revenue and retention goals.

Tax Clearance

Definition: Official confirmation from a state tax authority that a business has paid all required taxes and has no outstanding liabilities. It may be required before transferring business ownership or dissolving an entity.

Key Features:

Typically requested during due diligence or before closing
May include sales tax, payroll tax, franchise tax, and income tax obligations
Often required in asset sales to avoid successor liability

Why It’s Important:

Protects the buyer from inheriting unpaid tax liabilities
Required by escrow companies and lenders in some jurisdictions
Helps ensure a clean break and proper legal transfer of assets

Example: Before closing on a retail store acquisition, the buyer requests a tax clearance certificate from the state confirming that the seller has no outstanding sales tax obligations.

Tiered Financing

Definition: A funding structure that uses multiple layers or “tiers” of capital—each with different levels of risk, repayment priority, and return expectations—to finance a business acquisition. Commonly includes a mix of senior debt, mezzanine financing, and equity.

Key Features:

Senior Debt: First in line for repayment, lowest risk, lowest cost (e.g., SBA or bank loan)
Mezzanine/Junior Debt: Subordinated to senior debt, higher risk, higher interest
Equity: Last in line, highest risk, but highest potential return

Why It’s Used:

Allows buyers to raise the full purchase price while preserving equity
Spreads risk among different financing sources
Offers flexibility in structuring large or complex deals

Example: A buyer structures a $4M acquisition using $2.5M in senior bank debt, $1M in mezzanine financing, and $500K in equity. Each tier has its own terms and repayment structure.

Transaction Costs

Definition: All expenses incurred by the buyer and/or seller during the process of negotiating, structuring, and closing a business acquisition. These costs can be significant and should be factored into the overall deal budget.

Common Transaction Costs:

Legal fees (e.g., drafting and negotiating agreements)
Accounting and tax advisory fees
Due diligence expenses (e.g., QoE reports, inspections)
Escrow and filing fees
Broker or M&A advisor commissions
Financing costs (e.g., loan origination fees, SBA guarantee fees)

Why It’s Important:

Affects the buyer’s total cash needed at closing
Can impact net proceeds for the seller
May be negotiated as shared or seller-paid costs in the purchase agreement

Example: In a $2M transaction, the buyer incurs $75K in legal, lending, and advisory fees, while the seller pays a $100K broker commission. Both parties account for these costs when calculating their net proceeds or investment.

Term Sheet

Definition: A non-binding document that outlines the basic terms and structure of a proposed transaction. It serves as a roadmap for drafting a formal purchase agreement and helps both parties align on key deal points early in the process.

Key Features:

Includes price, payment structure, financing sources, and contingencies
May outline non-compete, earnout, or seller financing terms
Often includes a proposed closing timeline and exclusivity period
Not legally binding (except for certain clauses like confidentiality or exclusivity)

Why It’s Important:

Sets expectations and accelerates deal discussions
Helps identify deal-breakers early
Guides attorneys and advisors in preparing final documents

Example: A buyer presents a term sheet offering $1.5M for a business: $1M in SBA financing, $250K in seller financing, and $250K cash down. It also includes a 60-day exclusivity period and a proposed closing date.

Third-Party Consents

Definition: Approvals required from external parties—such as landlords, lenders, franchisors, or major clients—before certain contracts or agreements can be transferred or assigned in a business sale.

Key Features:

Common with leases, loan agreements, vendor contracts, and franchise agreements
May be required in both asset and stock sales, depending on contract language
Can delay closing if not identified and pursued early
Often included as a closing condition in the purchase agreement

Why It’s Important:

Without proper consent, key contracts may become void or unenforceable
Protects the buyer from operating without essential agreements post-closing
Failure to secure them can result in deal delays or legal complications

Example: A buyer is acquiring a restaurant. The lease includes an anti-assignment clause, so the landlord’s written consent is required before the business can be sold.

Turnkey Business

Definition: A business that is fully operational and ready for immediate transfer to a new owner with minimal effort or setup. The buyer can step in and start running the business right away.

Key Features:

Includes trained staff, equipment, systems, and existing customer base
Often comes with documented procedures and established vendor relationships
May include transitional support from the seller
Ideal for absentee owners or first-time buyers

Why It’s Important:

Reduces ramp-up time and operational risk
Attracts buyers looking for passive or semi-passive investment
Easier to finance if cash flow and operations are already stable

Example: A buyer acquires a turnkey dry cleaning business that has a loyal customer base, experienced employees, and updated equipment. The buyer takes over and begins generating revenue on day one.

Underwriting

Definition: The process lenders use to evaluate the risk of financing a business acquisition. It involves a detailed review of the business’s financials, the buyer’s background, and the overall deal structure to determine whether to approve the loan.

Key Features:

Includes analysis of tax returns, profit & loss statements, balance sheets, and cash flow
Reviews the buyer’s credit score, industry experience, and personal financials
Considers valuation, collateral, and debt service coverage ratios (DSCR)
May require additional documentation or third-party reports (e.g., appraisal, QoE)

Why It’s Important:

Determines whether a loan will be approved, and on what terms
Impacts the timing and certainty of closing
Helps lenders assess repayment ability and deal risk

Example: A buyer applies for an SBA loan to acquire a medical practice. During underwriting, the lender reviews three years of tax returns, the buyer’s resume, and verifies that the practice has sufficient cash flow to support the loan.

Uniform Commercial Code (UCC) Filing

Definition: A public notice filed by a lender or creditor to indicate a security interest in a borrower's assets. UCC filings are common in SBA loans, seller financing, and asset-based lending, and are used to secure repayment.

Key Features:

Filed at the state level (typically with the Secretary of State)
Discloses collateral claims to other potential creditors or buyers
Must be cleared or subordinated before closing in most business sales
Buyers should run a UCC search during due diligence

Why It’s Important:

Reveals existing liens that could complicate the transaction
Affects the buyer’s ability to obtain clean title to assets
Prevents disputes over collateral after the sale

Example: During due diligence, a buyer discovers a UCC filing showing a lien on the seller’s equipment from a prior loan. The lien must be released before the business can be transferred.

Use of Proceeds

Definition: A detailed breakdown of how loan or investment funds will be spent in a business acquisition. Most lenders, especially SBA and institutional lenders, require a clear use-of-proceeds statement as part of the loan application.

Key Features:

Outlines the allocation of funds for purchase price, working capital, fees, etc.
Ensures financing aligns with deal structure and lender guidelines
Can affect loan approval and underwriting decisions

Why It’s Important:

Helps lenders evaluate loan risk and repayment sources
Demonstrates borrower preparedness and financial planning
May be audited or verified prior to loan disbursement

Example: A buyer applies for a $1.2M SBA loan with the following use of proceeds: $1M for business acquisition, $100K for working capital, and $100K for closing costs and fees.

Valuation

Definition: The process of determining the economic worth of a business. It helps buyers and sellers agree on a fair purchase price and is often based on financial performance, industry trends, and risk factors.

Key Valuation Methods:

EBITDA Multiple: Common in mid-sized deals (e.g., 4× EBITDA)
SDE Multiple: Often used for small businesses and owner-operators
Discounted Cash Flow (DCF): Projects future cash flow and discounts to present value
Asset-Based Valuation: Focuses on the net value of tangible assets

Why It’s Important:

Sets a foundation for negotiations and financing
Used by lenders and investors to evaluate deal feasibility
Influences tax treatment and purchase price allocation

Example: A company earns $400K in EBITDA. Based on recent industry sales at a 3.5× multiple, the business is valued at $1.4M.

Vesting

Definition: The process by which an individual earns full rights to an asset or benefit over time. In the M&A context, vesting typically applies to employee equity, stock options, or ownership granted as part of a sweat equity or earn-in arrangement.

Key Features:

Can be time-based (e.g., 25% per year over 4 years) or performance-based (e.g., triggered by hitting revenue targets)
Common in startup acquisitions, management buyouts, and equity incentive plans
Often includes a “cliff,” where no equity is earned until a minimum period is reached

Why It’s Important:

Encourages long-term commitment from key team members or buyers
Protects businesses from granting ownership too early
Ensures equity is earned through contribution or tenure

Example: A partner in a buy-in deal is granted 40% equity, but it vests over 4 years with a 1-year cliff. If the partner leaves after 18 months, only 12.5% (half of year 2’s equity) is vested.

Vendor Take-Back (VTB)

Definition: A type of seller financing in which the vendor (seller) agrees to finance part of the purchase price by accepting a promissory note from the buyer. It's commonly used in Canadian transactions but interchangeable with "seller carryback" or "seller financing" in other regions.

Key Features:

The seller becomes a lender and receives payments over time
Terms include interest rate, repayment schedule, and potential balloon payment
Often used when traditional financing falls short or as part of a layered deal

Why It’s Important:

Makes deals more accessible for buyers with limited upfront capital
Helps close deals faster and smooths out valuation gaps
Shows seller confidence in the business and the buyer’s ability to succeed

Example: A business is sold for $900K. The buyer puts down $300K and obtains $400K from a bank. The remaining $200K is financed through a Vendor Take-Back, payable over 5 years at 6% interest.

Venture Debt

Definition: A type of loan provided to early-stage, high-growth companies that have raised equity funding but may not yet be profitable. Venture debt is often used alongside venture capital to extend runway or fund specific growth initiatives.

Key Features:

Provided by specialized lenders or venture-focused banks
Typically includes interest payments and warrants (the right to buy equity)
Repayment terms are shorter than traditional loans (e.g., 2–4 years)
Not based on cash flow or collateral, but on company potential and VC backing

Why It’s Important:

Provides non-dilutive capital between equity rounds
Helps fund growth without giving up additional ownership
Can increase valuation by boosting revenue before the next equity raise

Example: A startup raises a $5M Series A round, then secures $1M in venture debt to scale marketing efforts. The lender receives interest payments and warrants to purchase equity if the company succeeds.

Warranty

Definition: A promise or assurance made in the purchase agreement that certain facts about the business are true and accurate. Warranties are typically made by the seller and may relate to financial statements, legal compliance, assets, contracts, and other key areas.

Key Features:

Often paired with representations ("reps and warranties")
Can be general (e.g., “books are accurate”) or specific (e.g., “no pending lawsuits”)
Breaches may lead to indemnification claims or legal remedies
Subject to time limits (survival periods) and financial thresholds (caps, baskets)

Why It’s Important:

Protects the buyer from undisclosed liabilities or misrepresentations
Encourages full disclosure and accuracy from the seller
Forms the basis for post-closing risk allocation

Example: A seller warrants that all taxes have been paid through closing. If the buyer later discovers an unpaid tax liability, they may have the right to recover the cost from the seller under the warranty provision.

Working Capital

Definition: The difference between a business’s current assets and current liabilities. It represents the short-term liquidity available to run day-to-day operations and is a key metric in M&A transactions.

Formula:
Working Capital = Current Assets − Current Liabilities

Key Components:

Current assets: cash, accounts receivable, inventory
Current liabilities: accounts payable, accrued expenses, short-term debt

Why It’s Important:

Ensures the business can meet its immediate financial obligations
Buyers typically expect a “normal” level of working capital to be included in the purchase
May impact post-closing adjustments if a working capital target is set

Example: A buyer agrees to acquire a company with a working capital target of $150K. At closing, actual working capital is $120K. The purchase price is reduced by $30K as part of the adjustment process.

Working Capital Loan

Definition: A short-term loan used to finance a company’s everyday operations, such as payroll, rent, and inventory. It is not used to purchase long-term assets or investments but to support ongoing cash flow needs.

Key Features:

Can be a line of credit, term loan, or SBA loan
Typically repaid within 1–3 years
May be secured by business assets or backed by personal guarantees
Interest rates vary depending on lender type and borrower creditworthiness

Why It’s Important:

Helps smooth out cash flow fluctuations
Allows businesses to continue operating while waiting for receivables or seasonal income
Often used post-acquisition to cover operating costs or fuel growth

Example: After acquiring a catering company, the buyer takes out a $100K working capital loan to purchase supplies and cover payroll while building up new event bookings.

Working Capital Adjustment

Definition: A post-closing price adjustment based on the difference between the actual working capital delivered at closing and a target amount agreed upon in the purchase agreement. It ensures the buyer receives a business with sufficient short-term liquidity.

Key Features:

Based on a “working capital peg” (target), often calculated from historical averages
If actual working capital is below the target, the purchase price is reduced
If it’s above the target, the seller may receive an additional payment
Typically finalized within 30–90 days after closing

Why It’s Important:

Protects buyers from inheriting a business that's undercapitalized
Encourages sellers to maintain normal operating levels through closing
A common negotiation point in both asset and stock sales

Example: The parties agree on a $100K working capital target. At closing, the actual working capital is $85K. The buyer receives a $15K adjustment (reduction in purchase price) to account for the shortfall.

Year-Over-Year (YoY)

Definition: A financial comparison of a specific metric (like revenue or profit) from one year to the same period in the previous year. It’s commonly used during due diligence to assess growth trends and business stability.

Key Features:

Used to evaluate consistency or volatility in performance
Commonly applied to revenue, expenses, profit, and customer metrics
Can highlight seasonal trends or long-term improvements/declines

Example: The business’s YoY revenue increased by 18% from 2022 to 2023, signaling strong upward momentum and customer demand.

Zero Based Budgeting

Definition: A budgeting method where every expense must be justified for each new period, starting from a “zero base.” Unlike traditional budgeting, it does not rely on prior year budgets and forces a fresh evaluation of all costs.

Key Features:

All departments or cost centers must justify their expenses from scratch
Encourages cost discipline and alignment with strategic goals
Common in private equity-backed acquisitions or turnaround efforts
Can lead to leaner, more efficient operations post-closing

Why It’s Important in M&A:

Often used by new owners post-acquisition to optimize spending
Helps identify inefficiencies and eliminate unnecessary legacy costs
Signals a shift toward performance-based management

Example: After acquiring a multi-location service business, the new owners implement zero-based budgeting to reduce overhead and reallocate spending toward marketing and tech upgrades.

Zombie Business

Definition: A business that is still operating but is barely profitable, stagnant, or unable to grow. It generates just enough cash flow to survive but not enough to reinvest, scale, or attract financing.

Why It’s Useful in M&A Lingo:

Buyers should be cautious of acquiring “zombie” businesses that look stable but have no growth trajectory
May require turnaround expertise or aggressive restructuring

Example: A manufacturing firm generates $1M in revenue but barely breaks even year after year. With no reinvestment or growth, it’s considered a “zombie business.”

LEGAL DISCLAIMER

THIS GLOSSARY IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. THE TERMS AND DEFINITIONS INCLUDED ARE GENERAL IN NATURE AND MAY NOT APPLY TO YOUR SPECIFIC SITUATION.

READING OR USING THIS GLOSSARY DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP WITH OUR FIRM. WE ARE ONLY YOUR ATTORNEYS IF AND WHEN YOU SIGN A WRITTEN ENGAGEMENT AGREEMENT WITH US.

IF YOU ARE BUYING OR SELLING A BUSINESS — OR CONSIDERING DOING SO — YOU SHOULD CONSULT WITH A QUALIFIED ATTORNEY WHO CAN ADVISE YOU BASED ON YOUR SPECIFIC CIRCUMSTANCES. THIS MAY BE OUR TEAM AT EMPIRE BUSINESS LAW, OR ANOTHER TRUSTED LEGAL PROFESSIONAL. IN ANY CASE, IT IS IMPORTANT TO OBTAIN LEGAL COUNSEL TAILORED TO YOUR SITUATION BEFORE MAKING ANY DECISIONS.

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