M&A Glossary
24 terms · Last updated 2026-08-07
The vocabulary of a small-business sale, defined the way it is actually used in a deal rather than the way a textbook would put it. Every entry states what the term means, how it is calculated where there is a calculation, and what practitioners most often get wrong about it.
Earnings Measures
The figures a business is actually priced on — what each one includes, which buyer quotes which, and the measurement window they are struck over.
- Seller's Discretionary Earnings (SDE)Seller's Discretionary Earnings (SDE) is a pre-tax cash-flow metric measuring the total annual financial benefit one full-time owner-operator derives from a business: reported net income plus income taxes, interest, depreciation, amortization, that owner's entire compensation and benefits, and any discretionary or non-recurring expenses that would not continue under new ownership.
- EBITDAEBITDA (earnings before interest, taxes, depreciation, and amortization) is a profitability metric that measures a business's operating earnings before financing costs, income taxes, and the non-cash charges that write down fixed assets and intangibles, calculated as net income plus interest expense, income tax expense, depreciation, and amortization.
- Adjusted EBITDAAdjusted EBITDA is a normalized earnings metric that restates EBITDA to show what a business would earn under ordinary ongoing ownership, adding back non-recurring, non-operating and non-market items such as owner compensation above the fully loaded cost of a hired manager, one-time legal settlements, personal expenses run through the business, and related-party rent set off market.
- Trailing Twelve Months (TTM)Trailing twelve months (TTM) is a measurement window covering the most recent twelve consecutive months of financial results, ending at the most recently closed month rather than being tied to the fiscal year end, so that a valuation reflects how the business is performing now instead of how it looked at the last year close.
Rebuilding the Financials
The exercise that turns a filed tax return into the earnings figure a buyer pays a multiple of, and the three kinds of adjustment — upward, downward, and hypothetical — that belong in separate columns.
- RecastingRecasting is the process of rebuilding a business's reported financial statements and tax returns into a normalized picture of ongoing earning power, reclassifying and adding back owner-discretionary, non-recurring and non-operating items so a buyer can see what the business would produce under new ownership.
- NormalizationNormalization is the process of restating a company's reported financial statements to show the ongoing economic earnings a buyer would inherit, by removing owner-specific, non-recurring, and non-operating items and repricing anything transacted with a related party.
- Add-BackAn add-back is an adjustment made when recasting a business's financial statements that restores a reported expense to earnings because the expense is discretionary, non-recurring, or will not continue under new ownership, such as the owner's salary, a personal vehicle lease, a one-time legal settlement, or non-cash depreciation.
- Pro Forma AdjustmentA pro forma adjustment is a restatement of reported historical results showing what a period would have produced if a known, quantifiable change, such as a signed contract, a closed location, a renegotiated lease, or a completed acquisition, had been in effect for the whole period.
The Adjustments, Category by Category
The five expense categories that account for most of the dollars on an add-back schedule, and the specific document each one has to carry to survive a buyer's review.
- Owner CompensationOwner compensation is the fully loaded cost of employing the owner-operator: W-2 salary and bonus, the employer payroll taxes on that pay, company-paid health and retirement benefits, and owner-only perquisites run through the company.
- Discretionary ExpenseA discretionary expense is a recurring cost the current owner chose to run through the business but that a new owner would not have to incur to produce the same revenue, such as a personal vehicle, family travel, club memberships, or a relative on payroll who does not work.
- One-Time ExpenseA one-time expense is a cost that hit the income statement because of a specific event not expected to repeat, such as a legal settlement, storm damage, an abandoned sale process, or a system implementation, and that therefore overstates what the business costs to run going forward.
- Related-Party TransactionA related-party transaction is a purchase, sale, lease, or loan between a business and a party connected to its owner, such as an owner-controlled real estate entity, a family member on payroll, or an affiliated company charging management fees, with terms set by the relationship rather than by an arm's-length market.
- Depreciation and AmortizationDepreciation and amortization are non-cash charges that spread the cost of an already-acquired asset across its useful life, depreciation covering tangible property such as vehicles, equipment, and leasehold improvements, and amortization covering intangibles such as acquired customer lists, goodwill, and loan costs.
Putting a Price on It
How an earnings figure becomes an asking price, and why a multiple quoted without naming its earnings basis carries no information at all.
- SDE MultipleSDE Multiple is the valuation ratio used to price owner-operated small businesses, calculated as the total price paid for the operating business divided by its Seller's Discretionary Earnings, so a business generating $500,000 of SDE that sells for $1,500,000 carries a 3.0x SDE multiple.
- EBITDA MultipleEBITDA Multiple is the valuation ratio used to price companies large enough to be run by hired management, calculated as enterprise value divided by earnings before interest, taxes, depreciation and amortization, normally the adjusted EBITDA figure rather than the reported one, so a company with $2,000,000 of adjusted EBITDA that sells for $10,000,000 trades at a 5.0x EBITDA multiple.
Going to Market
The two documents that carry a price into the market and then fix it — one written to attract offers, one written to take the seller off the market.
- Confidential Information Memorandum (CIM)A Confidential Information Memorandum (CIM) is the primary sell-side marketing document in a business sale — typically 20 to 60 pages, released only after a prospective buyer signs an NDA — describing a company's operations, market, customers, and financial history in enough detail to support an offer without meeting the owner.
- Letter of Intent (LOI)A Letter of Intent (LOI) is a short document signed by a buyer and seller that sets out the proposed price, deal structure, and timeline for an acquisition before either side spends money on due diligence and definitive agreements.
Verification and Diligence
What happens once exclusivity starts and the buyer's accountants, lawyers and lenders re-perform every number the seller published.
- Quality of Earnings (QoE)Quality of Earnings (QoE) is an independent accounting analysis of a target company's historical profit, commissioned by a buyer, a lender, or a seller preparing for sale, that tests whether reported and adjusted earnings are real, recurring, and supported by the underlying records.
- Due DiligenceDue diligence is the buyer's verification period after a letter of intent is signed — typically 30 to 90 days in a lower-middle-market deal — during which the buyer and its accountants, lawyers, and lenders test the seller's claims about the business before signing a definitive purchase agreement.
Structure, Funding and Getting Paid
The terms that decide how much of the headline price the seller actually receives, when it arrives, and what has to happen first.
- Asset Sale vs. Stock SaleAsset sale versus stock sale is the structural choice in a private-company acquisition: in an asset sale the buyer purchases specified assets and assumes only named liabilities, while in a stock sale the buyer purchases the owner's equity and takes the entity whole, including liabilities the buyer has not yet discovered.
- Working Capital AdjustmentWorking Capital Adjustment is the purchase-price true-up that compares the net working capital a seller actually delivers at closing against an agreed target, or peg, raising the price dollar-for-dollar when the seller leaves more than the peg and reducing it when the seller leaves less.
- Earn-OutAn earn-out is a portion of the purchase price that a buyer pays only if the acquired business hits agreed performance targets after closing, most often revenue, gross profit, or EBITDA measured annually over one to three years.
- Seller FinancingSeller Financing is the portion of a business purchase price that the seller agrees to receive over time under a promissory note from the buyer, with interest accruing on the unpaid balance, rather than in cash at closing.
- Debt Service Coverage Ratio (DSCR)Debt Service Coverage Ratio (DSCR) is the coverage ratio a lender uses to test whether an acquired business generates enough cash to make its loan payments, calculated as annual cash flow available for debt service divided by total annual principal and interest, so $480,000 of available cash flow against $340,000 of annual debt service is a DSCR of about 1.41x.