M&A glossary: the terms in the sale of a business

An adjustment to reported earnings for an expense that a buyer will not incur, such as owner compensation above market or a one-time legal cost. Add-backs increase adjusted EBITDA and must be documented.

Earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring, non-operating, and owner-related items. The number buyers multiply.

The part of the purchase price paid in cash on the day the sale closes, the most certain layer of the price.

The detailed document describing the business, its financials, and its opportunity, provided to qualified buyers under NDA.

The state in which several qualified buyers are pursuing the business at the same time. The source of pricing power in a process.

A secure online repository of documents buyers review during diligence.

The binding contract that completes the sale, often called the purchase agreement, drafted by the buyer's lawyers against the letter of intent and negotiated by every legal team.

The buyer's examination of a business after the letter of intent is signed: its financial statements, contracts, people, legal matters, and operations, checked against what the buyer was told when it set the price.

Part of the purchase price paid after closing, contingent on the business meeting agreed targets.

Earnings before interest, taxes, depreciation, and amortization. The starting point for the adjusted EBITDA buyers multiply.

The headline value of the business, before debt, cash, fees, and structure.

What you receive after debt and cash are settled.

A portion of the price held back at closing for a period to cover indemnity claims.

A period during which the seller agrees not to negotiate with other buyers, usually granted on signing an LOI.

FNDRS's fixed-scope engagement delivering the deal workbook and the deal scenarios model.

The seller's promise, in the purchase agreement, to make the buyer whole if what was said about the business in the agreement turns out to be wrong.

A non-binding written range of value from a buyer, submitted before management meetings.

A non-binding term sheet setting out price, structure, and key terms, which typically grants exclusivity.

A session in which shortlisted buyers meet the founder and management team.

The ratio of enterprise value to adjusted EBITDA. A verdict on risk, size, and growth.

The confidentiality agreement a buyer signs before it learns the name of the business or receives the CIM, limiting what it may do with what it learns.

What the seller actually keeps: enterprise value less debt, fees, working capital adjustments, deferred and contingent consideration, and tax.

The seller's promise, signed as part of the sale, not to compete with the business after leaving it, limited in time, geography, and activity.

Profit before the owner's own pay and perks, interest, taxes, and depreciation: the earnings small, owner-run businesses are priced on.

A financial buyer that acquires a company to grow it and sell it again, either as a platform to build on or as an add-on to a company it already owns.

An accountant's review, commissioned by the buyer, that tests whether reported and adjusted earnings are real and sustainable.

A transaction in which the founder sells part of the business, usually a majority, to a financial buyer and keeps a stake.

A buyer's request to lower the price after the letter of intent is signed and exclusivity granted, usually because of something diligence found.

The founder's reinvestment of part of the proceeds into the new ownership entity.

The founder's proceeds from the sale of rollover equity when the buyer exits.

Part of the price paid by the buyer over time, documented as a loan from the seller, usually subordinated to bank debt.

An operating company that acquires for fit with its own business.

A one- or two-page anonymous summary sent to prospective buyers before an NDA.

The most recent twelve months of results, the period a buyer prices a business on.

The agreed normal level of working capital the business must have at closing; any shortfall or excess adjusts the price.