Glossary

Business Sale & Exit Planning Glossary

Every term you'll hear from buyers, brokers, attorneys, and CPAs during a business sale — defined in plain English by our M&A team.

338(h)(10) election

A joint tax election that treats a stock sale as an asset sale for federal tax purposes. Gives the buyer a stepped-up basis while letting the seller sign a cleaner stock-sale contract. Common in S-corp and consolidated-group deals; usually requires the seller to be grossed up for the extra tax hit.

Add-backs

Non-recurring, personal, or discretionary expenses run through the business that a buyer will not inherit — owner salary above market, personal vehicles, one-time legal fees, family payroll. Legitimate add-backs raise SDE and therefore sale price. Undocumented add-backs get stripped out in quality-of-earnings review and can kill the deal.

Asset sale

A transaction structure where the buyer acquires the assets of the business (equipment, inventory, contracts, goodwill) rather than the legal entity. Preferred by buyers for tax and liability reasons; typically worse for sellers on taxes than a stock sale.

Basket (deductible)

A threshold in the definitive agreement below which the buyer cannot make an indemnification claim. A 'tipping' basket pays from dollar one once the threshold is crossed; a 'true deductible' basket pays only amounts above the threshold. Usually 0.5%–1% of purchase price.

Bolt-on acquisition

An acquisition made by a private-equity-backed platform company to expand its existing business. Bolt-ons typically pay a lower standalone multiple but benefit from synergies with the platform — meaning strategics may still pay a full price.

Break fee

A payment owed if a party walks away from the deal after signing. In small business M&A, a break fee (usually reimbursement of the other side's diligence costs) is rare and should be resisted unless matched by a reverse break fee.

Cap (indemnification cap)

The maximum amount a seller can be required to pay for indemnification claims after closing. Usually capped at the escrow amount (5%–15% of purchase price) for general reps, with higher caps for fundamental reps like title and taxes.

Cash-free, debt-free

The standard convention for quoting purchase price in M&A: the seller keeps all cash at closing and pays off all interest-bearing debt. The quoted price is what the buyer pays for the operating business itself, independent of the balance sheet.

CIM (Confidential Information Memorandum)

The formal marketing document a broker prepares for qualified buyers under NDA. Contains company overview, financials, growth story, and deal terms. Usually 30–60 pages.

Closing conditions

The list of items — regulatory approvals, financing commitments, third-party consents, no material adverse change — that must be satisfied before the buyer is obligated to close. Every unmet condition is a way the deal can slip or die.

Consulting agreement

A post-closing engagement paying the seller to assist with transition, customer introductions, or knowledge transfer. Also used to shift a portion of purchase price into ordinary income for buyer tax deductibility — watch how this affects your after-tax proceeds.

Data room

A secure online repository where diligence documents (financials, contracts, HR files, IP, corporate records) are shared with the buyer and their advisors. A well-prepared data room shortens diligence by weeks.

Definitive agreement (APA / SPA)

The binding purchase contract signed at closing — an Asset Purchase Agreement (APA) for asset sales, a Stock Purchase Agreement (SPA) for stock sales, or a Merger Agreement. Contains price, structure, reps and warranties, indemnification, and closing conditions.

Disclosure schedules

Detailed lists attached to the definitive agreement disclosing exceptions to the seller's representations — pending litigation, key customer contracts, IP, employee agreements, environmental matters. Anything properly disclosed cannot be the basis of an indemnification claim.

Due diligence

The buyer's investigation of the business after LOI is signed — financial, legal, operational, HR, and IT review. Typically 45–90 days. The place where deals most often break down.

Earnout

A portion of the purchase price paid to the seller only if the business hits agreed performance targets after closing. Bridges valuation gaps but shifts risk to the seller. Cap at 15–20% of total consideration and only accept metrics you control.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. The standard earnings measure for mid-market businesses ($1M–$2M+ in earnings) that are run by a management team. Does not add back owner salary — assumes a hired CEO.

Enterprise value vs equity value

Enterprise value is what the operating business is worth on a cash-free, debt-free basis. Equity value is what the shareholders actually receive: enterprise value plus cash, minus debt, plus or minus the working capital adjustment. Sellers get paid equity value.

Equity rollover

A portion of the seller's proceeds is reinvested as equity in the acquiring company (typically the PE buyer's platform). Common in private-equity deals — usually 10%–30% rollover — and can be highly tax-efficient. The rollover shares often deliver a second, larger payday when the platform is sold.

Escrow (holdback)

5%–15% of the purchase price held by a third party for 12–24 months after closing to cover buyer claims for breaches of the seller's representations and warranties. Rep and warranty insurance can reduce or eliminate escrow on larger deals.

ESOP (Employee Stock Ownership Plan)

A qualified retirement plan that buys the company's stock, effectively selling the business to employees. Offers significant tax advantages for C-corp sellers (Section 1042 rollover) and preserves company legacy, but takes 12+ months to structure and requires ongoing trustee governance.

Exclusivity (no-shop)

A binding clause in the LOI that prevents the seller from talking to other buyers during diligence. 60–90 days is standard; longer hands leverage to the buyer.

Financial buyer

A private equity firm, family office, search fund, or independent sponsor buying the business as a financial investment with a 3–7 year hold. Values the business on cash flow and growth potential, and typically wants the owner to stay on or an experienced #2 in place.

Goodwill

The portion of purchase price above the fair value of tangible and identifiable intangible assets. Represents brand, customer relationships, and going-concern value. Central to how the deal is structured for tax purposes.

Hart-Scott-Rodino (HSR) filing

A pre-closing antitrust filing required for transactions above a federal size threshold (roughly $120M in 2026, indexed annually). Triggers a mandatory 30-day waiting period. Rarely applies to main-street or lower-middle-market deals.

Indemnification

The seller's contractual promise to compensate the buyer if any representation or warranty in the definitive agreement turns out to be untrue. Escrow secures indemnification obligations.

Independent sponsor

A dealmaker who sources and negotiates acquisitions without a committed fund, raising equity from LPs on a deal-by-deal basis. Slower to close than a traditional PE firm but often more flexible on structure. Confirm financing is committed before granting exclusivity.

Installment sale

A tax treatment that lets the seller recognize capital gain over the years payments are actually received, rather than all at closing. Useful for large seller notes or earnouts — spreads the tax hit and can lower the effective rate. Not available in all deal structures.

Key-person risk

The risk that the business depends heavily on one person — usually the owner — and would suffer if that person leaves. High key-person risk is one of the largest single drivers of multiple compression. Building a real #2 before you sell is often worth six or seven figures.

LOI (Letter of Intent)

A short document outlining the headline terms of a proposed acquisition — price, structure, exclusivity, timeline. Mostly non-binding, but exclusivity, confidentiality, and expense clauses are binding at signing. See the full LOI guide for detail.

Management incentive plan (MIP)

A post-closing equity or bonus pool set aside by the buyer (usually a PE firm) to retain and align key managers, typically 5%–15% of equity on a vesting schedule. Sellers who intend to stay on should negotiate MIP participation as part of the LOI.

Materiality scrape

A provision that removes materiality qualifiers from the seller's representations when calculating damages after a breach. Effectively broadens the seller's indemnification exposure. Push back — a well-drafted deal caps materiality scrapes narrowly.

Multiple

The number applied to earnings (SDE or EBITDA) to arrive at value. Reflects buyer perception of risk and growth. Small service businesses trade at 2x–3.5x SDE; mid-market companies at 4x–8x EBITDA. Industry, size, recurring revenue, and owner dependency all move the multiple.

NDA (Non-Disclosure Agreement)

A confidentiality agreement signed by any prospective buyer before they receive the CIM or any non-public information about the business. Protects trade secrets, financials, and customer data.

Non-compete / non-solicit

Post-closing restrictions preventing the seller from competing with the business or soliciting its customers and employees, usually 3–5 years and within a defined geography. Overly broad non-competes may be unenforceable in some states — negotiate scope, term, and territory carefully.

Precision valuation

A defensible valuation prepared by an M&A advisor using normalized financials, a documented add-back schedule, and comparable transaction analysis. The starting point for a real go-to-market process, as opposed to a calculator estimate.

Purchase price allocation

The IRS-required breakdown of purchase price across asset classes (Class I cash through Class VII goodwill) in an asset sale. Drives both parties' taxes — the seller wants more goodwill (capital gains), the buyer wants more equipment (faster depreciation). Negotiate before signing.

QoE (Quality of Earnings)

A CPA-led report the buyer commissions during diligence to verify the seller's earnings figures and add-backs. Tests revenue recognition, expense classification, and normalizations. Often the trigger for a price re-trade.

QSBS (Qualified Small Business Stock)

Section 1202 of the tax code allows shareholders of qualifying C-corps to exclude up to 100% of federal capital gains on sale, subject to caps and holding-period requirements. Can save millions in taxes for eligible sellers — requires planning years in advance.

R&W insurance (Reps & Warranties Insurance)

An insurance policy that covers breaches of the seller's representations and warranties, replacing or reducing escrow. Increasingly common on deals over $10M. Cost is typically 2.5%–4% of coverage limit.

Recapitalization

A partial sale — often to a private equity firm — where the owner sells a majority (or minority) of the business, takes chips off the table, and rolls the rest into equity in the new entity. Popular with owners who want liquidity now but a second bite of the apple later.

Recasting

The process of normalizing financial statements to show what the business would earn under a new owner — adding back owner compensation, one-time expenses, and non-operating items. The foundation of the SDE calculation.

Representations and warranties

Statements the seller makes in the definitive agreement about the business — that financials are accurate, contracts are enforceable, taxes are paid, no undisclosed litigation, etc. Breaches trigger indemnification claims. Negotiate the scope, survival period, and cap carefully.

SDE (Seller's Discretionary Earnings)

EBITDA plus the owner's salary and personal add-backs. The standard earnings measure for owner-operated businesses under $1M–$2M in earnings. Tells a hands-on buyer the total financial benefit they can expect.

Seller note

A portion of purchase price the buyer owes the seller after closing, paid over time with interest. Common in main-street deals. Interest rate, term, subordination, and security all matter — negotiate them like a bank would.

Stock sale

A transaction structure where the buyer acquires the legal entity (and everything inside it) by purchasing the seller's stock or membership interests. Usually better for sellers on taxes than an asset sale, but harder to negotiate because the buyer inherits all liabilities.

Strategic buyer

An operating company acquiring the business for strategic reasons — market share, geographic expansion, new capabilities, or supplier consolidation. Strategics can pay premium multiples because they underwrite synergies a financial buyer cannot.

Survival period

How long the seller's representations and warranties remain enforceable after closing — typically 12–24 months for general reps, longer or indefinite for fundamental reps (title, taxes, authority) and fraud. The shorter the survival period, the less indemnification risk the seller carries.

Tail insurance (run-off D&O)

Extended directors and officers liability coverage for pre-closing acts, typically 6-year run-off, purchased at closing. Protects the seller and pre-closing directors from claims that surface after the deal closes. The buyer usually pays; make sure it is in the LOI.

Trailing twelve months (TTM)

The financial figures from the most recent twelve months — a rolling window updated monthly. Buyers value businesses on TTM performance rather than the calendar-year P&L, so a business that has been trending up sells for more if you time the process to a strong TTM.

Transition services agreement (TSA)

A post-closing agreement where the seller provides ongoing services (IT, back-office, payroll processing) for a defined period while the buyer stands up their own operations. Common in carve-outs and PE deals; usually 3–12 months and priced at cost plus a small margin.

Working capital target (peg)

The amount of current assets minus current liabilities the buyer expects to receive at closing. Delivering less than the target reduces purchase price dollar-for-dollar at close. Negotiate the peg off a trailing 12-month average, not a snapshot month.