This reference is intended to be kept at hand throughout the process. No reasonable counterparty objects to a seller asking what a term means, but in practice the terms that go unasked are the ones that cost money. Each definition below says what the thing is and what it means for you specifically.
| Term | What it is, and what it means for you |
|---|---|
| Owner earnings (SDE) | What the business earns for the one person who owns and runs it: profit plus your salary plus the personal costs it covers plus true one-time expenses. The number small businesses are priced on. |
| EBITDA | Earnings with a manager's salary left in, used for larger businesses that run without their owner. Larger transactions are quoted on EBITDA; owner-run businesses on SDE. The same business has both numbers, and SDE is higher, so always ask which one a multiple refers to. |
| Add-back | An expense added back to profit because a buyer will not face it. Every add-back needs a paper trail; undocumented ones get struck, and each strike lowers the price by that amount times the multiple. |
| Multiple | The number earnings are multiplied by to reach a price. A summary of risk drawn from comparable sales: more durable earnings, higher multiple. |
| Confidentiality agreement (NDA) | The contract a buyer signs before learning identifying detail about your business. No serious buyer refuses one. It is also the reason your employees and competitors do not find out. |
| Information package (CIM) | The document describing your business to qualified buyers: financials, operations, the recurring base, the story. Assembled once, early, and it is where preparation shows. |
| Indication of interest (IOI) | A buyer's non-binding first number, used to decide who advances. Its job is comparison, not commitment. |
| Letter of intent (LOI) | The document that sets price and structure and takes the business off the market while the buyer verifies everything. Mostly non-binding on price, firmly binding on exclusivity. The single most consequential signature before the purchase agreement. |
| Exclusivity (no-shop) | Your promise, inside the LOI, not to talk to other buyers for a set period. Leverage shifts to the buyer the day you sign it, which is why terms get settled before signing, not after. |
| Earnout | Part of the price paid later, only if the business hits agreed targets after closing. Reads as price, behaves as risk: judge a deal by its cash at close, and treat an earnout as upside. |
| Seller note | Part of the price you lend to the buyer, repaid over years. Common in small deals and genuinely useful, but you are acting as the lender, so the buyer's ability to run the business becomes your risk. |
| Escrow / holdback | A slice of the price parked with a third party after closing to cover surprises. Standard. What is negotiable is how much and for how long. |
| Working capital peg | The agreed level of receivables, payables and inventory the business must hand over at closing. It appears to be an accounting detail; it regularly moves six figures. Ask how the peg is calculated before the LOI is signed. |
| Asset sale vs. stock sale | Whether the buyer purchases the business's assets into a new entity, or your company itself. Small-business deals are usually asset sales. The choice changes your taxes materially: this is the question for your CPA, early. |
| Due diligence | The buyer's verification of everything: books, taxes, contracts, licenses. Runs for weeks under exclusivity. Prepared sellers experience it as tedious; unprepared ones experience it as expensive. |
| Retrade | A price reduction demanded mid-diligence, usually justified by a discovered problem. The defense is simple and unforgiving: no discoverable surprises. Disclose known problems yourself, early, when they can be priced calmly. |
| Reps and warranties | Statements of fact about the business you stand behind in the purchase agreement. If one proves false after closing, the buyer can claim against you. Read them as promises, because they are. |
| Non-compete | Your agreement not to open a competing shop for some years in some radius. Every buyer asks. Scope and duration are negotiable; existence is not. |
| Transition period | The stretch after closing when you stay to hand over relationships, and in licensed trades, often licenses. How long and at what pay is a deal term, negotiated with everything else. |
Where this fits: from the first buyer conversation onward. Next in the series: the documents behind every serious offer.