This reference is meant to be kept at hand throughout the process. No reasonable counterparty objects to a seller asking what a term means, and in practice the terms that go unasked are the ones that cost money. Each definition says what the thing is and what it means for the seller.
| Term | What it is, and what it means for the seller |
|---|---|
| Owner earnings (SDE) | What the company earns for the one person who owns and runs it: profit plus the owner's salary, the personal costs the company covers and true one-time expenses. The figure small companies are priced on. |
| EBITDA | Earnings with a manager's salary left in, used for larger companies that run without their owner. The same company has both figures, and SDE is higher, so it is worth asking which one a multiple refers to. |
| Add-back | An expense added back to profit because a buyer will not face it. Each needs a paper trail; undocumented ones are struck, and each one struck lowers the price by its 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, a higher multiple. |
| Confidentiality agreement (NDA) | The contract a buyer signs before learning identifying detail about the company. It is also why employees and competitors do not learn of the sale. |
| Information memorandum (CIM) | The document describing the company to qualified buyers: financials, operations, the recurring base and its history. Assembled once, early, and where preparation shows. |
| Indication of interest (IOI) | A buyer's non-binding first number, used to decide who advances. Its purpose is comparison, not commitment. |
| Letter of intent (LOI) | The document that sets price and structure and takes the company off the market while the buyer verifies everything. Mostly non-binding on price, binding on exclusivity: the most consequential signature before the purchase agreement. |
| Exclusivity | The seller's promise, inside the LOI, not to talk to other buyers for a set period. Leverage shifts to the buyer when it is signed, which is why terms are settled before signing. |
| Earnout | Part of the price paid later, only if the company meets agreed targets after closing. It reads as price and behaves as risk; a deal is best judged by its cash at closing. |
| Seller note | Part of the price the seller lends to the buyer, repaid over time. Common and useful, but the seller is acting as a lender, so the buyer's ability to run the company becomes the seller's risk. |
| Escrow or holdback | A portion of the price held by a third party after closing to cover surprises. Standard; the amount and the duration are negotiable. |
| Working capital peg | The agreed level of receivables, payables and inventory the company must deliver at closing. It appears to be an accounting detail and can move the price materially, so its calculation is worth settling before the LOI. |
| Asset sale or stock sale | Whether the buyer purchases the company's assets into a new entity, or the company itself. The choice changes the seller's taxes materially and is a question for the seller's accountant, early. |
| Due diligence | The buyer's verification of everything: books, taxes, contracts, licenses. Prepared sellers find it tedious; unprepared ones find it expensive. |
| Retrade | A price reduction sought during diligence, usually justified by a discovered problem. The defense is to leave nothing to discover: disclose known problems early, when they can be priced calmly. |
| Representations and warranties | Statements of fact about the company the seller stands behind in the purchase agreement. If one proves false after closing, the buyer may claim against the seller. |
| Non-compete | The seller's agreement not to compete for a period within an area. Scope and duration are negotiable; its existence is not. |
| Transition period | The time after closing when the seller stays to hand over relationships and, where they matter, licenses. Its length and pay are terms of the deal. |
Where this fits: from the first buyer conversation onward. Next in the series: the documents behind every serious offer.