Glossary
The vocabulary of small-business acquisitions
Plain-English definitions of the financial metrics, deal-structure concepts, and diligence terms that come up when evaluating small businesses. Each term links to a full entry with related concepts and the contexts in which it matters.
Financial Analysis
15 termsAdd-back
An expense added to reported net income to arrive at SDE or adjusted EBITDA, representing a cost that is personal, non-cash, or non-recurring in nature.
Adjusted EBITDA
EBITDA restated to remove owner-specific compensation above market rate, one-time expenses, and non-recurring items, producing a normalized measure of operating earnings used in business acquisitions.
Comparable Transactions (Comps)
Recent sale prices of similar businesses in the same industry, size range, and geography, used alongside multiples and DCF to triangulate a business valuation.
Discount Rate
The rate applied to future cash flows to convert them to present value in a DCF model. For small private businesses, typically falls in the 12-18% range.
Discounted Cash Flow (DCF)
A valuation method that projects a business's future free cash flows and discounts them to present value using a required rate of return.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a business's operating earnings independent of capital structure, tax position, and non-cash charges.
Enterprise Value vs. Equity Value
Enterprise value is the total value of a business including debt obligations; equity value is the portion attributable to the owner's stake and is typically what a seller receives at closing.
Free Cash Flow
Cash generated by business operations minus capital expenditures required to maintain the business, representing the amount available to service debt, pay distributions, or reinvest.
Gross Margin
Revenue minus cost of goods sold, expressed as a percentage of revenue. Measures the margin remaining after direct product or service costs, before operating expenses.
Industry Rule-of-Thumb Multiples
Quick-reference valuation multiples, varying by industry, used as an initial benchmark when estimating the value of a small business before applying deal-specific adjustments.
Seller's Discretionary Earnings (SDE)
The total annual financial benefit available to a single owner-operator of a small business, derived by adding owner compensation and non-cash or non-recurring items back to net income.
Terminal Value
The estimated value of a business at the end of a DCF projection period, representing the present value of all cash flows beyond the forecast horizon.
Trailing Twelve Months (TTM)
The most recent 12-month period of financial data, used as the primary basis for valuation because it reflects current business performance rather than prior calendar-year results.
Valuation Multiple
A number multiplied by a business's earnings figure, typically SDE or EBITDA, to produce an estimated purchase price. Reflects perceived risk, growth potential, and business quality.
Working Capital
Current assets minus current liabilities. The liquid resources a business requires to fund day-to-day operations, covering inventory, receivables, and short-term obligations.
Due Diligence
2 termsProof of Cash
A reconciliation that ties a business's bank deposits to its reported revenue, used during due diligence to confirm that stated sales reflect actual cash received.
Quality of Earnings (QoE) Report
A third-party forensic analysis of a business's reported earnings that verifies add-backs, ties bank deposits to stated revenue, and identifies financial inconsistencies.
Deal Structure & Financing
3 termsPreferred Lender Program (PLP)
An SBA designation authorizing select lenders to approve 7(a) loans internally without SBA review, reducing closing timelines by three to four weeks.
SBA 504 Loan
An SBA loan program providing long-term, fixed-rate financing for major fixed assets and owner-occupied real estate, structured across two lenders and a borrower equity contribution.
SBA 7(a) Loan
The Small Business Administration's primary loan-guarantee program, used in most small business acquisitions under $5M, where an approved lender provides capital and the SBA guarantees 75-85% of the loan amount.