If you’re buying or selling a business for the first time, the process can feel overwhelming—especially when you’re faced with unfamiliar financial and legal jargon. Understanding the key terms used by brokers, lenders, and advisors is essential to navigating the transaction with confidence.
Here’s a breakdown of the most important terms you’ll encounter during a business sale:
📌 Add Back
These are expenses the current owner incurs that won’t carry over to the new owner—like personal phone bills, health insurance, or inflated salaries for family members. Add backs help normalize earnings and give buyers a clearer picture of the business’s true profitability.
📊 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA is a measure of a company’s financial performance. It’s calculated by adding interest, taxes, depreciation, and amortization back to net income. Buyers use this figure to assess profitability during due diligence.
💰 SDE, DE, OB, and Cash Flow
These terms refer to the amount of money an owner can expect to take home. The formula is:
EBITDA + Owner’s Salary + Add Backs = Seller’s Discretionary Earnings (SDE)
This figure helps buyers determine if the business can support their salary and loan payments.
🔍 Due Diligence
This is the investigative phase where buyers examine the business’s financials, legal standing, and operations. It typically begins after signing a Letter of Intent (LOI) or Asset Purchase Agreement to avoid wasting time and money.
💵 Gross vs. Net Revenue
- Gross Revenue: Total income before returns or discounts.
- Net Revenue: Income after returns and allowances.
Understanding both helps buyers evaluate the business’s true earning potential.
📈 Gross vs. Net Profit
- Gross Profit: Revenue minus cost of goods sold.
- Net Profit: Gross profit minus all operating expenses.
Net profit gives a more realistic view of the business’s bottom line.
📝 Letter of Intent (LOI)
An LOI outlines the basic terms of a proposed deal. It’s usually non-binding and serves as a roadmap for the final purchase agreement. It’s different from an Offer Letter, which can be legally binding.
🔢 Multiple
This is a ratio used to price a business. For example, if a business earns $2 million in discretionary income and is priced at $5 million, the multiple is 2.5. Multiples vary by industry, financing method, and business size.
🔐 Non-Disclosure Agreement (NDA)
An NDA protects sensitive information during the sale process. It ensures that buyers don’t share confidential details with competitors, employees, or the public.
📊 Opinion of Value vs. Business Appraisal
- Opinion of Value: A broker’s estimate of market value.
- Business Appraisal: A detailed report by a certified valuation analyst (CVA), often used for legal or financial purposes.
💳 Seller Financing
The seller agrees to finance part of the sale, allowing the buyer to pay over time. This shows the seller’s confidence in the business and helps ease the buyer’s cash flow.
🏢 Private Equity
Private equity firms invest in businesses with strong financials. Their goal is to grow the company and eventually sell it for a profit.
🤝 Searchfunder
A searchfunder pools investor money to buy a business. They often run the business themselves and offer equity to investors in exchange for funding.
Final Thoughts
Understanding these terms can help you make informed decisions, avoid costly mistakes, and communicate effectively with professionals throughout the buying or selling process.
Would you like this glossary turned into a downloadable PDF or formatted for your website? I can also create a printable version for client handouts—just let me know!
Michael Shea represents the Tampa Florida Transworld office. In business since 2005, he has established a reputation as a trusted business broker across Florida’s key markets- from Tampa to Orlando, Melbourne, and more. Over the past two decades, Michael and his team have closed over $1 Billion in sold business volume and presided over more than 450 transactions. His credentials include the IBBA Certified Business Intermediary®, and most recently, the prestigious Certified Exit Planning Advisor® (CEPA) credential.