Chicago-based business brokers and M&A firm specializing in buying and selling privately-held companies.
M&A Glossary: Key Terms in Buying and Selling a Business
Adjusted EBITDA
Earnings before interest, taxes, depreciation, and amortization, modified by “add-backs” for expenses that won’t continue under new ownership. This is typically excess owner compensation, personal expenses run through the business, one-time costs, and non-recurring items. Adjusted EBITDA is the primary valuation metric for lower-middle-market businesses.
Add-Backs
Expenses added back to reported earnings when calculating adjusted EBITDA because they are personal, discretionary, or non-recurring. Common add-backs include above-market owner salary, owner vehicle and travel expenses, one-time legal fees, and family members on payroll who don’t work in the business. Buyers scrutinize add-backs closely; poorly documented add-backs reduce credibility and price.
Asset Sale
A transaction structure where the buyer purchases the business’s assets (equipment, inventory, customer relationships, goodwill) rather than the legal entity itself. Asset sales are the most common structure in lower-middle-market deals because they let buyers avoid inheriting unknown liabilities and provide tax advantages through asset basis step-up.
Stock Sale
A transaction structure where the buyer purchases the ownership interests (stock or membership units) of the legal entity, acquiring the company with all its assets and liabilities. Stock sales are generally more favorable to sellers for tax purposes but expose buyers to the entity’s historical liabilities.
Blind Profile
A marketing document that describes a business for sale (industry, size, financial performance, geographic market) without revealing its identity. Used to generate buyer interest while maintaining confidentiality. Buyers must sign a non-disclosure agreement to learn the business’s name.
Confidential Information Memorandum (CIM)
The detailed document provided to qualified buyers after they sign an NDA. A CIM typically covers the business’s history, operations, financial performance, customers, employees, market position, and growth opportunities. It is the primary sales document in a professional M&A process.
Customer Concentration
The degree to which a business’s revenue depends on a small number of customers. A business where one customer represents more than 15–20% of revenue carries concentration risk that typically reduces its valuation multiple, because losing that customer would materially damage the business.
Deal Structure
The combination of payment terms and conditions in a transaction: how much is paid in cash at closing, how much is seller-financed, whether there’s an earnout, how working capital is treated, and the terms of the seller’s transition. Two offers with the same headline price can produce very different actual outcomes depending on structure.
Due Diligence
The verification period, typically 30–90 days after a letter of intent is signed, during which the buyer confirms the accuracy of the seller’s financial, operational, and legal representations before closing.
Earnout
A deal provision where part of the purchase price is paid over time, contingent on the business hitting agreed performance targets after the sale. Earnouts bridge valuation gaps between buyer and seller but require careful definition of the metrics, measurement period, and the buyer’s obligations to operate the business in a way that gives the earnout a fair chance of being achieved.
Enterprise Value
The total value of a business’s operations, independent of how it’s financed — typically calculated as the equity purchase price plus assumed debt, minus cash retained by the seller. Lower-middle-market deals are commonly quoted in enterprise value terms.
Escrow / Holdback
A portion of the purchase price held by a neutral third party (or withheld by the buyer) for a defined period after closing to cover potential claims under the purchase agreement, such as breaches of representation and warranties.
Fair Market Value
The price a willing buyer and willing seller would agree on in an open market, with neither under compulsion and both reasonably informed. Distinct from strategic value, which reflects what a specific buyer with specific synergies might pay.
Financial Buyer
An acquirer (typically a private equity group, family office, or individual investor) who purchases a business primarily for its cash flow and growth potential rather than for synergies with an existing operation.
Strategic Buyer
An acquirer, usually a company in the same or adjacent industry, that purchases a business for synergies: customers, geography, capabilities, or product lines. Strategic buyers can often justify higher prices than financial buyers because the acquisition creates value beyond the standalone cash flow.
Letter of Intent (LOI)
A document outlining the principal terms of a proposed transaction (price, structure, timeline, and exclusivity) signed before due diligence begins. Most LOI terms are non-binding, but the exclusivity provision (preventing the seller from negotiating with other buyers during due diligence) typically is binding.
Lower Middle Market
Generally, privately held businesses with enterprise values between roughly $2 million and $100 million, or revenues between $5 million and $100 million. Definitions vary. Sun Acquisitions focuses on transactions between $2 million and $75 million in enterprise value.
Multiple
The ratio between a business’s value and its earnings, most commonly expressed as a multiple of adjusted EBITDA. A business earning $1 million in adjusted EBITDA that sells for $4 million sold at a 4x multiple. Multiples vary by industry, size, growth, and risk; lower-middle-market businesses commonly trade between 2.5x and 6.5x adjusted EBITDA.
Non-Disclosure Agreement (NDA)
A legal agreement in which a prospective buyer commits to keep confidential all information learned about a business for sale, and typically to not solicit its employees or customers. Signing an NDA is the gateway between seeing a blind profile and receiving identifying information.
Non-Compete Agreement
A provision restricting the seller from starting or joining a competing business within a defined geography and time period after the sale, commonly two to five years. Buyers require non-competes to protect the value of what they’re purchasing.
Off-Market Deal
An acquisition opportunity that is not publicly listed for sale, typically surfaced through direct outreach to owners. Many of the highest-quality lower-middle-market acquisitions are off-market transactions.
Owner Dependency
The degree to which a business’s performance relies on the owner’s personal involvement in sales relationships, technical expertise, or daily management. High owner dependency reduces valuation because the business’s earnings are at risk when the owner leaves.
Quality of Earnings (QofE)
An analysis, usually commissioned by the buyer during due diligence, that examines how sustainable and accurate a business’s reported earnings are, which validates add-backs, revenue recognition, customer trends, and working capital patterns. A QofE report frequently drives price renegotiation.
Recurring Revenue
Revenue that repeats predictably: contracts, subscriptions, maintenance agreements, or repeat customer purchasing patterns, as opposed to one-time or project-based revenue. Businesses with high recurring revenue command premium multiples because their future earnings are more predictable.
SBA 7(a) Loan
The U.S. Small Business Administration’s primary loan program, widely used to finance business acquisitions up to $5 million in loan amount. SBA loans allow buyers to acquire businesses with as little as 10% down, making them the dominant financing source for smaller lower-middle-market transactions.
SDE (Seller’s Discretionary Earnings)
A valuation metric used for smaller owner-operated businesses: EBITDA plus the full compensation of one working owner. SDE reflects the total financial benefit available to a single owner-operator. Smaller businesses are typically valued on SDE multiples; larger businesses on EBITDA multiples. The dividing line is roughly $1 million in earnings, though it varies.
Seller Financing / Seller Note
A portion of the purchase price that the seller lends to the buyer, repaid over time with interest. Seller notes commonly cover 10–20% of the price in lower-middle-market deals. They signal the seller’s confidence in the business and help buyers bridge financing gaps.
Working Capital Adjustment
A purchase agreement mechanism that adjusts the final price based on the actual working capital (receivables, inventory, payables) delivered at closing versus an agreed target. Prevents sellers from stripping the business of cash and receivables before handing over the keys and protects sellers from delivering excess working capital without compensation.
