Reference
M&A Glossary
Plain-English definitions of the terms you'll meet when buying or selling a business — no jargon, no assumed knowledge.
- Add-backs (Normalisation)
- One-off or owner-specific costs added back to profit to show the true, ongoing earnings a buyer would inherit — e.g. the owner's above-market salary or personal expenses.
- Asset sale vs share sale
- In an asset sale the buyer purchases specific assets (and usually not the liabilities); in a share sale they buy the company itself, taking on everything. The choice has big tax and risk implications.
- Asking price
- The headline price a seller lists a business at. It's a starting point for negotiation, not necessarily what the business will sell for.
- Data room
- A secure online space where a seller shares confidential documents (financials, contracts, leases) with vetted buyers during due diligence.
- Due diligence
- The buyer's investigation of a business before completing — verifying the financials, contracts, legal standing and operations behind the headline numbers.
- Earnout
- Part of the price paid later, contingent on the business hitting agreed targets after the sale. Bridges a gap between what a seller wants and what a buyer will pay up front.
- EBITDA
- Earnings before interest, tax, depreciation and amortisation — a proxy for a business's core operating profit, and the most common basis for a valuation multiple.
- Enterprise value (EV)
- The total value of the business's operations, independent of how it's financed — typically what a multiple of EBITDA produces. Equity value is EV minus debt plus cash.
- Escrow
- Money held by a neutral third party after completion, released once conditions are met — often used to cover potential warranty claims.
- Heads of terms
- A short document setting out the key commercial terms of a deal before lawyers draft the full agreement. Similar in spirit to a letter of intent.
- Letter of intent (LOI)
- A mostly non-binding document in which a buyer sets out the proposed price and key terms, signalling serious intent to proceed to due diligence and a formal agreement.
- Multiple (EV/EBITDA)
- The factor applied to earnings to value a business. A business earning $1m EBITDA sold at a 5× multiple has an enterprise value of $5m.
- Net working capital peg
- An agreed 'normal' level of working capital the business must have at completion. Deviations adjust the final price up or down.
- Non-disclosure agreement (NDA)
- A confidentiality undertaking a buyer signs before seeing sensitive information, promising to keep it private and use it only to evaluate the deal.
- Reps & warranties
- Statements of fact the seller makes about the business in the sale agreement. If they turn out to be untrue, the buyer may have a claim.
- Seller (vendor) financing
- When the seller lets the buyer pay part of the price over time, rather than all at completion — a sign of confidence and a way to close a price gap.
- SDE (Seller's Discretionary Earnings)
- EBITDA plus the owner's salary and benefits — the total financial benefit to a single owner-operator. Common for valuing small, owner-run businesses.
- Strategic vs financial buyer
- A strategic buyer wants the business for synergies with their own; a financial buyer (like private equity) wants a return on investment. They often value the same business differently.
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