The Language of SMB Acquisitions

A contractor or part-time worker paid via Form 1099 whose labor cost may understate true operating expenses — and whose status as a contractor rather than employee may itself be a liability.

A tax election allowing the buyer and seller to treat a stock sale as if it were an asset sale for federal income tax purposes — giving the buyer a stepped-up tax basis while preserving the stock sale's operational benefits.

Money the business owes to vendors and suppliers for goods and services received but not yet paid — a current liability that represents near-term cash outflows.

Money owed to the business by customers for goods or services already delivered — a current asset on the balance sheet that represents future cash inflows.

A report that categorizes outstanding customer invoices by how long they've been unpaid — the primary tool for assessing whether accounts receivable on the balance sheet will actually be collected.

Expenses added back to net income when calculating SDE or Adjusted EBITDA because they are owner-specific, one-time, or non-recurring.

Earnings Before Interest, Taxes, Depreciation, and Amortization, further normalized for non-recurring items and owner-specific expenses — the standard valuation metric for businesses earning $1M+ annually.

The systematic allocation of an intangible asset's cost over its useful life — similar to depreciation but applied to non-physical assets like patents, customer lists, and acquired goodwill.

The annualized value of all active subscription or contract revenue — the primary revenue metric for businesses with predictable, contracted income streams.

The definitive legal contract governing an asset sale — specifying exactly which assets and liabilities are being acquired, the purchase price allocation, representations and warranties, and closing conditions.

A transaction structure where the buyer purchases specific assets of a business — equipment, contracts, customer lists, goodwill — rather than acquiring the legal entity itself.

A financial statement showing what a business owns (assets), what it owes (liabilities), and the residual owner's equity — a snapshot of financial position at a point in time.

An add-on acquisition by a platform company — purchasing a smaller business in the same industry to add revenue, customers, or capabilities to an existing operation.

The net asset value of a business as recorded on its balance sheet — total assets minus total liabilities — reflecting historical cost of assets minus accumulated depreciation.

The calculation of what revenue level a business must generate to cover all fixed and variable costs — the point at which profit is exactly zero.

An intermediary who represents the seller in marketing and selling a small business — typically earning a commission of 8-12% of the sale price, paid by the seller at closing.

The formal process of determining the economic value of a business — using income-based, market-based, or asset-based approaches to arrive at an estimated fair market value.

Spending on physical assets — equipment, vehicles, machinery, property improvements — that have a useful life beyond one year and are capitalized on the balance sheet rather than expensed.

Two methods of recording transactions: cash basis records income when cash is received and expenses when paid; accrual records income when earned and expenses when incurred, regardless of cash timing.

A financial statement showing all cash inflows and outflows during a period, organized into operating, investing, and financing activities — the most reliable measure of actual cash generation.

A seller-prepared document — typically 20-50 pages — that provides a structured overview of the business for prospective buyers, including financials, operations, market position, and growth opportunities.

The fees and expenses incurred in connection with an acquisition — including legal fees, lender fees, appraisal costs, and escrow fees — typically totaling 3-7% of the purchase price.

The direct costs of producing the goods sold or services delivered — materials, direct labor, and direct overhead — the expenses that move in proportion to revenue.

Assets pledged as security for a loan — the lender's recourse in the event of default. SBA acquisition loans are typically secured by business assets, personal assets, and a personal guarantee.

Recent sales of similar businesses used as valuation benchmarks — the primary evidence base for determining appropriate deal multiples in small business acquisitions.

A liquidity measure calculated as current assets divided by current liabilities — indicating whether a business can meet its short-term obligations with its short-term assets.

A risk factor measuring how much revenue depends on a small number of customers. A single customer representing more than 20% of revenue is a concentration risk; above 25% is typically a financing trigger.

A secure digital repository where the seller organizes and shares financial, legal, and operational documents with buyers during due diligence — typically a shared folder or virtual data room platform.

The average number of days a business takes to pay its suppliers — a measure of how efficiently a company uses supplier credit as a source of working capital.

The average number of days it takes a business to collect payment after making a sale — a measure of receivables efficiency and customer payment behavior.

A valuation method that estimates the present value of a business by projecting future cash flows and discounting them back to today using a risk-adjusted discount rate.

The ratio of purchase price to SDE or EBITDA — the primary shorthand for comparing business valuations. A $900K business earning $300K SDE sold at a 3x multiple.

Cash received from customers for services not yet delivered — a liability on the balance sheet representing obligations the business must fulfill after closing.

The systematic allocation of a tangible asset's cost over its useful life — a non-cash accounting expense that reduces taxable income but doesn't reduce cash flow.

Annual net operating income divided by annual debt payments — the primary metric lenders use to determine whether a business can service acquisition debt. SBA lenders typically require 1.25x or higher.

The investigative process buyers conduct after signing an LOI to verify the seller's claims, identify undisclosed risks, and confirm that the business is what it appears to be before closing.

A deposit made by the buyer at LOI signing or early in the deal process to demonstrate serious intent — typically $10,000-$50,000, which may be refundable or non-refundable depending on the deal terms.

A contingent payment structure where the seller receives additional consideration after closing, tied to the business hitting agreed performance targets.

Earnings Before Interest and Taxes — operating profit before financing costs and income taxes, measuring how much the business earns from its core operations regardless of capital structure or tax situation.

EBITDA expressed as a percentage of revenue — a normalized profitability ratio that allows comparison of operating efficiency across businesses of different sizes and capital structures.

The total value of a business — equity plus debt minus cash — representing what it would cost to acquire the entire operating enterprise, regardless of capital structure.

The strategy of becoming a business owner by acquiring an existing company rather than building one from scratch — buying a profitable, operating business and stepping in as the owner-operator.

The potential liability arising from contamination, hazardous waste, or regulatory violations at a business's property or in its operations — a due diligence requirement for industrial, automotive, and certain service businesses.

The buyer's required cash contribution into the acquisition — the minimum amount of capital the buyer must put in before an SBA lender will fund the balance, typically 10% of total project cost.

The value of the seller's ownership interest — what the seller actually receives at closing, after accounting for any business debt paid off and excess cash retained.

A portion of the purchase price withheld at closing and held by a third party (escrow) or the buyer (holdback) for a defined period to cover potential indemnification claims, working capital adjustments, or transition contingencies.

The defined window after LOI signing during which the seller is contractually prohibited from negotiating with other buyers — giving the buyer time to complete due diligence and finalize financing without competitive pressure.

The price at which a business would change hands between a willing buyer and a willing seller, neither under compulsion to buy or sell, both having reasonable knowledge of the relevant facts.

Operating cash flow minus capital expenditures — the cash actually available to the owner after maintaining and investing in the business, before debt service and owner distributions.

The portion of the purchase price that exceeds the fair market value of identifiable tangible and intangible assets — representing the value of reputation, customer relationships, brand, and going-concern premium.

Revenue minus cost of goods sold (COGS), expressed as a percentage of revenue — the profitability of the business's core product or service before operating overhead.

A financial statement showing revenue, expenses, and net income over a period — the primary document used to calculate SDE and EBITDA in business acquisitions.

A contractual obligation requiring one party to compensate the other for losses arising from specific events — in acquisitions, primarily the seller compensating the buyer for pre-closing liabilities and rep breaches.

The range of SDE or EBITDA multiples at which businesses in a specific industry typically trade — used as the primary pricing benchmark in small business acquisitions.

Goods held by a business for sale or for use in producing goods or services — a current asset on the balance sheet that must be assessed for accuracy, condition, and obsolescence in acquisitions.

The vulnerability of a business to disruption if a specific individual — other than the owner — leaves, becomes incapacitated, or is no longer available.

The risk that a business's operating lease — for its primary location, equipment, or vehicles — will not transfer to the buyer, will expire shortly after closing, or contains terms that disadvantage the buyer.

A non-binding document that outlines the key terms of a proposed acquisition before a definitive purchase agreement is signed — establishing price, structure, exclusivity, and conditions of closing.

A flexible business entity that provides limited liability protection to its owners (members) while allowing pass-through taxation — the most common structure for new small businesses.

A condition in a loan agreement that requires the borrower to maintain certain financial metrics or refrain from certain actions — violation gives the lender the right to call the loan or impose penalties.

A sum of money paid by the buyer to the seller (or into escrow) at the time of LOI signing to demonstrate serious intent — typically refundable during due diligence but forfeited if the buyer walks without cause.

A contractual provision allowing a buyer to terminate the purchase agreement without penalty if a significant negative development occurs between signing and closing that materially affects the target business.

A hybrid layer of financing that sits between senior debt and equity — subordinated to bank debt but senior to equity, often used to bridge the gap between what a senior lender will fund and the total capital required.

The monthly value of all active subscription or contract revenue — the operational heartbeat metric for subscription businesses, equal to ARR divided by 12.

A confidentiality contract requiring the buyer to keep information about the business private — signed before the seller releases the CIM or detailed financial information.

The bottom line of the income statement — revenue minus all expenses, taxes, interest, and depreciation. The starting point for SDE and EBITDA calculations.

A post-signing mechanism that adjusts the final purchase price up or down based on the actual working capital delivered at close compared to a negotiated target — ensuring the buyer receives a normally functioning business.

A binding provision in an LOI preventing the seller from soliciting or entertaining offers from other buyers during the exclusivity period — the primary protection that makes an LOI meaningful.

A contractual restriction preventing the seller from starting or working for a competing business for a defined period and within a defined geographic area after the sale closes.

Financial statements adjusted to remove owner-specific, one-time, and non-recurring items — showing the business's true economic performance as it would operate under new, arm's-length ownership.

The governing document of an LLC that defines ownership percentages, management rights, profit distribution rules, and the procedures for transferring membership interests.

The total economic benefit the business owner receives — including salary, benefits, distributions, perks, and retirement contributions — the largest single add-back in most SDE calculations.

The degree to which a business's revenue, customer relationships, or operations are tied to the personal presence, skills, or reputation of the current owner.

A business structure (S-corp, LLC, partnership) where income is not taxed at the entity level — instead, profits and losses pass directly to the owners' personal tax returns.

A contractual commitment by an individual — typically the buyer — to personally repay a business loan if the business defaults, making the borrower personally liable beyond their equity investment.

Taxable income that a business owner must report and pay taxes on even though they haven't received actual cash — most commonly triggered by S-corp or partnership pass-through income that wasn't distributed.

The initial acquisition in a buy-and-build strategy — a business of sufficient size and operational infrastructure to serve as the foundation for subsequent add-on acquisitions.

The operational, financial, and cultural work of combining the acquired business with the buyer's existing operations — or standing it up as a self-sustaining entity under new ownership.

Financial projections that show what results would have been (or will be) under different assumptions — used in acquisitions to show adjusted historical performance or projected future performance.

A written promise to repay a specified sum of money on defined terms — the legal instrument documenting a seller note, SBA loan, or any other debt obligation in a business acquisition.

The process of assigning the total acquisition price across specific asset classes — tangible assets, intangibles, and goodwill — which determines the tax treatment for both buyer and seller.

An independent analysis — typically performed by a third-party CPA firm — that verifies whether reported earnings are accurate, sustainable, and recurring before an acquisition closes.

A stricter liquidity measure than the current ratio — calculated as liquid assets (cash + receivables) divided by current liabilities, excluding inventory and prepaid expenses.

Revenue from customers under contract or subscription arrangements that renews automatically or with high predictability — the most valuable type of revenue for business valuation purposes.

The potential for adverse regulatory changes, enforcement actions, or compliance failures that could disrupt a business's operations or reduce its profitability post-acquisition.

The market-rate compensation required to hire a general manager to perform the owner's operational role after acquisition — the critical variable that determines whether the SDE add-back creates real economic value.

Factual statements made by the seller in the purchase agreement that assert the accuracy of disclosures and the absence of undisclosed liabilities — breaches trigger indemnification obligations.

A measure of how sustainable, predictable, and genuinely earned a business's reported revenue is — distinguishing between recurring contracted revenue and one-time, pull-forward, or unsustainable sources.

A financing strategy that allows buyers to use 401(k) or IRA retirement funds to fund a business acquisition without triggering early withdrawal taxes or penalties — by rolling funds into a new C-corp retirement plan that invests in the business.

An annualized projection of current financial performance — calculated by taking a recent period's results (a month or quarter) and extrapolating to a full year.

A pass-through tax entity that allows profits and losses to flow directly to shareholders' personal tax returns — the most common legal structure for small businesses sold in acquisitions.

An SBA loan program designed for the purchase of fixed assets — primarily commercial real estate and major equipment — offering long-term, fixed-rate financing at below-market rates.

The Small Business Administration's primary loan program for small business acquisitions — allowing buyers to acquire businesses with as little as 10% down, with the SBA guaranteeing up to 85% of the loan amount.

An investment vehicle in which investors fund an entrepreneur (the searcher) to search for, acquire, and operate a single private company — the dominant institutional model for entrepreneurship through acquisition.

A deal structure where the seller provides a portion of the purchase price as a loan to the buyer, repaid over time — typically 5-10% of the purchase price, junior to any senior lender.

A provision requiring the seller to defer all principal and interest payments on their seller note for a defined period — typically 24 months — allowing the seller note to count as equity for SBA purposes.

The total economic benefit a single working owner receives from a business — net income plus owner compensation plus all personal add-backs.

The generational wave of baby boomer business owners retiring simultaneously — expected to transfer ownership of over 12 million U.S. businesses worth trillions of dollars between 2020 and 2040.

A transaction structure where the buyer acquires the legal entity itself — purchasing the owner's shares or membership interest — inheriting all assets and liabilities.

A contractual provision in the purchase agreement requiring the seller to train the buyer on business operations for a defined period post-closing — typically included as part of the transition arrangements.

The period after closing during which the seller remains involved in the business — introducing the buyer to customers and employees, transferring operational knowledge, and supporting continuity.

The most recent 12-month period of financial performance, ending at the current month — used instead of a fiscal year to give the most current view of a business's earnings.

A Uniform Commercial Code filing by a lender that publicly records a security interest in a borrower's business assets — a lien that must be cleared before an asset sale can close cleanly.

A risk factor where a business depends on one or a small number of suppliers for critical inputs — creating supply disruption risk if the vendor relationship ends or terms worsen post-acquisition.

Current assets minus current liabilities — the operating liquidity of a business at a point in time. Most acquisition agreements include a working capital target that adjusts the purchase price at closing.