Valuation Terms |
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Addbacks |
Adjustments used to increase EBITDA by removing expenses that won’t continue after the sale (e.g., your personal vehicle, one-time bonuses, one-time legal fees). |
Adjusted EBITDA |
EBITDA after removing one-time, owner-specific, or non-recurring expenses. It reveals the real ongoing profitability of the business. |
EBITDA |
Stands for Earnings Before Interest, Taxes, Depreciation & Amortization. It’s the most common measure buyers use to value companies because it reflects the business’s true operating performance. |
Enterprise Value (EV) |
The total value of your business before subtracting debt or adding cash. It creates a fair baseline for valuation discussions. |
Valuation Multiple |
A number buyers apply to EBITDA (for example, 4x or 5x) to estimate value. Multiples vary based on industry, size, stability, and risk. |
Deal Structure Terms |
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Asset Sale |
The buyer purchases specific assets (equipment, contracts, customers). |
Cash at Close |
The amount you receive immediately when the deal closes. Sellers often focus on this number because it's guaranteed. |
Earnout |
A portion of the purchase price paid only if the business meets certain future performance goals. |
Holdback / Escrow |
A small portion of the price the buyer holds temporarily to protect against unexpected issues. |
Purchase Price Adjustment |
A true-up based on final working capital. If actual working capital is below the target, you may owe money back. If above, you may receive more. |
Rollover Equity |
You keep a minority ownership stake in the company after selling. If the buyer grows and sells it later, you get a “second bite of the apple.” |
Seller Financing (Seller Note) |
A loan from you to the buyer for part of the purchase price. The buyer pays you back over time with interest. |
Stock Sale |
The buyer acquires your ownership interest in the business entity. Sellers often prefer this because it’s simpler and may be more tax efficient. |
Working Capital & Working Capital Target |
Working capital is the cash, inventory, receivables, and payables needed for daily operations. Deals often include a “target” or “peg” to ensure the business is delivered with a normal level of working capital. |
Process Terms |
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Closing |
The moment the sale becomes official and funds are transferred. After closing, ownership and control shift to the buyer. |
Definitive Agreement |
The final, legally binding contract spelling out everything in the deal. It replaces the LOI and governs the entire transaction. |
Due Diligence |
The buyer examines your financials, taxes, customers, contracts, employees, equipment, and operational processes. This phase is detailed and time-consuming, but completely normal. |
Indication of Interest (IOI) |
A non-binding, early-stage expression of interest that typically includes a proposed price range, deal structure, and any key assumptions. |
Letter of Intent (LOI) |
A preliminary agreement outlining price and key terms. It typically includes an exclusivity period, meaning you agree not to negotiate with other buyers while due diligence is underway. Once signed, the process moves toward a Definitive Agreement. |
NDA (Non-Disclosure Agreement) |
A confidentiality agreement signed before sharing sensitive business information with a potential buyer. It legally prevents them from disclosing or misusing what they learn during the process and is typically one of the first documents exchanged in the process. |
Quality of Earnings (QoE) |
A third-party financial review used to verify your financials. Buyers rely heavily on QoE reports to confirm valuation. |
Risk, Legal & Protection Terms |
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Disclosure Schedules |
Documents where you list exceptions to your reps & warranties. They protect you from future disputes by clearly disclosing known issues. |
Indemnification |
Your obligation to compensate the buyer if something you represented turns out untrue. Usually limited by escrow caps. |
Non-Compete |
You agree not to start or work for a competing business for a set time and within a defined area after the sale. |
Representations & Warranties |
Statements you make about the accuracy of your business (financials, legal compliance, taxes, etc.). |
Selling your business isn’t just a transaction, it’s a transition into your next chapter. Understanding M&A terms helps you navigate the sale with confidence and maximize your outcome, so you can focus on what comes next. Whether that’s retirement, a new venture, or simply freedom, clarity today supports opportunity tomorrow.
DirectExit was built for exactly that: giving business owners the tools, access, and expertise to run a smart sale on their own terms. Ready to explore what your next chapter could look like? Join the DirectExit platform to connect directly with vetted buyers and start exploring your options.