Business Acquisition Vocabulary & Valuation Guide

Vocabulary and formula flashcards generated from the Business Acquisition Study Guide.

Revenue

Total sales generated by the business before expenses.

Gross Profit

Profit remaining after deducting direct costs, calculated as $\text{Revenue} - \text{COGS}$.

Net Income

Accounting profit remaining after deducting operating expenses, interest, taxes, depreciation, and other costs.

SDE (Seller's Discretionary Earnings)

A common small-business cash-flow measure that starts with net profit and adds back one owner's compensation along with certain legitimate discretionary or non-recurring expenses.

EBITDA

Earnings before interest, taxes, depreciation, and amortization; standard for larger businesses and does not automatically include one owner's compensation.

Working Capital

Short-term operating resources needed to keep the company running, calculated as $\text{Current Assets} - \text{Current Liabilities}$.

CapEx (Capital Expenditures)

Major spending required for long-lived assets such as vehicles, machinery, roofs, HVAC systems, or production equipment.

Adjusted SDE

The refined cash flow figure calculated as $\text{Stated SDE} - \text{Questionable Add-Backs} + \text{Legitimate Adjustments}$.

SDE Multiple

Valuation measure calculated as $\text{Asking Price} \div \text{SDE}$, representing how many years of current SDE the price equals.

Adjusted Multiple

A valuation measure calculated as $\text{Asking Price} \div \text{Adjusted SDE}$ to reflect price relative to corrected cash flow.

SDE Margin

Efficiency metric calculated as $\frac{\text{SDE}}{\text{Revenue}} \times 100$, showing the percentage of revenue converted into owner cash flow.

Revenue-to-SDE

An inverse view of cash-flow efficiency calculated as $\text{Revenue} \div \text{SDE}$.

Gross Margin

Direct profitability percentage calculated as $\frac{\text{Gross Profit}}{\text{Revenue}} \times 100$.

DSCR (Debt Service Coverage Ratio)

Debt-payment cushion metric calculated as $\frac{\text{Cash Flow Available for Debt}}{\text{Annual Debt Service}}$.

Cash-on-Cash Return

Return on actual invested cash calculated as $\frac{\text{Annual Cash Flow to Owner}}{\text{Cash Invested}} \times 100$.

SBA Loan Amount

Financing requirement calculated as $\text{Purchase Price} - \text{Equity Injection} - \text{Seller Financing/Other Sources}$.

Profit & Loss Statement (P&L)

Financial document showing operating performance over a period of time, including revenue, expenses, and profit.

Balance Sheet

Financial document showing a company's financial position at a specific date, listing assets, liabilities, and equity.

Due Diligence

The systematic process of verifying financial, operational, legal, commercial, asset, and revenue facts before completing an acquisition.

LOI (Letter of Intent)

A preliminary document setting out proposed transaction economics, financing structure, transition, and diligence conditions prior to definitive closing agreements.

Seller Financing

An acquisition structure where the seller accepts payment for a portion of the purchase price over time, reducing initial bank debt and aligning buyer-seller incentives.

Earn-Out

A contingent payment structure where a portion of the purchase price is paid post-closing only if agreed business performance targets are achieved.

Escrow / Holdback

An arrangement where a portion of transaction proceeds is set aside with a neutral third party to satisfy potential post-closing claims or liabilities.

Indemnification

A contractual commitment forcing the seller to reimburse or absorb costs resulting from specified pre-closing liabilities.

CapEx Credit

A negotiated concession where the seller reduces the purchase price, performs repairs, or provides credit to cover near-term asset replacement costs.

Transition Period

An agreed post-closing timeframe during which the seller stays on to transfer customer relationships, operational knowledge, and managerial responsibilities.

Questionable Add-Backs

Discretionary expenses claimed by the seller that must actually continue under new ownership, such as required marketing, recurring travel, or essential operational payroll.

Customer Concentration Risk

A risk profile where a significant portion of total revenue is tied to a single customer or small group of customers.