The ETA glossary
The vocabulary of buying a small business, in plain language — each term with the reason it matters to your search, not just a textbook definition.
- Add-backs
- Expenses added back to reported profit to present 'true' earnings — owner perks, one-time costs, family salaries. Legitimate ones are real; aggressive ones inflate the business.
- Asset sale vs. stock sale
- Buying the business's assets (most small deals — cleaner liabilities, better tax treatment for buyers) versus buying the entity itself (continuity of contracts and licenses).
- CIM (Confidential Information Memorandum)
- The seller-side marketing document a broker shares after an NDA — business overview, financials, customers, and asking terms, written to sell.
- Customer concentration
- How much revenue depends on the largest customer or few customers — the classic small-business fragility.
- DSCR (Debt Service Coverage Ratio)
- Cash flow available for debt payments divided by those payments; lenders commonly screen acquisition loans around 1.25× after a market owner salary.
- Due diligence
- The verification phase between LOI and closing — financial (QoE), legal, operational, and insurance review of everything the purchase price assumes.
- Earnout
- Purchase price contingent on future performance — the seller gets paid more if agreed targets are hit after close.
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization — the earnings measure used once a business is big enough to run under professional management rather than an owner-operator.
- Equity injection
- The cash (and qualifying standby seller note) a buyer must put into an SBA-financed purchase — typically at least 10% of total project cost.
- Escrow / holdback
- Purchase money held back at close — by an escrow agent or as a deferred payment — to cover indemnification claims if seller representations fail.
- Full standby
- A loan condition under which a seller note receives no payments — commonly for the life of the SBA loan — required since mid-2025 for notes counted toward the equity injection.
- HoldCo (holding company)
- An entity that owns one or more operating businesses — the structure ambitious buyers grow into as acquisitions accumulate.
- IOI (Indication of Interest)
- A short, non-binding letter expressing serious interest and a rough valuation range, sometimes requested before deeper access.
- Loan covenants
- Ongoing promises in the loan agreement — coverage ratios to maintain, reports to deliver, actions needing lender consent — that survive long after closing.
- LOI (Letter of Intent)
- A mostly non-binding agreement on headline terms — price, structure, exclusivity, timeline — that kicks off diligence and financing.
- Lower middle market
- The tier above main street — commonly a few million to tens of millions in revenue with professionalized management — priced on EBITDA and courted by institutional buyers.
- Main street (business)
- The smallest tier of sellable businesses — roughly under $1M in earnings — typically owner-operated and sold through local brokers on SDE multiples.
- Multiple
- The ratio of price to earnings (SDE or EBITDA) used to talk about valuation — 'asking 3.2× SDE.'
- NDA (Non-Disclosure Agreement)
- The confidentiality agreement brokers require before sharing a business's identity and CIM.
- Personal guarantee
- Your personal promise to repay the loan if the business can't — standard and unavoidable on SBA acquisition loans for meaningful owners.
- Proprietary deal flow
- Deals sourced by contacting owners directly before they list — 'off-market' — versus responding to brokered listings everyone sees.
- QoE (Quality of Earnings)
- An accounting engagement that verifies the earnings you think you're buying — revenue recognition, add-backs, customer concentration, working capital patterns.
- Reps & warranties
- The seller's contractual statements of fact about the business — financials, taxes, litigation, contracts — with indemnification if they prove false.
- Roll-up / add-on acquisition
- Buying multiple small companies in one industry onto a shared platform — each 'add-on' cheaper and easier than the first purchase.
- SBA 504 loan
- The SBA program for fixed assets — owner-occupied real estate and heavy equipment — often paired with a 7(a) when an acquisition includes the building.
- SBA 7(a) loan
- The U.S. government-guaranteed loan program most small acquisitions run on — up to $5M per loan, ten-year terms for business-only deals, personal guarantee required.
- SBA guaranty fee
- The upfront fee the SBA charges for guaranteeing the loan, typically financed into the loan balance and scaled to loan size.
- SDE (Seller's Discretionary Earnings)
- A small business's pre-tax profit with one owner's salary, benefits, and discretionary or one-time expenses added back — the standard earnings measure for owner-operated businesses.
- Search fund
- The investor-backed model: investors fund a two-ish-year search and then the acquisition, in exchange for most of the equity, with the searcher earning ownership through performance.
- Self-funded search
- Searching on your own dime and buying with SBA leverage and your own equity — keeping most or all ownership and control.
- Seller note
- Part of the price the seller finances themselves, paid over time — alignment, gap-filler, and sometimes part of the buyer's equity injection.
- Transition services
- The seller's committed post-close involvement — training, introductions, availability — written into the purchase agreement.
- Working capital peg
- The agreed 'normal' level of working capital the business must be delivered with at close; deviations adjust the price.