Quick reference

Glossary

The terms of art in a small-business sale, defined once, in plain language. A backstop; every piece still defines a term where it first uses it.

Accounts receivable (receivables)

The money customers already owe a business. Together with cash and inventory, it is part of what a business has on hand to keep running. In many small business sales the seller keeps the receivables, so the buyer takes on payroll from day one without them.

Add-backs

Expenses on the books that a new owner would not carry, added back to profit to show the real earnings. The owner's salary, personal costs run through the business, and one-time items such as a lawsuit or a roof. An add-back you can document is money. One you cannot is an argument.

Appraisal

A professional's written estimate of what something is worth. When real estate or major equipment is part of a purchase, the lender orders separate appraisals of those, alongside its valuation of the business. A building's value is set by a real estate appraiser, usually with an environmental review.

Articles of incorporation (articles of organization)

The document filed with the state to create a company. A corporation files articles of incorporation; a limited liability company files articles of organization. A buyer asks for them to confirm the company exists, who formed it and what it is allowed to do.

Asset sale (asset purchase)

A sale where the buyer purchases the business's assets and takes on only the liabilities named in the agreement. The seller keeps the legal entity. Most small-business sales are asset sales, and the choice between an asset sale and a stock sale changes the tax treatment for both sides.

Balance sheet

A financial statement that shows, on one date, what the business owns, what it owes and what is left for the owner. A buyer reads it to see what comes with the business and what debts stand against it.

Business broker (broker)

A person or firm paid, usually a percentage of the sale price at closing, to value a business, prepare the materials, find and screen buyers and manage the process. What a broker does and does not do is its own piece. Whether to use one is the seller's decision.

Most brokers are paid a success fee at closing. Published guidance varies, but on smaller sales the figure most often quoted falls somewhere between eight and twelve percent, and the percentage usually steps down as the price rises. Those are ranges published by brokerages and advisory firms; published figures differ, and no neutral survey tracks commissions. What moves the real cost more than the headline rate: a minimum fee, whether a monthly retainer is credited against the fee at closing, and the tail provision, which can leave a seller owing a fee after the agreement ends. Every fee is negotiable, and the only number that matters is the one in the agreement.

Buy box

A written description of the business a buyer wants to buy. It covers the type of business, the size, the location and how involved the buyer plans to be. Buyers keep the full list for themselves and their advisors and send a short version to brokers and owners.

Buy-side advisor

An advisor who works for the buyer: finding businesses, helping evaluate them and guiding the buyer through the purchase. A business broker usually works for the seller; a buy-side advisor sits on the buyer's side of the table. They work alongside the buyer's M&A attorney, CPA and lender and do not replace them.

Bylaws

The internal rules of a corporation. How the board is chosen, how votes are taken and who can sign for the company. In a stock sale they tell the buyer what approvals the sale needs.

C corporation

A corporation taxed on its own profits, separately from its owners. When the owners are then paid from those profits, they are taxed again. That second layer of tax is why a C corporation selling its assets often costs the seller more than a stock sale would.

Cash at close

The money a buyer must bring on the day of closing. The down payment, closing costs and, in a well-planned deal, the working capital the business needs in its first weeks. It is larger than the down payment alone, which is the part most first-time buyers plan for.

Cash flow statement

A financial statement that shows where cash came from and where it went over a period. A business can show a profit and still run short of cash; this statement shows why.

Certified Development Company

A nonprofit partner that the SBA certifies and regulates, which makes SBA 504 loans alongside a bank. A buyer who finances the building with a 504 loan works through one.

Change-of-ownership loan

A loan that pays for buying an existing business, as opposed to starting one or expanding one. The SBA sets its own rules for these loans, including what the seller may and may not be paid after closing.

Closing

The day the purchase agreement is signed, the money moves and the keys change hands. Everything before it is preparation; everything after it is the transition.

Collateral

What secures a loan: business assets and sometimes personal property, such as the borrower's home. If business assets do not fully secure an SBA loan, lenders often also take a claim on personal real estate. What a lender requires varies, and it can be negotiated.

Collateral assignment

An agreement that gives a lender the right to be paid from the borrower's life insurance policy, up to the amount still owed, if the borrower dies. The borrower keeps owning the policy, and the beneficiaries receive anything above what the lender is owed. The assignment ends when the loan is repaid.

Confidential information memorandum (CIM)

The document that describes a business for sale to a buyer who has signed a non-disclosure agreement. The numbers, the history, the customers, the people and the reason for selling. Reading one critically is a buyer skill; writing an honest one is a seller skill.

Conventional loan

A business loan made without an SBA guarantee, on terms each lender sets. It often requires a larger down payment and shorter repayment than an SBA loan, but it can be simpler and faster when the buyer and the business are strong. Some conventional lenders accept a limited personal guarantee.

Cost of goods sold (cost of goods)

The direct cost of what the business sold. The materials, the parts and the labor that went into each job or product. Revenue minus cost of goods sold is gross profit.

Customer concentration (concentration)

How much of a business's revenue comes from its largest customer, or from a few. If one customer brings in a large share and leaves after the sale, the buyer loses a large share of the earnings they paid for. It does not always end a deal; it may call for a lower price, a longer handover or a contract signed before closing.

Debt service coverage ratio (DSCR, debt service coverage)

How many times over the business's earnings cover its loan payments. For an SBA loan, the SBA sets the minimum: 1.25 for buying an existing business, including an owner buyout or ESOP, and 1.15 for a business expansion. It is measured on historical earnings, from the last fiscal year or a two-year average, and projections cannot be used to meet it. Lenders can require more. The ratio is the reason a business's earnings, not its revenue, set what a buyer can borrow.

Depreciation and amortization

Accounting charges for the wearing out of equipment and other assets. They are among the common add-backs, and EBITDA measures earnings before them.

Diligence (due diligence)

The period, usually under a letter of intent, in which the buyer verifies what the seller has told them. The money, the people, the leases, the customers and what the business carries. It ends with the buyer closing, renegotiating or walking away.

Disclosure schedules

The seller's written list of exceptions to the promises in the purchase agreement. They tell the buyer what the seller is admitting, and disclosing known problems this way is the seller's main protection.

Earnest money

A deposit a seller may ask a buyer for in return for exclusivity. Many small business sales have none. When there is one, it can be held by a neutral escrow agent, and the letter of intent sets when it comes back to the buyer and when it does not.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

A measure of what a business earns before loan interest, income taxes and the accounting charges for the wearing out of equipment and other assets. Unlike SDE, it treats the owner as replaced by a paid manager, so only owner pay above a fair manager's salary is added back. Buyers and lenders use it more as a business grows and the buyer plans to hire someone to run it.

Earnout

A part of the price paid later and only if the business hits agreed targets after the sale. A buyer using an SBA-backed loan cannot offer one, because the program does not allow a price that depends on future performance.

Employer identification number (EIN)

The federal tax ID a company gets from the IRS. A buyer's new company needs one, along with bank accounts, payroll, state registrations and licenses in its own name.

Employment at will (at will)

The usual arrangement for employees in most states. Either side can end the job at any time, for any lawful reason, without a contract saying otherwise. It is why a buyer's promise to keep the crew is hard to enforce unless it is written into the purchase agreement.

Entrepreneurship through acquisition (ETA)

Buying an existing business to run it, as an alternative to starting one or staying employed. The umbrella term for search funds, self-funded searchers and independent sponsors.

Equity injection

The buyer's own money in an SBA-backed purchase: at least 10 percent of the total project cost. Out-of-pocket valuation and quality of earnings costs count toward it. Fees to a business broker or SBA loan advisor do not count. A seller note on full standby can count for no more than half of it.

Escrow

Money held by a neutral third party, called an escrow agent, until agreed conditions are met. In a sale, part of the price may be held in escrow after closing to cover claims. Money set aside this way is also called a holdback.

Estate planning attorney

A lawyer who plans how a person's property passes to their family and heirs, through wills, trusts and similar documents. Not the same as an M&A attorney. A sale changes what an owner holds, so the estate plan often needs to change with it.

Estoppel letter

A letter in which the landlord confirms the lease is in effect and there are no defaults. A lender may ask for one before closing, and landlords take time to sign them.

Exclusivity

A period, usually set in the letter of intent, during which the seller agrees not to negotiate with other buyers. It gives the buyer time to complete diligence and arrange financing without the deal being sold out from under them.

Financing contingency

A term in the letter of intent that gives the buyer the right to walk away if the loan is not approved. Together with a due diligence period, it is one of the two terms that protect a buyer's way out of a deal.

Franchisor

The company that grants a franchise. It licenses its name and its system to the owner of each franchise location. Most franchise agreements require the franchisor to approve a new owner before the business can be sold.

Going hard

Buyer slang for the point at which a deposit becomes non-refundable. Before it, a buyer can walk away and get the deposit back. After it, walking away costs the deposit.

Goodwill

The part of a business's value that is not equipment, inventory or cash. The name, the reputation, the customer relationships and the habits of the crew. In an asset sale it is usually the largest piece of the price, and how much of the price is called goodwill affects the tax both sides pay.

Gross profit (gross margin)

Revenue minus the cost of goods sold. Gross margin is gross profit shown as a share of revenue. A buyer compares margins year over year and against similar businesses to judge pricing and cost control.

Indemnification

What the seller owes the buyer after closing if one of the seller's promises in the purchase agreement turns out wrong. The agreement also sets its limits: the most the seller could owe, small claims that do not count and how long the buyer has to make a claim.

Independent sponsor

A person who finds a business to buy and then raises the money from investors deal by deal, rather than raising a fund first. One of the buyer types a seller may meet.

Independent valuation (business valuation)

A written estimate of what a business is worth, from a trained professional with no stake in the sale. When a buyer uses an SBA loan and the purchase price is above $350,000, the lender orders its own, from an appraiser holding one of five credentials: ASA, CBA, ABV, CVA or BCA. The loan cannot be larger than the valuation supports. Any gap has to come from the buyer's own money, or a seller note on full standby counted within the SBA's equity limits. A valuation either side orders for itself does not replace the lender's.

Indication of interest (IOI)

A short, non-binding letter from a buyer stating a price range and rough terms, sent before a letter of intent. It tells the seller whether the two sides are in the same neighborhood before either spends much time.

Investment banker

An advisor who sells or buys companies for clients, usually larger companies than a business broker handles. They are paid much the way brokers are: mostly a fee when the deal closes.

Landlord waiver

An agreement, signed by the landlord, that lets the lender access equipment and inventory in the building if the loan goes into default. A lender may require one when the business leases its location.

Letter of intent (LOI)

The offer document. It sets out the price, the structure and the main terms, and starts diligence. Most of it does not bind either side; some parts, usually exclusivity and confidentiality, do. Which parts bind is the first question for a buyer's attorney.

Lien

A claim against an asset, such as a lender's claim on equipment or a tax lien. Any debt with a lien on business assets must be paid off, or the buyer cannot take clean ownership.

Limited liability company (LLC)

A type of company that many buyers form to own the business they buy. A new company keeps the business's debts and obligations separate from the owner's other affairs, although a personal guarantee on the loan still applies. An LLC can choose how it is taxed.

Line of credit

A loan a business draws on only when it needs to, rather than taking as a lump sum. A buyer can set one up alongside the main acquisition loan to fund working capital after closing, instead of adding a lump sum to the loan, which raises the loan payment.

Loan commitment (commitment letter)

A lender's written approval of a loan, with its amount and conditions. Until the buyer has one, the buyer's financing is not certain.

Loss run (claims history)

An insurer's record of past claims on a policy. It shows past accidents, injuries and claims, and frequent claims may mean safety or quality problems.

Malpractice insurance

Insurance that pays claims against a professional, such as a lawyer or accountant, for mistakes in their work. A bar association referral program checks that its attorneys carry it.

Minority stake

A share of a company smaller than half. The holder owns part of the business but does not control it. A seller who keeps a minority stake shares in what the business earns after the sale without running it. If the buyer uses an SBA loan, an outside buyer must buy 100 percent, so keeping a stake is possible only when a partner or employee buys in, or with a non-SBA buyer.

Multiple

The number of years of earnings a buyer pays for a business. A business that sells for two and a half times seller's discretionary earnings of $200,000 sells for $500,000. The multiple is a judgment about risk: how confident a buyer can be that the earnings keep arriving after the owner leaves.

Net profit (net income)

What is left after every expense, including interest and taxes, is taken out of revenue. The bottom line of the profit and loss statement.

Non-compete

A promise not to compete with a business: how long, how far and in what kind of work. In a sale, the seller's non-compete is part of the purchase agreement and protects the customers and goodwill the buyer is paying for.

Non-disclosure agreement (NDA)

The agreement a buyer signs before seeing anything that identifies a business for sale. It is what lets a seller explore a sale without their crew, customers or competitors finding out.

Off-market

A sale of a business that was never listed, where the owner has not hired a broker or told anyone. Off-market businesses have fewer competing buyers and more room to shape the deal. They take longer to find, and the owner may not be prepared.

Operating agreement

The internal rules of a limited liability company. Who owns what share, how decisions are made and what happens when an owner leaves or sells. In a sale it tells the buyer what approvals are needed.

Operating expenses

The costs of running the business that are not tied to each job or product. Rent, office staff, insurance, marketing and utilities. Gross profit minus operating expenses is operating profit.

Personal financial statement (SBA Form 413)

A snapshot of a person's finances: what they own, what they owe and their income. A lender uses it to judge whether the buyer can repay and has the cash they say they have; SBA lenders ask for it on SBA Form 413, and some lenders use their own form. The buyer signs it as true and complete, and lenders check it against bank statements, tax returns and credit reports.

Personal guarantee

A buyer's personal promise to repay a business loan if the business cannot. SBA-backed loans require an unlimited guarantee from every owner of 20 percent or more. It is the reason a buyer's house is part of the conversation.

Pre-qualification (pre-qualification letter)

A lender's early look at a buyer, before they have found a business, that says roughly what size of purchase the lender could see financing. The result is usually a short letter the buyer can show brokers and sellers. It is optional, and it is not a loan approval or a commitment.

Price allocation (Form 8594)

How the price of an asset purchase is divided across classes of assets for taxes. Buyer and seller both report the split to the IRS on Form 8594. It is negotiated: more assigned to equipment can mean faster write-offs for the buyer, while the seller may prefer more assigned to goodwill.

Private equity

Investment firms that buy companies with money pooled from their own investors, usually aiming to grow the company and sell it again within several years. They more often buy businesses larger than most owner-run small businesses.

Profit and loss statement (P&L)

A financial statement that shows revenue, expenses and profit over a period, usually a month or a year. Also called an income statement. It is the first statement a buyer reads.

Proof of funds

A recent bank or brokerage statement showing the cash a buyer plans to use. Brokers and sellers ask for it, or for a lender's pre-qualification letter, as proof a buyer can pay.

Purchase agreement

The final, binding contract for the sale. It replaces the letter of intent and sets the price and terms, what the seller promises about the business and what happens if a promise turns out wrong. Each side's M&A attorney negotiates it, and the buyer's loan documents must match it.

Quality of earnings (QoE)

An accountant's review of a business's earnings, deeper than an audit of the books, to confirm that the stated earnings are real, recurring and correctly adjusted. It is required for an SBA-financed purchase of a business, or a business expansion, with a purchase price of $3 million or more. The lender orders it.

Representations and warranties

The formal statements the seller makes about the business in the purchase agreement. For example, that the financial statements are accurate, there are no undisclosed lawsuits and the equipment works. If one turns out to be false, the buyer may be able to recover money from the seller after closing.

Retainer

A payment made to an advisor up front or monthly, before any deal closes. Brokers, buy-side advisors, attorneys and CPAs may each charge one, often combined with other fees. With a broker, whether the retainer is credited against the fee at closing changes the real cost.

Retrade

A buyer coming back after diligence to ask for a lower price or different terms than the letter of intent set. Sometimes justified by what diligence found. Sometimes a tactic. The seller's piece on what to do when a buyer comes back with a lower number covers both.

Rollover as business startup (ROBS)

A structure that lets a buyer use retirement savings to fund a business purchase without the early-withdrawal penalty. Whether and how it counts toward an SBA equity injection depends on the current rules.

S corporation

A corporation whose profits pass through to its owners and are taxed once, on the owners' own returns. Many small businesses are S corporations or limited liability companies taxed the same way.

SBA 504 loan

The SBA program for buying real estate and heavy equipment, made with a certified development company alongside a bank. Relevant when the building comes with the business.

SBA 7(a) loan

The Small Business Administration's main loan program. The SBA guarantees part of a loan a bank makes, which is why banks will lend on small-business purchases at all. The rules for it live in the SOP.

SBA loan advisor (SBA loan broker)

An advisor who shops a buyer's loan to many lenders at once and manages the process to closing. On SBA loans the lender often pays their fee, and SBA rules require it to be disclosed in writing. Not the same as a buy-side advisor, who helps find and evaluate businesses.

Search fund

A structure in which a searcher raises money from investors to fund the search for a business, then raises more to buy it. Investors get a stake; the searcher runs the company.

Seller note (seller financing)

Part of the price the seller carries. The buyer signs a promissory note and pays the seller over years, with interest, out of the business's earnings. Common in small-business sales, and the reason the seller's piece on carrying a note exists.

Seller's discretionary earnings (SDE)

The total benefit one owner-operator takes out of a business in a year. Profit, plus the owner's salary, plus the add-backs. The number a buyer is actually paying for, and the first number a lender asks for.

Shared online folder

A folder kept on a file-sharing service and opened only to the people you name. Google Drive, Dropbox and Box are common examples. It is enough of a data room for many small business sales, as long as access goes to named people and never to a link anyone can open.

Standard operating procedure (SOP)

The SBA's rulebook for its loan programs. It sets what counts as the buyer's contribution, what a seller note has to look like, and how long it must sit on standby. It has changed several times in recent years, and any piece that depends on it carries the version it was written under.

Standby

A condition on a seller note. To count toward the buyer's equity injection on an SBA loan, the note must be on full standby: the seller receives no payments on it, of principal or interest, for the life of the SBA loan. It can cover no more than half of the required injection.

Stay bonus

A payment to a key employee for staying through the handover, a set period after closing. Buyers and sellers both use them to keep key people through a sale.

Stock sale (entity sale)

A sale where the buyer purchases the company itself, taking on its assets and its liabilities together. Less common in small-business sales than an asset sale, and different in its tax treatment.

Subordinated debt

A loan that is repaid only after another lender is paid. A seller note that sits behind the bank is subordinated debt: if the business struggles, the bank is paid first.

Success fee

A fee paid only when a deal closes. Most brokers are paid a success fee at closing, a percentage of the sale price; a buy-side advisor's success fee is paid when the buyer closes a purchase.

Surety bond

A guarantee, issued by a bonding company, that a business will finish a job or meet an obligation. Many contractors and licensed trades must carry one. Bonds are usually issued to a specific owner, so a new owner applies for their own.

Tax clearance

A notice from a state tax agency that a business has paid the taxes it owes, such as sales and payroll taxes. Some states require one before or at a sale; without it, the buyer can be held responsible for the seller's unpaid taxes.

Term sheet

The lender's outline of the loan it is prepared to consider: amount, rate, term, fees, collateral and conditions. It comes after the application and before underwriting, and it is not final approval.

Transition period

The weeks or months after closing when the seller stays on to introduce the buyer to customers, hand over what only they know and let the crew get used to the new owner. How long is set in the deal. If the buyer uses an SBA loan, the seller may stay only as a consultant, not as an employee, officer or owner, for up to 24 months in total, with fixed pay.

Underwriting

The detailed review a lender makes before approving a loan, or an insurer makes before issuing a policy. For a business purchase, the lender checks the earnings against tax returns, tests whether the business can cover the loan payments, reviews the buyer, orders an independent valuation and decides on collateral. Life insurance underwriting can take weeks.

Working capital

The cash a business needs to run between paying its bills and being paid by its customers. Payroll runs before customers pay, and in most sales the money customers already owe goes to the seller, so a buyer opens on day one needing working capital of their own.

Working capital target (peg)

A set amount of working capital agreed to stay with the business at closing. If the actual amount at closing is below the target, the price goes down; if it is above, the price may go up. Not every sale has one: in many, the seller keeps the cash and the money customers already owe.

Write off

To deduct the cost of something from taxable income. A buyer who purchases assets can write off much of the price over a number of years, which is one reason buyers usually prefer asset sales.

The documents

What a buyer asks for and when, and what a seller gathers before being asked. One list, viewed from either side.

The SBA loan, start to finish

The stages of an SBA-backed business purchase, on one page, in the order they happen.

Written under SOP 50 10 8.1, effective 1 October 2026. The rules have moved more than once in recent years; confirm the version in force with the lender before relying on them.

Tools

A tool that structures your own answers is teaching. None of these decides anything for you.

• Valuation estimator · for sellers
• Readiness checklist · for sellers
• Confidential Information Memorandum (CIM) builder · for sellers
• LOI worksheet and review checklist · for buyers
• Cash-at-close calculator · coming · for buyers
• Deal ceiling calculator · coming · for buyers
• Diligence checklist · for buyers
• Question bank by stage · for buyers and sellers