Short, plain-English explainers for people buying, financing or investing in lower-middle-market businesses. Each guide opens with the direct answer, then the detail.
A search fund is a vehicle in which an entrepreneur, called a searcher, raises a small amount of capital from investors to pay for the search for a single private company to acquire, and then becomes the CEO of that company.
An SBA 7(a) loan is a loan made by an approved lender and partially guaranteed by the U.S. Small Business Administration, and it is one of the most common ways to finance the purchase of a small business.
An independent sponsor is a private equity dealmaker who finds, negotiates and manages acquisitions without a committed pool of capital, raising equity from investors separately for each deal.
Seller's discretionary earnings (SDE) is a business's pre-tax earnings with one owner's salary, discretionary expenses and non-cash items added back, while EBITDA is earnings before interest, taxes, depreciation and amortization, usually after paying a market-rate manager.
A letter of intent (LOI) is a document in which a buyer sets out the proposed price and main terms of an acquisition before the final purchase agreement, and it is usually non-binding except for provisions such as confidentiality and exclusivity.
The lower middle market is the segment of private companies larger than main-street small businesses but smaller than the traditional middle market, and definitions vary by firm, commonly describing companies with roughly $1 million to $10 million of EBITDA.
A roll-up is a strategy where one owner buys several small companies in the same niche, combines them under one group, and aims to sell or refinance the larger group at a higher valuation multiple than the parts cost.
A business broker or M&A advisor is an intermediary who markets a company for sale and manages the process, usually paid mostly through a success fee when the deal closes.
Due diligence is the buyer's structured investigation of a company between signing a letter of intent and closing, to confirm the financials, customers, operations, legal standing and people are what the seller said.
Seller financing is an arrangement where the seller of a business accepts part of the purchase price over time, as a promissory note from the buyer, instead of receiving all of it at closing.
In an asset sale the buyer purchases selected assets and assumes only agreed liabilities, while in a stock sale the buyer purchases the owner's shares and takes the whole company, including its history and liabilities.
To find out who acquired a company, check the target's own announcement and the acquirer's press releases first, then regulatory filings and deal databases, and confirm any price or date against a primary source.
