Search fund and ETA glossary: terms searchers, lenders and advisors use
This glossary defines the terms you will meet when searching for, valuing, financing and buying a business, in plain English, with notes on where SBA rules or the Stanford and IESE studies use them.
Key takeaways
- Definitions are general. Contracts and lender rules control in a real deal.
- Where a term has an SBA meaning, the entry says so and cites the SOP.
- Use the contents list to jump to a letter section.
A to C
- Accredited investor: an investor who meets SEC wealth or income tests and can participate in many private offerings. Rules are set by the SEC.
- Add-back: an expense added back to earnings because it is personal, one-time or non-cash. See the evaluating guide.
- Amortization (loan): how a loan is repaid over time. SBA change-of-ownership loans may not amortize over more than 10 years, except real estate portions.
- Amortization (tax): spreading the cost of an intangible over time. Goodwill acquired in an asset purchase is amortized over 15 years for U.S. tax.
- APA (asset purchase agreement): contract to buy selected assets and assume agreed liabilities.
- Basket: threshold of losses that must be passed before indemnity claims are payable.
- Broker: intermediary who markets a business for sale, usually paid a success fee by the seller.
- Buyer rebate: a payment from the seller to the buyer based on business performance. Allowed under the SBA SOP and applied to loan principal.
- Cap (indemnity): the maximum a seller pays for ordinary breaches.
- Capital stack: the layers of financing in a deal, from senior debt to common equity.
- Carried interest or promote: a share of profits paid to a sponsor above a return threshold.
- CIM (confidential information memorandum): the seller's or broker's sales document about the business.
- Closing: the date ownership transfers and funds move.
- Collateral: assets pledged to secure a loan.
- Core search fund: the traditional search fund model with investor-backed search capital.
- Customer concentration: the share of revenue from the largest customers.
D to L
- Data room: an organized online folder of diligence documents.
- DSCR (debt service coverage ratio): cash flow available for debt service divided by required debt payments. The SBA SOP defines historical DSC as EBITDA divided by combined post-transaction debt service and sets 1.25 as the minimum for Initial Acquisitions in SOP 50 10 8.1.
- Due diligence: the buyer's investigation between LOI and closing.
- EBITDA: earnings before interest, taxes, depreciation and amortization.
- Earn-out: extra price paid to the seller if the business hits agreed targets. Prohibited for sellers in SBA-financed changes of ownership.
- Equity injection: the buyer's own money in the deal. The SBA minimum is 10 percent of total project costs for Initial Acquisitions.
- Escrow: money held by a third party to pay possible claims after closing.
- ETA (entrepreneurship through acquisition): the path of buying and running an existing company.
- Exclusivity (no-shop): period when the seller may not negotiate with other buyers.
- Full standby: seller or other debt that receives no principal or interest payments during the life of the SBA loan; interest may accrue.
- Goodwill: value of a business above its identifiable net assets.
- Guaranty (personal): a promise by an individual to repay a loan. The SBA requires unlimited guaranties from owners of 20 percent or more.
- Holdback: part of the price withheld at closing to cover claims.
- HSR (Hart-Scott-Rodino): the U.S. premerger notification law. The 2026 size-of-transaction threshold is $133.9 million.
- Indemnity: a seller's agreement to compensate the buyer for specified losses.
- Independent sponsor: a dealmaker who raises equity deal by deal rather than from a fund.
- Initial Acquisition (SBA): the default category for 7(a) changes of ownership, resulting in a new majority or largest individual owner.
- IRR (internal rate of return): the annualized return that equates cash in and cash out over time.
- LDE (long duration enterprise): a term used in Stanford's 2026 study for companies held over long horizons; the study introduced data on 67.
- LOI (letter of intent): non-binding outline of price and terms, with binding confidentiality and exclusivity.
- Limited sources (SBA): equity injection sources capped together at half of the required injection, including standby debt and non-controlling minority equity.
- Lower middle market: segment of private companies above main-street and below the traditional middle market; definitions vary.
M to R
- Main street business: a small owner-operated business, usually valued on SDE.
- Mezzanine debt: debt that ranks below senior debt and above equity, with higher cost.
- NDA: non-disclosure agreement.
- Net working capital: current assets (excluding cash and debt-like items) less current liabilities.
- Owner buyout (SBA): a change of ownership between existing owners or long-time employees, with different equity and DSCR rules from Initial Acquisitions.
- Peg (working capital): the target working capital the buyer expects at closing, adjusted in the price if actual differs.
- Piggyback financing (SBA): multiple loans at about the same time for a similar purpose where the SBA loan is junior or unsecured; not permitted.
- PLP (Preferred Lender Program): SBA program that lets certain lenders process loans with delegated authority.
- PME (public market equivalent): compares an investment's returns with a public market index over the same cash flows; above 1 means it beat the index.
- Qualified Source (SBA): an accredited, independent business valuer meeting the SOP's definition.
- QoE (quality of earnings): independent review of whether earnings are accurate and repeatable. Required by the SBA for Initial Acquisitions with a business purchase price of $3 million or more.
- Representations and warranties: seller's statements of fact in the purchase agreement.
- Rollover equity: seller keeps an ownership stake in the business after the sale.
- Roll-up: strategy of buying several companies in one niche and combining them.
- ROI (return on investment): multiple of invested capital returned.
S to Z
- SBA 7(a): the SBA's main loan program, partially guaranteeing loans made by approved lenders. The maximum loan is $5 million.
- SDE (seller's discretionary earnings): pre-tax earnings with one owner's compensation, discretionary and non-cash items added back.
- Search capital: money raised from investors to fund the search.
- Searcher: entrepreneur who searches for a company to acquire and then leads it.
- Section 197 intangible: goodwill and similar intangibles amortized over 15 years for U.S. tax.
- Seller note: loan from the seller to the buyer for part of the price.
- Self-funded search: a search funded by the buyer's own money and debt rather than investor search capital.
- Senior debt: debt with first claim on assets.
- SOP 50 10: the SBA's Standard Operating Procedure for 7(a) and 504 lenders. Version 8.1 took effect October 1, 2026.
- SPA (stock purchase agreement): contract to buy the shares or interests of a company.
- Standby agreement: lender form (SBA Form 155 or equivalent) that subordinates debt and bars payments or action by the creditor.
- Step-up: a premium investors may receive when search capital converts into acquisition equity; the terms are negotiated, and the Stanford primer is the reference for market practice.
- Subordination: agreement that one debt is paid after another.
- Survival period: how long representations remain enforceable after closing.
- TSA (transition services agreement): agreement for the seller to provide services after closing; in SBA initial acquisitions this is a consulting arrangement of up to 24 months.
- Total project costs (SBA): all costs required to complete the change of ownership regardless of the source of funds, except lines of credit and 504 loans; the base for the 10 percent equity injection.
- Upfront guaranty fee (SBA): fee paid by the lender to the SBA and often passed to the borrower; the maximum is a percentage of the guaranteed portion.
- Working capital: see net working capital.
Frequently asked questions
SDE adds back one owner's whole compensation; EBITDA is usually stated after paying a market-rate manager. See the evaluating guide.
In SBA lending, debt on full standby receives no principal or interest payments for the term of the 7(a) loan. Interest may accrue and be paid after the 7(a) loan is repaid.
Sources
Last reviewed . General information, not legal, tax or financial advice.
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Related guides
- What is a search fund? The traditional, self-funded and independent sponsor models
- Evaluating a business: SDE vs EBITDA, add-backs, quality of earnings, concentration and owner dependence
- SBA 7(a) loans for buying a business: eligibility, equity injection, DSCR and the rules in SOP 50 10 8.1
- Browse businesses for sale