Glossary

Plain definitions of the deal, financing, accounting and search fund terms used across these guides.

88 terms used across these guides, grouped by topic. Where a definition depends on a rule (SBA, tax, search fund terms), it follows the source listed at the bottom; confirm the current version before relying on it. For the same ideas in context see modeling fundamentals, valuation, M&A basics and LBO modeling; also the community guides.

Accounting and finance basics

Accrual accounting: Recording revenue when earned and costs when incurred, regardless of when cash moves. Many small sellers use cash-basis books, which shifts revenue and costs between months.
Accounts receivable (AR): Money customers owe for sales already made. A current asset.
Accounts payable (AP): Money the company owes suppliers. A current liability.
Balance sheet: A snapshot of assets, liabilities and equity at one date. Assets equal liabilities plus equity.
Capex: Capital expenditures: spending on long-lived assets such as equipment. Maintenance capex keeps the business running; growth capex expands it.
Cash flow statement: Shows cash from operations, investing and financing for a period.
COGS: Cost of goods sold: the direct costs of producing what was sold.
Contribution margin: Revenue less variable costs. It is the profit a lost or gained dollar of revenue really carries.
DIO: Days inventory outstanding: inventory divided by cost of goods sold, times 365.
DPO: Days payables outstanding: payables divided by cost of goods sold, times 365.
DSO: Days sales outstanding: receivables divided by revenue, times 365.
Depreciation and amortization (D&A): Non-cash expenses that spread the cost of tangible assets (depreciation) and intangibles (amortization) over time.
EBIT: Earnings before interest and taxes.
EBITDA: Earnings before interest, taxes, depreciation and amortization. A common proxy for operating cash flow. It ignores capex, working capital and taxes.
Free cash flow (FCF): Cash left after operating costs, taxes, capex and working capital investment. Unlevered free cash flow excludes interest; levered free cash flow is after interest.
Goodwill: The part of a purchase price above the fair value of identifiable net assets. In a tax asset purchase it is generally amortized over 15 years (IRS section 197).
Income statement: Revenue less costs for a period, ending in net income.
Net working capital (NWC): Operating current assets (receivables, inventory) less operating current liabilities (payables, accrued costs), excluding cash and debt.
Normalized earnings: Reported earnings adjusted for items that will not recur or that are not at market terms, such as owner pay or one-time legal costs.
Pass-through entity: A business whose profit is taxed on the owners' returns rather than at the company level (for example many LLCs and S corporations). Owners take distributions to pay the tax.
TTM or LTM: Trailing (last) twelve months. The most recent 12 months of results, often used in place of the last fiscal year.

Valuation

Add-back: An adjustment that increases reported earnings because a cost is personal, one-time or not required after the sale. Each needs documentation.
Comparable companies (comps): Similar companies whose valuation multiples guide the value of a target.
Control premium: Extra value paid for the ability to direct a company, relative to a minority stake.
DCF: Discounted cash flow: value from forecast free cash flows discounted at a rate reflecting risk, plus a terminal value.
Discount for lack of marketability: A reduction in value for an asset that cannot be sold quickly, common for private companies. The amount is judgment.
Enterprise value (EV): Value of the operating business to all capital providers: equity value plus debt minus cash.
Equity value: Enterprise value less debt plus cash. What belongs to owners.
Multiple: A valuation ratio, such as enterprise value divided by EBITDA.
Precedent transactions: Prices paid in past acquisitions of similar businesses.
SDE: Seller's discretionary earnings: pre-tax profit plus one owner's compensation and benefits, interest, depreciation and amortization, and personal or one-time costs. Used for owner-operated businesses.
Terminal value: The value of cash flows beyond the forecast period in a DCF, from a perpetual growth rate or an exit multiple.
WACC: Weighted average cost of capital: the blended cost of equity and after-tax cost of debt, used as the DCF discount rate.
Beta: A measure of how much a stock moves with the market. Used in the cost of equity.
Size premium: Extra return required for investing in small companies, added to the cost of equity.

Deals and diligence

Asset purchase: The buyer buys selected assets and assumes selected liabilities. The buyer gets a stepped-up tax basis.
APA / SPA: Asset purchase agreement / stock (or equity) purchase agreement: the definitive contract.
Broker: An intermediary who markets a business for sale, common in smaller deals.
CIM: Confidential information memorandum: the sell-side document describing the business.
Cash-free, debt-free: A price convention where the seller keeps the cash and pays off the debt, and the buyer receives a normal level of working capital.
Closing: The date ownership transfers and funds move.
Diligence: The buyer's investigation of a business before closing: financial, customer, legal, tax, operations and others.
Earnout: Contingent consideration paid after closing if the business hits an agreed target.
Equity purchase: Buying the ownership of the entity (shares or membership interests) rather than selected assets.
Escrow or holdback: Part of the price held back after closing to cover claims or adjustments.
Form 8594: The IRS form on which buyer and seller report how the price is allocated among asset classes in an asset acquisition.
Indemnification: The seller's obligation to cover the buyer's losses from breaches of the agreement, usually with a basket, cap and survival period.
IOI: Indication of interest: a non-binding statement of price range and structure.
LOI: Letter of intent: a mostly non-binding document setting price, structure and timeline, with binding exclusivity and confidentiality.
NDA: Nondisclosure agreement that protects confidential information shared during a deal.
Peg (working capital peg): The agreed normal level of net working capital; closing working capital above or below it adjusts the price.
QoE: Quality of earnings: an independent analysis that tests and normalizes a company's earnings. Required by the SBA for initial acquisitions with a purchase price of $3M or more.
Representations and warranties: The seller's statements of fact about the business, which support indemnity claims.
Rollover equity: Equity the seller keeps in the buyer's new company.
Seller note: Debt owed by the buyer to the seller for part of the price.
Standby (full standby): A debt on which no principal or interest is paid for the term of another loan. Under SBA rules, subordinated seller debt on full standby can count as equity, subject to limits.
Synergies: Savings or revenue gains from combining two businesses.
Working capital true-up: The post-closing adjustment of price based on actual versus pegged working capital.

Debt and SBA terms

7(a) loan: SBA's main loan program. A standard 7(a) loan is capped at $5M. The SBA guarantees part of the loan to the lender.
Amortization: Repaying principal over time through scheduled payments.
Change of ownership: In SBA terms, a transaction in which a buyer acquires an existing business. SOP 50 10 8.1 sets equity, coverage and QoE rules for initial acquisitions.
Covenant: A condition in a loan agreement, such as a minimum coverage ratio.
DSCR: Debt service coverage ratio: operating cash flow divided by required principal and interest. The SBA requires 1.25:1 for initial acquisitions under SOP 50 10 8.1.
Equity injection: The buyer's own money required in an SBA acquisition: at least 10% of total project cost for initial acquisitions.
FCCR: Fixed-charge coverage ratio: cash available after capex and taxes divided by interest and scheduled principal. Definitions vary by lender.
Personal guaranty: A promise by an owner to repay a business loan. The SBA requires it from owners of 20% or more.
Prime rate: The bank prime loan rate published by the Federal Reserve in the H.15 release. SBA rate caps are expressed as Prime plus a spread.
Revolver: A line of credit that can be drawn and repaid, used for seasonal needs.
Sweep: Using excess cash flow to prepay debt.
Total project cost: All costs needed to complete the transaction, including price, fees and working capital, regardless of the source of funds.
Unlimited and limited equity sources: In SBA rules, unlimited sources (such as unborrowed cash) can supply all the injection; limited sources (standby debt, seller debt on full standby, minority investments) may supply no more than half.

Returns and funds

Carried interest (carry): A share of profits paid to the managers of a fund or deal after investors receive their capital back and any hurdle.
Catch-up: A provision letting the sponsor receive its full carry percentage on profits already distributed once a hurdle is met.
Clawback: An obligation to return carry paid earlier if later results fall short.
Hurdle (preferred return): The minimum return investors must earn before the sponsor shares in profits.
IRR: Internal rate of return: the annual rate that sets the net present value of cash flows to zero.
LP and GP: Limited partner (investor) and general partner (manager) of a fund.
MOIC: Multiple on invested capital: total value returned divided by capital invested.
Promote: An independent sponsor's share of profits, similar to carry.
Value creation bridge: A breakdown of the gain on an investment into EBITDA growth, multiple change and debt paydown.

Search fund and ETA terms

Acquisition capital: Money investors put in at the time of the acquisition. Many funds raise $5M to $10M, per Stanford's 2026 Primer.
ETA: Entrepreneurship through acquisition: buying an existing business to run instead of starting one.
Independent sponsor: A deal professional without a committed fund who raises capital deal by deal and earns fees and a promote.
Participating preferred equity: Investor equity that is repaid first, usually with an annual return (coupon), and then shares in the remaining profit with common equity.
Search capital: Money raised from investors to fund the search: the searcher's salary, benefits and expenses. The Stanford 2024 study reports a $500K median.
Searcher: The entrepreneur (or pair) who raises a search fund, buys a company and becomes its CEO.
Step-up: The increase in value applied when search capital converts into acquisition equity, often 150% of the amount invested.
Tranche (searcher equity): A portion of the searcher's equity. Typically one third vests at acquisition, one third over about four years, and one third on investor performance benchmarks.

Sources

More career resources

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Longer written answers live in the community guides.

Accounting and finance basics

Accrual accounting

Recording revenue when earned and costs when incurred, regardless of when cash moves. Many small sellers use cash-basis books, which shifts revenue and costs between months.

Accounts receivable (AR)

Money customers owe for sales already made. A current asset.

Accounts payable (AP)

Money the company owes suppliers. A current liability.

Balance sheet

A snapshot of assets, liabilities and equity at one date. Assets equal liabilities plus equity.

Capex

Capital expenditures: spending on long-lived assets such as equipment. Maintenance capex keeps the business running; growth capex expands it.

Cash flow statement

Shows cash from operations, investing and financing for a period.

COGS

Cost of goods sold: the direct costs of producing what was sold.

Contribution margin

Revenue less variable costs. It is the profit a lost or gained dollar of revenue really carries.

DIO

Days inventory outstanding: inventory divided by cost of goods sold, times 365.

DPO

Days payables outstanding: payables divided by cost of goods sold, times 365.

DSO

Days sales outstanding: receivables divided by revenue, times 365.

Depreciation and amortization (D&A)

Non-cash expenses that spread the cost of tangible assets (depreciation) and intangibles (amortization) over time.

EBIT

Earnings before interest and taxes.

EBITDA

Earnings before interest, taxes, depreciation and amortization. A common proxy for operating cash flow. It ignores capex, working capital and taxes.

Free cash flow (FCF)

Cash left after operating costs, taxes, capex and working capital investment. Unlevered free cash flow excludes interest; levered free cash flow is after interest.

Goodwill

The part of a purchase price above the fair value of identifiable net assets. In a tax asset purchase it is generally amortized over 15 years (IRS section 197).

Income statement

Revenue less costs for a period, ending in net income.

Net working capital (NWC)

Operating current assets (receivables, inventory) less operating current liabilities (payables, accrued costs), excluding cash and debt.

Normalized earnings

Reported earnings adjusted for items that will not recur or that are not at market terms, such as owner pay or one-time legal costs.

Pass-through entity

A business whose profit is taxed on the owners' returns rather than at the company level (for example many LLCs and S corporations). Owners take distributions to pay the tax.

TTM or LTM

Trailing (last) twelve months. The most recent 12 months of results, often used in place of the last fiscal year.

Valuation

Add-back

An adjustment that increases reported earnings because a cost is personal, one-time or not required after the sale. Each needs documentation.

Comparable companies (comps)

Similar companies whose valuation multiples guide the value of a target.

Control premium

Extra value paid for the ability to direct a company, relative to a minority stake.

DCF

Discounted cash flow: value from forecast free cash flows discounted at a rate reflecting risk, plus a terminal value.

Discount for lack of marketability

A reduction in value for an asset that cannot be sold quickly, common for private companies. The amount is judgment.

Enterprise value (EV)

Value of the operating business to all capital providers: equity value plus debt minus cash.

Equity value

Enterprise value less debt plus cash. What belongs to owners.

Multiple

A valuation ratio, such as enterprise value divided by EBITDA.

Precedent transactions

Prices paid in past acquisitions of similar businesses.

SDE

Seller's discretionary earnings: pre-tax profit plus one owner's compensation and benefits, interest, depreciation and amortization, and personal or one-time costs. Used for owner-operated businesses.

Terminal value

The value of cash flows beyond the forecast period in a DCF, from a perpetual growth rate or an exit multiple.

WACC

Weighted average cost of capital: the blended cost of equity and after-tax cost of debt, used as the DCF discount rate.

Beta

A measure of how much a stock moves with the market. Used in the cost of equity.

Size premium

Extra return required for investing in small companies, added to the cost of equity.

Deals and diligence

Asset purchase

The buyer buys selected assets and assumes selected liabilities. The buyer gets a stepped-up tax basis.

APA / SPA

Asset purchase agreement / stock (or equity) purchase agreement: the definitive contract.

Broker

An intermediary who markets a business for sale, common in smaller deals.

CIM

Confidential information memorandum: the sell-side document describing the business.

Cash-free, debt-free

A price convention where the seller keeps the cash and pays off the debt, and the buyer receives a normal level of working capital.

Closing

The date ownership transfers and funds move.

Diligence

The buyer's investigation of a business before closing: financial, customer, legal, tax, operations and others.

Earnout

Contingent consideration paid after closing if the business hits an agreed target.

Equity purchase

Buying the ownership of the entity (shares or membership interests) rather than selected assets.

Escrow or holdback

Part of the price held back after closing to cover claims or adjustments.

Form 8594

The IRS form on which buyer and seller report how the price is allocated among asset classes in an asset acquisition.

Indemnification

The seller's obligation to cover the buyer's losses from breaches of the agreement, usually with a basket, cap and survival period.

IOI

Indication of interest: a non-binding statement of price range and structure.

LOI

Letter of intent: a mostly non-binding document setting price, structure and timeline, with binding exclusivity and confidentiality.

NDA

Nondisclosure agreement that protects confidential information shared during a deal.

Peg (working capital peg)

The agreed normal level of net working capital; closing working capital above or below it adjusts the price.

QoE

Quality of earnings: an independent analysis that tests and normalizes a company's earnings. Required by the SBA for initial acquisitions with a purchase price of $3M or more.

Representations and warranties

The seller's statements of fact about the business, which support indemnity claims.

Rollover equity

Equity the seller keeps in the buyer's new company.

Seller note

Debt owed by the buyer to the seller for part of the price.

Standby (full standby)

A debt on which no principal or interest is paid for the term of another loan. Under SBA rules, subordinated seller debt on full standby can count as equity, subject to limits.

Synergies

Savings or revenue gains from combining two businesses.

Working capital true-up

The post-closing adjustment of price based on actual versus pegged working capital.

Debt and SBA terms

7(a) loan

SBA's main loan program. A standard 7(a) loan is capped at $5M. The SBA guarantees part of the loan to the lender.

Amortization

Repaying principal over time through scheduled payments.

Change of ownership

In SBA terms, a transaction in which a buyer acquires an existing business. SOP 50 10 8.1 sets equity, coverage and QoE rules for initial acquisitions.

Covenant

A condition in a loan agreement, such as a minimum coverage ratio.

DSCR

Debt service coverage ratio: operating cash flow divided by required principal and interest. The SBA requires 1.25:1 for initial acquisitions under SOP 50 10 8.1.

Equity injection

The buyer's own money required in an SBA acquisition: at least 10% of total project cost for initial acquisitions.

FCCR

Fixed-charge coverage ratio: cash available after capex and taxes divided by interest and scheduled principal. Definitions vary by lender.

Personal guaranty

A promise by an owner to repay a business loan. The SBA requires it from owners of 20% or more.

Prime rate

The bank prime loan rate published by the Federal Reserve in the H.15 release. SBA rate caps are expressed as Prime plus a spread.

Revolver

A line of credit that can be drawn and repaid, used for seasonal needs.

Sweep

Using excess cash flow to prepay debt.

Total project cost

All costs needed to complete the transaction, including price, fees and working capital, regardless of the source of funds.

Unlimited and limited equity sources

In SBA rules, unlimited sources (such as unborrowed cash) can supply all the injection; limited sources (standby debt, seller debt on full standby, minority investments) may supply no more than half.

Returns and funds

Carried interest (carry)

A share of profits paid to the managers of a fund or deal after investors receive their capital back and any hurdle.

Catch-up

A provision letting the sponsor receive its full carry percentage on profits already distributed once a hurdle is met.

Clawback

An obligation to return carry paid earlier if later results fall short.

Hurdle (preferred return)

The minimum return investors must earn before the sponsor shares in profits.

IRR

Internal rate of return: the annual rate that sets the net present value of cash flows to zero.

LP and GP

Limited partner (investor) and general partner (manager) of a fund.

MOIC

Multiple on invested capital: total value returned divided by capital invested.

Promote

An independent sponsor's share of profits, similar to carry.

Value creation bridge

A breakdown of the gain on an investment into EBITDA growth, multiple change and debt paydown.

Search fund and ETA terms

Acquisition capital

Money investors put in at the time of the acquisition. Many funds raise $5M to $10M, per Stanford's 2026 Primer.

ETA

Entrepreneurship through acquisition: buying an existing business to run instead of starting one.

Independent sponsor

A deal professional without a committed fund who raises capital deal by deal and earns fees and a promote.

Participating preferred equity

Investor equity that is repaid first, usually with an annual return (coupon), and then shares in the remaining profit with common equity.

Search capital

Money raised from investors to fund the search: the searcher's salary, benefits and expenses. The Stanford 2024 study reports a $500K median.

Searcher

The entrepreneur (or pair) who raises a search fund, buys a company and becomes its CEO.

Step-up

The increase in value applied when search capital converts into acquisition equity, often 150% of the amount invested.

Tranche (searcher equity)

A portion of the searcher's equity. Typically one third vests at acquisition, one third over about four years, and one third on investor performance benchmarks.