Business Exit Glossary
Plain-English definitions of every term you'll encounter when selling your business. From EBITDA to seller financing to due diligence.
A
Annual Recurring Revenue (ARR)
The annualized value of recurring subscription or contract revenue, representing the predictable revenue a business expects to generate each year from its existing customer base.
Asset Sale
A business acquisition structure where the buyer purchases specific assets of a company — rather than the company itself — leaving the legal entity and its liabilities with the seller.
B
Business Broker
A licensed professional who acts as an intermediary between business sellers and buyers, managing the sale process from valuation through closing in exchange for a commission.
Business Valuation
The process of determining the economic value of a business, typically using methods based on earnings multiples, asset values, or discounted cash flows.
Business Valuation Formula
A mathematical method used to estimate the economic value of a business, with the most common approaches being EBITDA multiples, discounted cash flow analysis, and asset-based valuation.
Buy-Sell Agreement
A legally binding contract between business co-owners that governs what happens to an owner's interest when a triggering event occurs -- such as death, disability, retirement, or voluntary departure -- ensuring orderly ownership transitions.
C
Churn Rate
The percentage of customers or revenue lost over a given period, serving as a critical indicator of customer satisfaction, product-market fit, and long-term business sustainability.
Competitive Moat
A durable competitive advantage that protects a business from rivals and sustains profitability over time, directly influencing the valuation multiple a buyer is willing to pay.
Confidential Information Memorandum (CIM)
A detailed document prepared by the seller or their advisor that presents the business opportunity to prospective buyers, covering financials, operations, and growth potential.
Customer Acquisition Cost (CAC)
The total cost of acquiring a new customer, including all sales and marketing expenses, used by buyers to evaluate the efficiency of a company's growth engine and the sustainability of its unit economics.
Customer Concentration
A risk metric that measures how much of a business's revenue depends on a small number of customers, typically flagged when any single customer represents more than 10-20% of total revenue.
Customer Lifetime Value (CLV)
The total revenue a business can expect from a single customer account over the entire duration of their relationship, used by buyers to assess the quality and sustainability of a company's revenue base.
D
Discounted Cash Flow (DCF)
A valuation methodology that estimates a business's worth based on the present value of its projected future cash flows, accounting for the time value of money and investment risk through a discount rate.
Due Diligence
The thorough investigation a buyer conducts into a business before completing an acquisition — covering financials, legal, operations, customers, and more.
Due Diligence Checklist
A comprehensive list of documents, records, and information that a buyer requests to verify the financial, legal, and operational health of a business before completing a purchase.
E
Earnout
A deal structure where part of the purchase price is contingent on the business hitting defined performance targets after the sale closes.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — the most widely used measure of business profitability when valuing a company for sale.
EBITDA Margin
The ratio of EBITDA to total revenue, expressed as a percentage, indicating how much of each revenue dollar converts to operating profit before interest, taxes, depreciation, and amortization.
Enterprise Value vs Equity Value
Enterprise value represents the total value of a business's operations regardless of capital structure, while equity value represents what the owner actually receives after accounting for debt and cash -- a critical distinction in M&A pricing.
Exit Strategy
A business owner's plan for transitioning out of ownership, whether through a sale, merger, management buyout, or other transfer of the business.
F
G
H
I
L
Letter of Intent (LOI)
A non-binding document outlining the key terms of a proposed business acquisition — including price, structure, and conditions — before a definitive agreement is drafted.
Letter of Intent Template
A standardized document framework that outlines the essential sections and terms a Letter of Intent should contain when proposing a business acquisition.
M
Management Buyout (MBO)
A transaction in which the existing management team purchases the business from its current owner, often using a combination of personal funds, debt financing, and seller notes.
Multiple of Revenue
A valuation method that estimates a business's value by multiplying its annual revenue by an industry-specific factor, commonly used for high-growth or pre-profit companies.
N
Non-Disclosure Agreement (NDA)
A legally binding contract that prevents prospective buyers from sharing or misusing confidential business information disclosed during the sale process.
Normalized Earnings
A company's earnings adjusted to remove non-recurring, non-operational, or owner-specific items, revealing the true ongoing profitability that a new owner can expect to sustain after the acquisition.
O
P
Q
R
Representations and Warranties
Statements of fact and assurances made by the seller (and sometimes the buyer) in a purchase agreement, covering the condition, legality, and accuracy of information about the business being sold.
Rule of Thumb Valuation
Quick, industry-specific formulas that provide rough estimates of business value based on revenue, cash flow, or other simple metrics -- useful as a starting point but insufficient for transaction-level pricing.
Run Rate Revenue
An annualized revenue projection based on a recent period's financial performance, used to estimate future revenue when a full year of data is unavailable or when recent trends differ significantly from historical results.
S
SDE (Seller's Discretionary Earnings)
A measure of total financial benefit to a single owner-operator, calculated by adding the owner's compensation, personal expenses, and non-cash charges back to net profit.
Seller Financing
An arrangement where the seller of a business accepts a portion of the purchase price in installments over time, effectively acting as the lender to the buyer.
Strategic Buyer vs Financial Buyer
Two primary categories of business acquirers: strategic buyers purchase companies for operational synergies and competitive advantage, while financial buyers acquire businesses primarily for investment returns.
Succession Planning
The process of identifying and developing future leaders or owners to ensure a smooth transition of business ownership and management when the current owner exits.
V
Vertical Integration
A growth strategy in which a company acquires businesses at different stages of its supply chain -- either upstream toward suppliers or downstream toward end customers -- to gain greater control over production and distribution.
Virtual Data Room (VDR)
A secure online repository used during a business sale to store and share confidential documents with prospective buyers, advisors, and legal teams during due diligence.