The Definitive Glossary of SMB Acquisition

This glossary defines the critical financial, legal, and operational terms used in the Small to Medium-Sized Business (SMB) acquisition landscape. Whether you are an acquisition entrepreneur, a search funder, or a business owner preparing for an exit, understanding these terms is the first step toward a successful transaction.

A – E: Financial Metrics & Foundation

Asset Purchase

A transaction where the buyer purchases individual assets of a company (equipment, customer lists, intellectual property) rather than the legal entity itself.

• Agorix Note: Asset purchases are often preferred by buyers for the “step-up” in tax basis.

Add-back

Expenses listed on a P&L statement that are non-recurring or personal to the current owner (e.g., a personal car lease or a one-time legal fee). These are added back to the net income to calculate the true earning power of the business.

CIM (Confidential Information Memorandum)

A document prepared by a broker or seller that provides a comprehensive overview of the business for sale, including operations, financial history, and growth opportunities.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. A standard measure of a company’s operational profitability, excluding non-operating expenses and non-cash accounting entries.

F – L: Deal Structuring & Legal

Holdback

A portion of the purchase price that is not paid at closing but held in escrow for a set period (usually 6–12 months) to cover potential undisclosed liabilities or breaches of representations.

Indication of Interest (IOI)

An informal, non-binding letter expressing a buyer’s serious interest in a business, typically preceding a formal Letter of Intent (LOI).

Letter of Intent (LOI)

A formal document outlining the proposed terms of the acquisition. While largely non-binding, it usually includes binding clauses regarding Exclusivity (No-Shop) and Confidentiality.

LBO (Leveraged Buyout)

The acquisition of a company using a significant amount of borrowed money (debt) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans.

M – S: Valuation & Sourcing

Multiple

The factor by which a business’s earnings (SDE or EBITDA) are multiplied to determine the Enterprise Value.

• Example: A business with $500k SDE sold at a 3x multiple has a valuation of $1.5M.

Proof of Funds (POF)

A document (usually a bank statement or letter) demonstrating that a buyer has the liquid capital required to cover the down payment of an acquisition.

SDE (Seller’s Discretionary Earnings)

The most common metric for valuing small businesses ($0–$5M revenue). It represents the total financial benefit to a single owner-operator.

• Formula: $Net Profit + Taxes + Interest + Owner’s Salary + Add-backs = SDE$

Seller Financing

A loan provided by the seller to the buyer to cover part of the purchase price. This demonstrates the seller’s confidence in the business’s future success.

T – Z: Closing & Transition

Working Capital Peg

The target amount of working capital (Current Assets minus Current Liabilities) that must be left in the business at the time of closing to ensure smooth operations post-transition.

Vesting

In an acquisition context, this often refers to “Earn-outs” or equity given to the seller or key employees that they “earn” over time based on performance or tenure.