Here are some common terms.

The following terms are often used in business sales transactions.


Adjusted Book Value

The Book Value (equity) of a company after adjusting the values of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet.

Adjusted Earnings

The earnings of a business after adjustments for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and any other expenses that are not essential for the successful ongoing operation of the business.

Asset Approach

A way of estimating the value of a business ownership interest using one or more Valuation Methods based on the Adjusted Book Value of the company.

Asset Sale

A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.

Base Year

The company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management.

Bill of Sale

A bill of sale is a legal document drawn up by a seller that is passed on to a purchaser to report and confirm that, on a specific date, at a specific locality and for a particular sum of money or other "value received," the seller sold a specific item of personal, or a parcel of real property to the purchaser, of which the seller had lawful possession. It is a written instrument that evidences the transfer of title to personal property from the vendor - the seller, to the vendee - the buyer.

Blue Sky

Any intangible portion of a price, above the maximum Good will, that cannot be reasonably supported through the application of established Valuation Methods.

Book Value

The value, net of depreciation, at which an asset appears on a company’s balance sheet.

Business Summary

A Business Summary, or a Selling Memorandum, is a written summary of your business you show to prescreened or qualified buyers. The purpose of a Business Summary is to give buyers a professional written summary on your business and answer the basic questions most buyers ask. The selling memorandum eliminates phone and email tag. In addition, having your business professionally packaged and preparing for the sale shows the buyer you respect their time.

Buyer Disclosure Statement

This disclosure statement is designed to help the seller evaluate the buyer's ability to purchase.

Capital Structure

The mix of invested equity and debt financing of a business enterprise.

Capitalization Rate

Any multiple or divisor used to convert a single period (usually a year) of anticipated economic benefits into a present economic value.

Capitalizing Net Income

Determining the value of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (investor's required ROI).

Cash Flow (also Discretionary Earnings)

Total financial benefit to an owner working in the business enterprise. With the Cash Flow, an owner must pay himself a salary, pay his company's income taxes, pay for any capital improvements (if needed) and set aside funds for unexpected events. Calculated by adding the following expenses back into the net income:

  • Interest
  • Taxes
  • Depreciation
  • Amortization
  • Owner’s Compensation
  • Owner’s Fringe Benefits
  • One-Time Expenses

Deal Structure

The combination of types of payment by which the purchase of a business is accomplished. It can include cash, promissory notes, stock, consulting agreements, earnout provisions and covenants not to compete. The sale can take the form of an Asset Sale or a Stock Sale.

Definitive Purchase Agreement

The Definitive Purchase Agreement is a legal document outlining the terms and conditions set by both participants. It is included in the agreement that surrounds the purchase or acquisition of a business. The agreement includes the purchase price and structuring of the sale, such as the assets included in the purchase, as well as the payment method and closing details. Representations, warranties, covenants, indemnification, assumption of liabilities and termination clauses are normally included, too.

Discount Rate

A rate of return used to calculate the present value of multiple periods (usually years) of payments.

Discretionary Earnings

See Cash Flow above.

Due Diligence

Due diligence is a term used for a number of concepts involving the investigation of a business and the seller prior to signing a contract. It can also refer to an act with a certain standard of care. It can be a legal obligation, but the term commonly applies to voluntary investigations.

Earnest Money Deposit

An Earnest Money Deposit is a deposit a buyer makes to a seller to show good faith in a transaction. Often used in real estate transactions, earnest money allows the buyer more time to seek financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.

Earn out

The portion of the purchase price that is contingent on the future performance of the business. It is payable to the seller after certain predefined levels of sales or income are achieved in the year(s) after acquisition.

Fair Market Value

The estimated price at which an asset or service would pass from a willing seller to a willing buyer, assuming that both buyer and seller are acting rationally, at arms length, in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.

Fixed Interest Rate

An interest rate that does not fluctuate over the term of the loan.

Going Concern Value

The gross value of a company as an operating business. This value may exceed or be at a discount from the Liquidation Value. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plan and the necessary licenses, systems and procedures in place.


The amount by which the price paid for a company exceeds the company’s Adjusted Book Value of the underlying tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income. 

Income (Income Based) Approach

General way of determining the value of a business, business ownership interest, security or intangible asset using one or more methods that calculate the present value of anticipated future income.

Intrinsic Value

An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price.

Investment Value

The value to a particular investor based on individual investment requirements and expectations.

Letter of Intent

A Letter of Intent (LOI) is an agreement detailing a corporation's intention to execute a corporate action. The corporation, along with its management and legal council, among others, creates the letter of intent and outlines the details of the action.

Liquidation or Liquidating Value

The estimated value, net of liabilities, of a company based on the market value of its assets.

Market (Market-Based) Approach

General way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.


Valuation multiple is a value, typically expressed as a factor, which is used to multiply a business economic benefit to calculate the value of a business.

Net Book Value

With respect to a business enterprise, the difference between total assets (net of depreciation, depletion and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.

Non-Compete Agreement

A non-compete agreement is a contract that limits a party from competing with a business after termination of employment or completion of a business sale.

Non-Disclosure Agreement (NDA)

A non-disclosure agreement is a legal contract between at least two parties that outlines confidential material, knowledge or information, which both parties want to share with each other for specific purposes, but with restricted access to or by third parties. A non-disclosure agreement (NDA) is also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement. In an NDA, both parties agree not to disclose information covered by the agreement, which creates a confidential relationship between the parties to protect any type of private and proprietary information or trade secrets. An NDA is a tool that protects non-public business information.

Normalized Financial Statements

Normalized (or recast) financial statements are financial statements that are adjusted to eliminate unusual items or anomalies, as well as to facilitate comparisons.

Offer to Purchase

An Offer to Purchase is a written contract used to set out the terms under which the buyer agrees to purchase the business. If the Offer to Purchase is accepted by the seller, it forms a legally binding contract that binds the people who signed to certain terms and conditions.

Present Value

The value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (Discount Rate).

Pro Forma Financial Statements

Hypothetical financial statements. Financial statements as they would appear if some event, such as increased sales or production, had occurred or were to occur. Also used to make projections for future years.


Prospective financial statements that present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.


Financial recasting eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decisions of the current owner and may not represent financing preferences of a new owner. Recasting provides an economic view of the company and allows meaningful comparisons with other investment opportunities.

Residual Value

The estimated market value of an asset at the end of the period being considered.

Return on Investment (ROI)

The rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.

Seller's Discretionary Earnings

Seller's Discretionary Earnings (SDE) is an estimate of the total financial benefit a full-time owner-operator would derive from the business on an annual basis. It is also referred to as the Seller's Discretionary Cash Flow, Adjusted Cash Flow, Owner Benefit, Recast Earnings or Normalized Earnings, although Seller's Discretionary Earnings is the official terminology advocated by the International Business Broker's Association (IBBA).

Seller's Disclosure Statement

This statement is a statement of the condition of the property in compliance with the Seller Disclosure Act. Simply put, it is a detailed summary of the condition and details regarding the property, as known by the seller.

Stock Sale

A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.

Term Sheet

A term sheet is a document formatted with bullet lists to outline the material terms and conditions of a business agreement. After a term sheet has been carried out, or executed, it serves as a guide for legal counsel in the preparation of a proposed final agreement. The purpose of a term sheet is to direct, but it is not necessarily binding, because the signatories negotiate the final terms of their agreement usually with the help of legal counsel.

Transaction Value

Total of all consideration passed at any time between the buyer and seller for an ownership interest in a business enterprise and may include but is not limited to all remuneration for tangible and intangible assets such as: furniture, equipment, supplies, inventory, Working Capital, non-competition agreements, customer lists, employment and/or consulting agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, Earn outs and future considerations.

Valuation Approach

A general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more Valuation Methods. There are three overall approaches generally used to value a business: Asset Approach, Income Approach and Market Approach.

Valuation Method

Under a chosen Valuation Approach, there are various specific methods to determine value.

Variable Interest Rate

An interest rate that adjusts periodically to a predefined margin above or below an index rate. A commonly used index is the bank prime rate.

Working Capital

The excess of current assets over current liabilities.