Shorthand for the two full fiscal years before the current period. Buyers typically request financial statements for TTM + 2PY to analyze trends, seasonality, and performance consistency. For example, if selling in 2026, buyers want 2024 and 2023 full-year financials plus trailing twelve months.

Cash Accounting records revenue and expenses when money actually moves.

Accrual Accounting records revenue when it is earned and expenses when they are incurred—regardless of when cash moves.

Example

• Situation: Customer pays next month

• Cash Basis: Revenue next month

• Accrual Basis: Revenue this month

Most small businesses operate on cash accounting because it is simpler for taxes. However, buyers and lenders analyze businesses on an accrual basis because it more accurately reflects operational performance.

Expenses added back to EBITDA because they are considered non-recurring, discretionary, or owner-specific.

Examples include:

• Owner personal expenses

• One-time legal settlements

• Non-recurring consulting costs

• Family payroll above market rates

Buyers will challenge add-backs that are poorly documented or aggressive.

EBITDA after removing one-time expenses, discretionary owner costs, or unusual items that are not expected to continue under new ownership.

Examples may include:

• Excess owner compensation

• Personal expenses run through the business

• One-time legal or consulting costs

• Non-recurring events

The key question in a deal is not simply what EBITDA is—but whether it is defensible.

Asset Purchase: The buyer acquires specific assets and assumes specific liabilities of the business. The legal entity remains with the seller. Generally preferred by buyers because it limits assumed liabilities and provides better tax treatment.

Stock Purchase (or Membership Interest Purchase for LLCs): The buyer acquires ownership of the entire legal entity, inheriting all assets, liabilities, contracts, and potential unknown risks. Generally preferred by sellers for simpler tax treatment and clean exit.

The structure significantly affects tax liability, liability exposure, and deal complexity for both parties.

A snapshot of what the business owns and owes at a specific point in time.

It includes:

• Assets (cash, accounts receivable, equipment)

• Liabilities (accounts payable, debt, obligations)

• Equity (owner investment and retained earnings)

While many founders focus on the P&L, buyers pay close attention to the balance sheet because it helps determine working capital, debt obligations, and potential risks.

The final step in a transaction when ownership officially transfers, documents are signed, and funds are exchanged. This occurs after all conditions in the purchase agreement have been satisfied, including completion of due diligence, financing arrangements, and regulatory approvals.

A secure online repository where documents are shared with buyers during diligence.

Organization matters. Buyers often infer management competence from how a data room is structured.

The buyer's process of investigating and verifying the business before finalizing the purchase. This includes reviewing financials, contracts, customer relationships, operational systems, legal compliance, tax filings, and any other material aspects of the business. Due diligence typically begins after signing an LOI and is the period when most deal issues surface.

A portion of the purchase price paid later if certain performance targets are met.

Earn-outs are used to bridge valuation gaps but introduce performance risk after the sale.

Earnings Before Interest, Taxes, Depreciation, and Amortization.

EBITDA is the most common measure used to value small and mid-sized businesses. It attempts to show the core operating profitability of the business before financing choices, tax structure, or accounting adjustments.

In most transactions, the value of a business is calculated as:

EBITDA × Multiple = Enterprise Value

However, the number buyers care about is Adjusted EBITDA, which reflects the real, sustainable earnings of the business.

The total value of the business based on its earnings and market multiple.

Example:

• EBITDA: $2M

• Multiple: 6×

• Enterprise Value = $12M

This number is not the same as what the seller takes home.

See MVIC. Some buyers and advisors use EVIC and MVIC interchangeably to describe the total invested capital including cash retained in the business at closing.

A timeframe (typically 30-90 days) after signing an LOI during which the seller agrees not to negotiate with other potential buyers. This allows the buyer to complete due diligence without competition. Sellers should carefully negotiate the length and terms, as they are "off the market" during this period.

A portion of the purchase price held for a period of time (typically 12-24 months) to cover potential claims under the purchase agreement.

If no claims arise, the funds are released to the seller.

The seller's obligation to reimburse the buyer for losses related to breaches of representations or undisclosed issues.

This is why financial and legal preparation before a sale matters.

A preliminary agreement outlining the key economic terms of the deal before detailed diligence and legal documentation begin.

An LOI typically includes:

• Purchase price

• Deal structure (asset vs. stock)

• Exclusivity period

• Basic closing terms

An LOI is not the finish line—it is the starting point of diligence.

The number by which EBITDA is multiplied to determine enterprise value. Multiples vary by industry, size, growth rate, customer concentration, and perceived risk. A business with $2M in EBITDA selling at a 6× multiple would have an enterprise value of $12M. Higher multiples reflect lower perceived risk and stronger growth prospects.

The total consideration paid for a business, including both equity value and interest-bearing debt assumed or refinanced by the buyer. MVIC represents the full price to acquire the business and is used in valuation comparables and market analysis. Also called EVIC (Enterprise Value Including Cash) by some advisors.

Example:

• Equity payment to seller: $10M

• Debt assumed by buyer: $2M

• MVIC = $12M

The amount the seller actually receives after:

• Debt payoff

• Working capital adjustments

• Taxes

• Escrow or holdbacks

• Transaction fees

Headline purchase price and net proceeds are often very different numbers.

A company owned by a private equity firm or investment fund. When a PE firm acquires your business, it becomes a portfolio company within their fund. PE firms typically own multiple portfolio companies simultaneously and may look to acquire additional businesses (bolt-ons) to add to existing portfolio companies.

Private Equity (PE) Buyer

An investment firm acquiring companies with the intention of growing and eventually reselling them.

PE buyers focus heavily on:

• EBITDA stability

• Scalability

• Risk mitigation

• Future exit potential

A financial report showing revenue, expenses, and profit over a specific period of time (monthly, quarterly, annually).

The P&L answers the basic question: "Is the business profitable?"

But in a sale process, buyers will look beyond the annual totals. They typically want to see monthly trends for the past 2–3 years to understand stability, seasonality, and growth patterns.

The definitive legal contract governing the transaction. This comprehensive document includes purchase price, payment terms, representations and warranties, indemnification provisions, closing conditions, and post-closing obligations. Unlike the LOI, the purchase agreement is legally binding.

A financial diligence report that tests whether the earnings presented by the seller are accurate and sustainable.

It typically examines:

• Revenue consistency

• Expense normalization

• Working capital trends

• Customer concentration

• Cash flow reliability

QoE reviews are commonly ordered by buyers after signing a Letter of Intent. This is where many deals experience re-trades, when the buyer discovers the earnings are different than expected.

Statements made by the seller about the condition of the business.

These typically cover areas such as:

• Financial statements

• Contracts

• Employees

• Taxes

• Compliance

If these statements are inaccurate, the seller may have post-closing liability.

Insurance purchased (typically by the buyer, sometimes by the seller) that covers losses from breaches of representations and warranties in the purchase agreement. This can reduce escrow requirements and provide sellers with a cleaner exit by transferring indemnification risk to an insurance company.

When the buyer reduces price or changes terms after the LOI due to diligence findings.

Most re-trades happen because:

• EBITDA cannot be supported

• Financials are unclear

• Structural risks surface late

When the seller retains ownership in the new entity after the sale.

This allows participation in future growth but also means continued alignment with the buyer.

A profitability metric commonly used for smaller, owner-operated businesses (typically under $5M in revenue). SDE adds back owner compensation and benefits to EBITDA, showing the total financial benefit available to a single owner-operator. More relevant for lifestyle businesses than institutional buyouts.

An operating company acquiring another business to expand markets, services, or capabilities.

Strategic buyers sometimes pay higher prices when strong synergies exist.

Financial performance over the most recent twelve-month period, regardless of fiscal year end. If today is March 2026, TTM would be April 2025 through March 2026. Buyers use TTM to see the most current performance and avoid relying solely on outdated annual statements. Critical for showing momentum or addressing seasonality.

Current assets minus current liabilities. What a business needs in cash to keep operating.

Examples include:

• Accounts receivable

• Inventory

• Accounts payable

• Short-term operational obligations

Most deals include a target working capital level that must be delivered at closing.

A post-closing calculation comparing actual working capital delivered to the agreed target.

If the delivered amount is higher or lower than expected, the purchase price adjusts accordingly.

This can meaningfully affect the seller's proceeds if not prepared for in advance.