M&A Terms Every Business Owner Should Know Before Selling
- Mark Hartmann
- 13 hours ago
- 8 min read
When I sold my own company, I remember the moment I got the first draft of the letter of intent (LOI) from a potential buyer. It was full of acronyms and phrases I’d never seen before: EBITDA, working capital peg, reps and warranties, earn-out, indemnification cap—and that was just page one.
I had spent years building a great business, but I wasn’t fluent in the language of selling one. And if you’re like most business owners I work with today, you’ve probably never sold a company either.
That’s why I’ve written this post. If you’re starting to think about exiting your business—whether it’s this year or five years down the road—understanding the common M&A terms used in the sale process will help you feel more confident, make smarter decisions, and avoid costly surprises.
Let’s walk through some of the most important M&A terms every business owner should know before selling.
1. M&A (Mergers and Acquisitions)
Let’s start with the basics. M&A stands for mergers and acquisitions—the umbrella term for buying, selling, or combining companies. While “merger” implies two companies coming together as equals, most lower middle market deals (like the ones I work on) are actually acquisitions—one party buys another.
2. LOI (Letter of Intent)
The Letter of Intent is a non-binding document that outlines the buyer’s offer. It typically includes the purchase price, deal structure, due diligence period, and other key terms.
Even though it’s “non-binding,” the LOI sets the tone for the deal. Once signed, the buyer has exclusivity and starts due diligence. That’s why it’s critical to negotiate favorable terms upfront—before agreeing to exclusivity.
3. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA is a standardized measure of a business’s profitability, and it’s often the foundation of your company’s valuation.
Think of it this way: EBITDA strips out non-operating and non-cash expenses so buyers can assess the true operating performance of your business.
Valuation multiples (like 4x EBITDA) are usually based on adjusted or “normalized” EBITDA, which brings us to the next term…
4. Add-Backs
Add-backs are adjustments made to EBITDA to reflect the true earnings potential of your business. These include:
• Owner’s compensation above market rate
• Personal expenses run through the business
• One-time legal fees or consulting costs
• Non-recurring revenue or costs
Getting add-backs right is critical—it can increase your company’s valuation significantly. As an M&A advisor, I work closely with business owners to identify and justify every legitimate add-back.
5. Multiple (Valuation Multiple)
Buyers typically value your business using a multiple of EBITDA—for example, 4x, 5x, or even higher.
The actual multiple depends on many factors: size, industry, growth rate, customer concentration, recurring revenue, owner involvement, and more.
It’s not just math—it’s market-driven. And that’s why getting a professional valuation is essential.
6. Enterprise Value (EV)
Enterprise value is the total value of the business, including debt and excluding cash. When buyers talk about offering “$10 million enterprise value,” that’s the number before adjusting for debt or working capital.
You don’t walk away with the EV—you walk away with net proceeds, which we’ll cover later.
7. Net Working Captial (NWC)
Buyers expect your business to come with a normal level of working capital—typically defined as current assets (like receivables and inventory) minus current liabilities (like payables).
You’ll hear about the working capital peg—the agreed-upon target amount of working capital at closing. If the actual working capital is above the peg, you might get a bonus. If it’s below, the purchase price could be reduced.
It’s one of the most misunderstood—and most negotiated—aspects of a deal.
8. Due Diligence
Once the LOI is signed, buyers begin due diligence—a deep dive into your financials, operations, legal structure, contracts, customers, HR, IT systems, and more.
This process can take 30 to 90 days, depending on the complexity of the business. It’s also the phase where deals are most likely to fall apart—especially if surprises pop up or the seller isn’t well-prepared.
I always tell clients: due diligence isn’t the time to get organized—it’s the time to be organized.
9. Reps & Warranties (R&W)
Representations and warranties are the legally binding promises you make about the condition of your business in the purchase agreement.
Examples include:
• “The financial statements are accurate.”
• “There are no undisclosed lawsuits.”
• “The business complies with all laws.”
If any of your reps turn out to be false, you could be held liable—so it’s important to be honest and thorough.
10. Indemnification
This is the mechanism for holding you accountable if something goes wrong post-sale (e.g., unpaid taxes, undisclosed liabilities).
Buyers may require you to indemnify them for losses, usually up to a certain limit (called a cap) and for a specific period (called a survival period).
Some deals use escrow or holdbacks—where a portion of the sale price is held in reserve to cover potential claims.
11. Earn-Out
An earn-out is a portion of the purchase price that is contingent on future performance—like hitting a revenue or EBITDA target over the next 1–3 years.
Earn-outs are common when there’s uncertainty about growth or when the seller stays on after closing. They can be a way to bridge valuation gaps—but they come with risk.
If you’re counting on the earn-out, make sure the metrics are clearly defined and achievable.
12. Seller Financing
In some deals, especially those involving individual buyers or SBA loans, the seller may be asked to finance a portion of the sale price.
Seller financing is usually structured as a promissory note—paid back over a few years with interest.
It can help get a deal done, but it also means you’re taking on some risk as the lender. I always advise clients to be cautious and consult your deal attorney.
13. SBA 7(a) Loan
For deals under $5 million, many individual buyers use Small Business Administration (SBA) loans to finance the acquisition. The SBA 7(a) loan program allows buyers to borrow up to 90% of the purchase price—with favorable terms and low interest rates.
However, SBA deals come with strict rules, paperwork, and timing constraints. If your buyer is using SBA financing, be prepared for a longer, more document-heavy process.
14. Asset Sale vs. Stock Sale
There are two main ways to structure a sale:
• Asset Sale: The buyer purchases specific assets (e.g., equipment, inventory, goodwill). This is more common in small to mid-size deals.
• Stock Sale: The buyer purchases ownership in the entity (LLC units or corporation stock), taking on all assets and liabilities.
The structure impacts taxes, liability, and logistics. From a seller’s perspective, stock sales are often better—but many buyers prefer asset sales for tax and risk reasons.
15. Deal Structure
The deal structure refers to how the purchase price is paid—how much is cash at closing, how much is in escrow, how much is contingent (earn-out), and whether any equity rollover is involved.
Deal structure can be just as important as the price. A $10 million offer with a 50% earn-out is very different from a $9 million offer with 100% cash at close.
Understanding structure is key to protecting your net proceeds—the money you actually take home.
16. Escrow / Holdback
Buyers often require part of the purchase price to be held in escrow (or held back) for 12–24 months to cover potential claims related to reps and warranties.
Typical escrow amounts range from 5% to 10% of the total purchase price. At the end of the escrow period, the funds are released—unless there’s a claim.
It’s a common way for buyers to manage risk, and one you should plan for.
17. Rollover Equity
In deals with private equity firms, sellers are often asked to roll over some of their equity—meaning you reinvest a portion of your sale proceeds into the new entity.
This gives you a “second bite at the apple” when the PE firm exits in a few years. It can be lucrative—but it also comes with risk and less control.
Make sure you understand the terms of the rollover: governance, liquidity rights, and expected holding period.
18. Confidential Information Memorandum (CIM)
Also called the “pitch book,” the CIM is the marketing document used to present your business to potential buyers. It includes your company’s background, financials, growth opportunities, management team, and value proposition.
A well-prepared CIM makes a huge difference in attracting serious buyers and commanding premium valuations. It’s typically prepared by your M&A advisor and reviewed by you before distribution.
19. Exclusivity
When you sign an LOI, the buyer usually asks for an exclusivity period—meaning you can’t negotiate with other buyers for a set period (typically 60 to 90 days).
This gives the buyer time to conduct diligence and finalize the deal. But be careful—once exclusivity starts, your leverage decreases. Make sure the LOI terms are favorable before signing.
20. Closing
Closing is the final step—when the documents are signed, the money transfers, and the buyer officially owns the business.
Leading up to closing, you’ll work through:
• The purchase agreement
• Assignments of contracts and leases
• Employee transitions
• Final tax and legal considerations
It’s a busy, detail-heavy phase—but it’s also the moment when everything becomes real.
Final Thoughts: Don’t Just Learn the Language—Get the Right Guide
Selling your business can feel like entering a foreign country where everyone speaks a slightly different language. It’s easy to feel overwhelmed.
That’s why having an experienced M&A advisor is so important. Someone who can interpret, explain, and advocate for you—so you’re not just reacting to terms you don’t understand.
I’ve been through this process as a seller and now as an advisor to other owners. I know how emotional, complex, and high-stakes this journey is. And I’m here to make it clearer and more successful for you.
Want help decoding the M&A process?
Schedule a confidential call with me, and let's discuss your goals, your timeline, and how to make your future as rewarding as your past.
Blog: M&A Terms Every Business Owner Should Know Before Selling
Mark Hartmann is a former business owner turned M&A advisor who knows firsthand what it takes to build, grow, and sell a successful company. A three-time Inc. 5000 CEO, Mark did just that before navigating its eight-figure sale—giving him a rare perspective that sets him apart from most brokers. Today, he helps owners of companies valued between $1M and $25M plan and execute smooth, profitable exits.
Mark understands that selling a business isn’t just a financial decision—it’s personal. That’s why he works closely with owners to protect their legacy, maximize value, and make the transition on their terms. He holds an MBA from Eastern University, a Master’s Degree in Organizational Change Management from St. Elizabeth University, and a Graduate Certificate in Executive Coaching from Columbia University. Some of his professional credentials include Certified Mergers & Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).
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