Every term with a simple explanation, an example, and why it matters.
Asset Purchase
You buy named assets of a business rather than the legal entity itself.
Example: A new LLC buys the equipment, name and customer list, leaving the old company behind.
Why it matters: Usually limits inherited liabilities and changes the tax treatment for both sides.
Business Multiple
Asking price divided by an earnings figure such as SDE or EBITDA.
Example: $700,000 price ÷ $250,000 SDE = 2.8x.
Why it matters: It is the fastest way to compare two very different businesses on price.
Cash Flow
Money actually moving in and out, as opposed to accounting profit.
Example: A profitable shop still runs short when customers pay 60 days late.
Why it matters: Loan payments come from cash, not from profit on paper.
Collateral
Assets pledged to secure a loan.
Example: Equipment, real estate, or a lien on business assets.
Why it matters: Affects whether a lender can approve the loan and on what terms.
Debt Service
Total loan principal and interest payments due over a period.
Example: A $500,000 loan at 11% over 10 years is roughly $82,700 per year.
Why it matters: It is the first claim on the cash flow you are buying.
DSCR
Debt Service Coverage Ratio: cash available for debt service ÷ annual debt service.
Example: $120,000 available ÷ $96,000 payments = 1.25.
Why it matters: Lenders use it to judge whether the business can afford the loan.
Due Diligence
The verification period where you check every claim in documents.
Example: Reconciling three years of tax returns against the P&L and bank statements.
Why it matters: It is the only part of the process that reliably prevents expensive surprises.
Earn-Out
Part of the price paid later, conditional on future performance.
Example: An extra $50,000 if the top customer is still active after 12 months.
Why it matters: Bridges disagreement about risk without overpaying at closing.
EBITDA
Earnings before interest, taxes, depreciation and amortisation.
Example: Net income $180k + interest $30k + D&A $40k = $250k EBITDA.
Why it matters: The usual measure once a business pays professional management.
Equity Injection
The buyer's own contributed funds in the transaction.
Example: Cash from savings contributed toward the purchase price.
Why it matters: Lenders and programme rules set expectations for how much is required.
Gross Profit
Revenue minus the direct costs of delivering the product or service.
Example: $1,000,000 revenue − $600,000 cost of goods = $400,000 gross profit.
Why it matters: Shows whether the core delivery model actually works.
LOI
Letter of Intent: the outline of proposed deal terms before contracts.
Example: Price, structure, diligence period and exclusivity, set out in a few pages.
Why it matters: Sets the frame for the whole negotiation — have an attorney review it.
Net Income
What remains after every expense, interest and tax.
Example: The bottom line of the P&L.
Why it matters: The starting point for calculating SDE.
Non-Compete
An agreement restricting the seller from competing after the sale.
Example: No similar business within 25 miles for three years.
Why it matters: Protects the customer base you are paying for; enforceability varies by state.
Personal Guarantee
A promise to repay a business loan personally if the business cannot.
Example: Owners above a stated ownership threshold typically sign one.
Why it matters: Puts personal assets at risk — understand it fully before signing.
Revenue
Total sales before any expenses.
Example: $2,500,000 of sales in a year.
Why it matters: On its own it says nothing about whether a business is worth buying.
SBA 7(a)
An SBA loan programme where a participating lender lends and the SBA guarantees part of it.
Example: Frequently used for business acquisitions and working capital.
Why it matters: Programme rules and lender policies are different things — verify both.
SDE
Seller's Discretionary Earnings: the full financial benefit to one owner-operator.
Example: Net income + owner salary + owner perks + interest + depreciation + one-offs.
Why it matters: The standard earnings measure for owner-operated small businesses.
Seller Financing
The seller accepts part of the price over time instead of all at closing.
Example: 20% of a $700,000 price carried as a $140,000 note.
Why it matters: Can support the financing stack and signals seller confidence.
Seller Note
The written loan agreement behind seller financing.
Example: $140,000 at an agreed rate over five years.
Why it matters: Terms, standby requirements and lender approval all need confirming.
Stock Purchase
You buy the ownership of the existing legal entity.
Example: Shares transfer; the company itself continues unchanged.
Why it matters: Contracts and licences usually continue — so do past liabilities.
UCC
Uniform Commercial Code filings that record a lender's claim on business assets.
Example: A UCC-1 filed against equipment by a prior lender.
Why it matters: Unreleased filings can block a clean transfer of assets.
Working Capital
Cash and short-term assets needed to run day-to-day operations.
Example: Payroll, inventory, and the gap before customers pay.
Why it matters: Closing without enough is a common cause of early distress.
AcquireAI is an educational platform. Information provided is for educational purposes only and is not legal, tax, accounting, lending, or financial advice. Financing is subject to lender approval and current program requirements.