Deal Vocabulary Glossary

Key Principle

The deal vocabulary every seller needs, read through one lens: a headline number is not proceeds, EBITDA is not cash flow, and the words attached to the money tell you whether the deal will actually close.

Why This Matters

Smaller private-company sales run on jargon that repeat-player buyers know cold and first-time sellers do not. That asymmetry is where value quietly leaks — into the gap between enterprise value and cash at close, into baskets and caps, into a rollover that's worth less than it looks. Defined terms level the field. A recurring sub-theme runs through the whole glossary: closing certainty is signaled by the funding source. Committed capital (PEG, family office, corporation) is most likely to close; independent/fundless sponsors, search funds, and "country club deals" carry progressively higher closing risk because the money is not yet secured.

Glossary by Cluster

Sale Types & Ownership

Majority Recapitalization (Recap) — Partial sale; the seller retains equity and stays exposed to the future. (Types of Sales)
Complete Sale — Selling 100%: more cash now, clean detachment, but lost upside. (Types of Sales)
Stock Sale vs. Asset Sale — Asset = buyer cherry-picks assets/liabilities (anything unlisted is not sold); stock = buyer inherits everything by default. The structure decides what risk travels with the deal. (Types of Sales; The Paperwork)
Second Bite of the Apple — Profiting again at a future exit on rolled equity; only real if the company grows, a future buyer appears, and the cap-table/waterfall pays you. (Types of Sales; Financial Structures)
Multiple Expansion — Bigger, more professionalized businesses earn higher multiples; growth is rewarded twice. (Types of Sales)
Rollover / Rolled Equity — "The amount of equity a seller continues to own post-transaction"; sits as junior common, often levered and discounted. Insight: shares not sold are rolled into the new structure and governed by the operating agreement. (Behind the Curtain)
Cap Table — Who owns equity, what they paid, and their rights. "If you're not listed on the cap table, you are not an owner." (Behind the Curtain)
Minority Shareholder Protections (3) — Right of inspection; right to bring a derivative claim; right against majority oppression. Note: rights are NOT strictly set by equity percentage. (Types of Sales)
Drag-Along / Tag-Along Rights — Drag-along lets a majority force a minority into a sale; tag-along lets a minority choose to join one. (Behind the Curtain)
Right of First Refusal — Right to buy an asset before the holder may sell to a third party; a majority owner typically holds it over all minority shares. (Behind the Curtain)
Call / Put Options — On rolled equity: the put is the seller's right to force liquidation of their remaining interest; the call is the buyer's right to force the seller to liquidate it. (Behind the Curtain)

Buyer Types

Private Equity Group (PEG) / PE Fund — Firm pooling LP capital via a GP into a ~10-year fund (~3 yrs investing, ~3 holding, then selling); fiduciary duty drives a short-term orientation. "The most common financial buyer is a PEG." (Types of Buyers; Behind the Curtain)
General Partner (GP) / Limited Partner (LP) — Fund manager / capital provider. (Types of Buyers)
Platform vs. Add-On (Bolt-On / Tuck-In) — Sector base investment vs. a smaller company absorbed into one; platforms keep more autonomy. (Types of Buyers)
Growth Equity — Fund buying a large minority stake with control provisions toward a defined exit. (Types of Buyers)
Independent / Fundless Sponsor — Sources a deal, then raises capital deal-by-deal. Has no committed capital and "must present and negotiate the opportunity to secure funding" — so higher closing risk (~1 in 10 close after LOI vs. ~1 in 4 generally). (Types of Buyers; Behind the Curtain)
Search Fund — Recent MBA grads raise ~$250K–$500K to search ~2 years for a company to buy and run. Like fundless sponsors, no committed capital, and likely looking to install themselves as day-to-day leader post-close. (Types of Buyers; Behind the Curtain)
Family Office — A pool of family wealth (a net worth, not a fund); "no two are the same," some active like a PE firm, some passive; can hold for decades. (Types of Buyers; Behind the Curtain)
Strategic (Acquirer) — Buys to strengthen competitive position; motives transcend current finances. Sub-types: Competitor, Extension (vertical/horizontal integration), Dependency-driven. (Types of Buyers)
Financial Buyer — Buys for a financial return on the assets (every buyer type above except strategics). (Types of Buyers)
Country Club Deal (coined) — Instead of a firm with committed capital, "the hat is passed around the country club by a 'deal guy.'" These "usually fall apart... because the organizer is part-time and lightly committed, and the backers are unsophisticated." The clearest funding-source warning sign. (Behind the Curtain)

Valuation

EBITDA — Net Income + Interest + Taxes + Depreciation + Amortization; a cross-company cash-flow proxy that strips out financing/investment choices — but "as Charlie Munger said, 'EBITDA is B.S. earnings.'" Never equals owner cash flow. (Types of Buyers; Behind the Curtain) [UNCLEAR: distilled chunk attributes the quote to Munger; terminology list flags the Buffett/Munger attribution generally — verify before reusing.]
Adjusted EBITDA — EBITDA with personal/non-essential add-backs. (Types of Buyers)
EBIT — Earnings before interest and taxes. (Financial Structures)
SDE (Seller's Discretionary Earnings) — Pre-tax earnings including owner comp/benefits, ex-one-time items. Used for smaller firms (under $5M EV) because the buyer will typically operate the company themselves. (Behind the Curtain)
Owner Earnings — Permanent Equity's preferred, stricter-than-EBITDA base: earnings less capex, operating interest, and normalized active-owner comp. "At Permanent Equity, we base our valuations on a multiple of owner earnings." (Behind the Curtain) [UNCLEAR: echoes Buffett's "owner earnings," but the chunk does not attribute it to Buffett.]
Multiple / "X" — A multiplier set by industry and performance, applied to earnings or revenue; always pin down what "X" refers to. Most companies trade on a multiple of earnings; the exception is software with strong recurring revenue but little profit, valued on revenue. Worked example: EBIT of $4M at 4.5X = $18M. [UNCLEAR: page-1 OCR rendered this as "$78 million"; the arithmetic confirms $18M — "$78" is an OCR error.] (Behind the Curtain)
Enterprise Value / Transaction Value — "The investor's appraisal of the company's current value," usually excluding existing debt and cash. The trap: "I got $15 million for my business" usually means enterprise value, not cash at close — it "must be broken down into cash at close, equity rollover, payments over time, and other uses of cash to determine actual proceeds to a seller." EV ≠ proceeds. (Behind the Curtain)
DCF / Present Value of Future Cash Flow — Discounting future cash to today's worth. (Financial Structures)
TTM (Trailing Twelve Months) / Adjusted TTM — The most recent 12 months; price is often a multiple of adjusted TTM since deals take 6–18 months. (Financial Structures)
Earnings Blend — Averaging earnings over a full cycle (commonly 12–36 months) to smooth cyclicality. (Financial Structures; The Negotiation)
Add-Backs / Adjustments — Modifications toward "true earning power": sellers add back (owner perks, one-time costs), buyers deduct (capex, market owner comp, warranty reserves). Over-adjusting erodes trust. (Financial Structures)
Lower Middle Market — Private companies with $5M–$100M EV; the book most directly addresses the lower end, $5M–$50M. (Behind the Curtain)
Proof of Health — Provable current strength (margins, retention, pricing power, position), weighted over unproven growth projections. (The Negotiation)

Financing & the Waterfall

Anchor insight: repayment is hierarchical and explicit, and each lower tier is paid for its risk with higher cost or strategic alignment.

The Waterfall — The priority order money is distributed: debt eats before equity, senior before subordinated, preferred before common. (Financial Structures)
Capital Structure / Capital Stack — Senior Debt → Subordinated/Mezz Debt → Seller Debt → Preferred Equity → Common Equity (most senior to most junior). (Financial Structures)
Subordination — "The condition of being lower in priority repayment." "Seller notes are usually subordinate to all other debt, and mezz debt is subordinate to bank debt. Bank debt is rarely subordinate to anything else – they get paid first." (Behind the Curtain)
Cash at Close — Cash delivered to the seller at closing. "If a buyer offers all cash at close, you're either selling a sure thing, or the price is low." All-cash is a pricing signal. (Behind the Curtain)
Senior Debt — Most senior claim (usually a bank), repaid 100% first in default; strict covenants including the repayment schedule; often ≤5-year payback. (Financial Structures)
Mezzanine / Subordinated Debt ("Mezz") — Junior, lightly/unsecured; high interest (12–25%) is the price of lower priority, plus an equity "kicker" (2–7%); often PIK'ed. Lets a buyer stack senior + mezz to finance a larger deal. (Financial Structures)
Equity Kicker — An equity slice (2–7%) given to mezz lenders for taking subordinated risk. (Financial Structures)
PIK (Payment-in-Kind) — Interest accrued to principal rather than paid in cash; eases near-term cash flow but compounds the most expensive debt. (Financial Structures)
Seller Note / Seller Debt — "Seller-funded debt," lowest in the stack. "Buyers like a seller note because it aligns the seller's interests" — it converts the seller into a junior lender betting on the buyer's success, with default-exposed proceeds. (Financial Structures; Behind the Curtain)
Interest-Only — A period paying interest but not principal (e.g., a six-year seller note, first three years interest-only, then amortized). (Behind the Curtain)
Preferred Equity — Ownership senior to common (debt-like payment / liquidation preference), junior to debt. (Financial Structures)
Liquidation Preference — A preferred holder's right to extract a multiple (e.g., 2X) of invested capital before common is paid. (Financial Structures)
Hurdle — Minimum LP return (typically 5–8%) cleared before others share in proceeds. (Types of Buyers)
Carry (Carried Interest) — The PE firm's share (15–40%+) of excess return above the hurdle. (Types of Buyers)
Leverage Discount — Rolled equity in a debt-funded deal is worth less: subordinated and effectively carrying its share of new debt. (Financial Structures)
Sources & Uses — Table of where deal cash comes from (senior debt, seller note, buyer equity, rollover) and where it goes (cash to sellers, seller note, rollover, company infusion). (LOI & Due Diligence)
Committed Capital — A pool in the bank or contractually committed by LPs. "An offer backed by committed capital is much more likely to close." The single best closing-certainty signal. (Behind the Curtain)
OPM — "Other People's Money." (Behind the Curtain)
Line of Credit — Pre-established drawable debt pool for short-term working-capital needs. (Behind the Curtain)

Deal Terms & Risk Allocation

Earnout — Payment at later dates on hitting agreed performance criteria; bridges buyer/seller disagreement. Lets a seller beat cash-at-close, but only "assuming those performance expectations become reality and the buyer is reputable" (two conditions). Manipulation risk falls the lower you go on the income statement (revenue is harder to manipulate than net income). (Financial Structures; Behind the Curtain)
Net Working Capital (NWC) — Current assets − current liabilities; "the amount of capital needed to operate the business." Buyers expect NWC left in the business at close so operations continue without a cash injection — effectively a hidden value adjustment the seller should anticipate. The "peg," heavily negotiated, set as a fixed figure or a closing formula. (Financial Structures; Behind the Curtain)
Bookable Inventory — Inventory that "counts" because it's sellable — vs. obsolete/damaged stock the buyer won't credit. (Financial Structures)
Reps & Warranties — "A representation is an assertion of a fact or circumstance as truthful. A warranty is a promise of indemnity if the assertion proves to be false." The mechanism by which risk is shared, set out in the purchase agreement. (Behind the Curtain)
Covenant — A promise to do, not do, or have done something; bank/loan covenants can constrain operations. (Financial Structures)
Caps & Baskets — Cap = max damages a buyer can recover from the seller; Basket = minimum threshold before a buyer can claim (a deductible). "Sellers want a big basket/small cap, buyers the reverse; risk tolerance and negotiation determine where they meet in the middle." (Behind the Curtain)
Tipping Basket — Once the threshold is met, the buyer recovers from dollar one (including the basket amount). (The Negotiation)
Sources of Repayment (Indemnification Backstops) — Escrow, offset right, personal guarantee, corporate guarantee. (The Negotiation)
Escrow — Third-party account holding proceeds to cover future liabilities. (The Negotiation; Behind the Curtain)
Reps & Warranties Insurance — Insurance (often via larger PE) replacing a seller-funded escrow/backstop. (The Negotiation)
Guarantee (Personal / Corporate / Limited) — "Guarantees are tools to shift risk based on pre-agreed upon circumstances," secured by personal assets, corporate assets, or capped liability; only as good as the guarantor's strength. (Behind the Curtain)
Non-Compete / Non-Solicit — Prevent the seller from competing, joining a competitor, or hiring away employees; transfer goodwill to the buyer. (The Negotiation; Deal Terms)
Purchase Price Adjustment — "A change in the amount owed to the seller," triggered when a buyer discovers something undisclosed in diligence. The honest-disclosure mechanism: hidden facts surface here as price cuts. (Behind the Curtain)
Re-Trade — "Re-negotiating the purchase price and/or terms after they've been agreed upon." A bad-faith tactic: "A less-than-ethical buyer may get a seller under LOI with the intention of re-trading the deal after dragging the other party through costly and time-consuming due diligence." (Behind the Curtain)
BATNA — Best Alternative To a Negotiated Agreement; your floor — never accept a worse deal (alternatives: another buyer, ESOP, continued ownership). (The Negotiation)
PE Fees — Closing, monitoring (flat C-suite-salary equivalent or 1–5% of EBITDA), financing, transaction, termination, acceleration. Acceleration/termination clauses can make all future fees payable on a later sale. (Financial Structures)

Real Estate

Cap Rate — Real-estate return on income: income ÷ cap rate = price (e.g., $180,000 net income at 9% ⇒ $2,000,000). ~5% (creditworthy long leases) to 15% (risky short leases); small-business RE typically 9–13%. (Behind the Curtain)
Triple Net (NNN) Lease — Tenant pays taxes, maintenance, insurance, utilities on top of rent. "Most buildings are leased on a triple net basis." (Behind the Curtain)
Option to Purchase — Tenant's contractual right to buy leased property (often via a cap-rate formula). (The Negotiation)

Process & Closing

Intermediary / Broker / Investment Banker — A general deal advisor; "a good intermediary seeks to create a match between the buyer and the seller." Market is heavily fragmented. (Behind the Curtain)
Sell-Side vs. Buy-Side Engagement — Paid by/loyal to the seller vs. hired by investors to find sellers via cold outreach. (The Process)
Lehman Formula — Standard scaled success fee (5/4/3/2/1% on successive $1M tranches); variants include Double Lehman (10/8/6/4/2). Retainer/work fees ~$50K+ or $3K–$15K monthly; success fees 6–12% on small deals, as low as 1.5% over $50M. (The Process)
Quality of Earnings (Q of E) — Accounting-firm report diagnosing underlying financial strength; a common diligence step, and findings tend to favor the paying party. (The Process; Behind the Curtain)
Teaser / Blind Profile — A short, non-confidential "30-second elevator pitch" to spark interest pre-NDA. (The Process)
NDA / Confidentiality Agreement — Restricts use/sharing of confidential data; lets a seller share detail with legal consequences for breach. (The Process; Behind the Curtain)
CIM / Offering Memorandum — Post-NDA document covering company history and material deal points. A filter — most investors pass after reading it; those who remain want to dig in. (Behind the Curtain)
IOI / Term Sheet — "A non-binding offer" stating valuation, structure, terms, timeline — but "none of those details are final or guaranteed." (Behind the Curtain)
LOI (Letter of Intent) — An "agreement to agree" pending diligence; signing generally triggers exclusivity (60–120 days) — you stop talking to other buyers. (Behind the Curtain)
Exclusivity Clause / Period — Seller ceases other conversations; a "forcing function," not a shot clock — usually extended in good faith. (LOI & Due Diligence)
Due Diligence — "Buyers use due diligence to validate their understanding. Surprises are the enemy." Converts tacit knowledge into "words and numbers." Fewer than 1 in 4 sub-$15M-EBITDA deals close after LOI. (Behind the Curtain)
Site Visit — Buyer's 4–8-hour tour plus off-site discussion and a meal; most buyers do one before drafting an LOI. (Behind the Curtain)
Purchase Agreement — Core legal document (asset or stock) with material terms, working-capital definition, reps & warranties, taxation. "The company hasn't been sold until both parties sign the purchase agreement and the consideration has been transferred." (Behind the Curtain)
Earnest Money — Usually non-refundable pre-purchase commitment; common in real estate, "unusual for purchases of operating companies." (Behind the Curtain)
Closing — The event where cash is exchanged and assignment made. "The process isn't over until Closing." (Behind the Curtain)

Post-Close

The New Normal — Post-close reality: usually more work (not a "permanent vacation"), a 1–3-year wind-down even after a full buyout, possibly a new partner. (A New Normal)
Operating Agreement — Governs post-close decision-making and defines who must consent to future decisions; critical when sellers roll equity. All remaining holders sign it as part of the transaction. (Behind the Curtain)
Seller's Remorse — The near-inevitable post-close wish you hadn't sold; remedy = remember why you sold (the Decision Notebook). (A New Normal)
The Decision Notebook — A real-time record of goals/decisions/reasoning, kept to rebut later emotional remorse. (A New Normal)

Abbreviations

BATNA — best alternative to a negotiated agreement · CA — confidentiality agreement · CIM — confidential information memorandum · EBIT / EBITDA · ESOP — employee stock ownership plan · GAAP · GP / LP — general / limited partner · IOI — indication of interest · IP · IRR — internal rate of return · KPI · LOI — letter of intent · M&A · NNN — triple-net · NDA · NWC — net working capital · OPM — other people's money · PEG — private equity group · PIK — payment-in-kind · Q of E — quality of earnings · ROA / ROE — return on assets / equity · SDE — seller's discretionary earnings · TTM — trailing twelve months. (Abbreviations, p.140)