Business sale & M&A glossary
Buying or selling a business comes with its own vocabulary. Here are the terms that matter most — defined in plain English, the way we'd explain them across the table.
Valuation
- Add-back
- An adjustment that restates reported earnings to a buyer's economic reality — for example, above-market owner salary, one-time expenses, or personal costs run through the business. Add-backs must be legitimate and documented or they're removed during due diligence.
- Customer concentration
- The degree to which revenue depends on a small number of customers. High concentration is a major risk that lowers valuation, because losing one client could materially hurt earnings.
- Discounted cash flow (DCF)
- A valuation method that projects future cash flows and discounts them to present value to reflect risk. Strategic and financial buyers use DCF to justify paying a premium for growth.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of a company's operating profitability independent of its financing and tax situation. Larger businesses are typically valued as a multiple of adjusted EBITDA.
- Goodwill
- The portion of a business's value above its tangible assets — reputation, customer relationships, brand, and earning power. Often the largest component of a profitable business's price.
- Multiple
- The factor applied to normalized earnings to estimate value (e.g., 3x SDE). Multiples reflect risk and transferability — durable, low-risk earnings command higher multiples.
- Normalized earnings
- Earnings recast to show ongoing, transferable profitability after removing one-time, non-operating, and discretionary items. The foundation of any credible valuation.
- Owner dependence
- How much a business relies on its owner for sales, relationships, or operations. The more a business can run without the owner, the more transferable — and valuable — it is.
Deal Structure
- Asset allocation
- In an asset sale, how the purchase price is divided across asset classes (equipment, inventory, goodwill). Allocation affects the tax outcome for both parties and is itself negotiated.
- Asset sale
- A transaction in which the buyer purchases selected assets (equipment, inventory, goodwill, customer lists) rather than the company's shares, typically leaving liabilities behind. Buyers often prefer this structure.
- Definitive agreement
- The final, binding purchase agreement that governs the transaction, signed after due diligence. It contains the negotiated price, representations and warranties, and closing conditions.
- Earnout
- A portion of the purchase price paid after closing, contingent on the business hitting agreed performance targets. Earnouts bridge valuation gaps but require careful drafting to avoid disputes.
- Letter of intent (LOI)
- A mostly non-binding document outlining the key terms of a proposed deal — price, structure, conditions, and timeline — signed before due diligence begins. It frames the negotiation that follows.
- Reps and warranties
- Statements of fact made by the seller (and buyer) in the definitive agreement — for example, that the financials are accurate. Breaches can trigger indemnification claims after closing.
- Vendor financing (seller note)
- When the seller finances part of the purchase price, paid by the buyer over time. It signals seller confidence, can widen the buyer pool, and often improves the total price.
Process
- Closing
- The completion of the transaction — signing the definitive agreement, transferring funds, and handing over ownership. The point at which the business officially changes hands.
- Confidential information memorandum (CIM)
- The detailed, NDA-gated document describing the business for sale — operations, financials, and the growth story. Released to qualified buyers after they sign a non-disclosure agreement.
- Confidentiality
- Controlling who knows a business is for sale. A confidential process protects staff, customer, supplier, and competitive relationships — and therefore the value of the business.
- Data room
- A secure repository of documents — financials, contracts, leases, legal records — provided to serious buyers during due diligence. A well-organized data room speeds the deal and builds buyer trust.
- Due diligence
- The buyer's investigation to verify the seller's claims before closing — financial, legal, commercial, and operational. Typically runs 30–75 days after a letter of intent.
- Non-disclosure agreement (NDA)
- A legal agreement a prospective buyer signs before receiving confidential information, committing them to keep the details — and the fact of the sale — private.
- Transition period
- The time after closing during which the seller helps the buyer take over — handing off relationships, knowledge, and operations. Length and terms are negotiated as part of the deal.
Tax & Legal
- Capital gain
- The profit realized when an asset or shares are sold for more than their adjusted cost base. A portion of capital gains is generally taxable in Canada, subject to current rules.
- Indemnification
- A contractual promise to compensate the other party for specified losses — for example, if a seller's representation turns out to be untrue after closing.
- Lifetime Capital Gains Exemption (LCGE)
- A Canadian tax provision that can shelter a portion of the capital gain on the sale of qualifying small business corporation shares from tax. The amount is indexed and subject to change — confirm current figures with a CPA.
- Purification
- Restructuring a company to remove non-active assets (surplus cash, investments, unused real estate) so its shares meet the active-business tests for the Lifetime Capital Gains Exemption.
- Qualified small business corporation (QSBC) shares
- Shares that meet specific asset-use and holding-period tests under the Income Tax Act, making them eligible for the Lifetime Capital Gains Exemption. Qualifying often requires advance planning.
Financing
- BDC
- The Business Development Bank of Canada — a common source of acquisition and growth financing for Canadian buyers, often used alongside commercial bank or credit union lending.
- Deal financing
- How a buyer funds an acquisition — typically a mix of personal equity, bank or BDC lending, and sometimes vendor financing. Pre-arranged financing is a major reason deals close faster.
- Working capital
- The short-term assets minus short-term liabilities needed to run the business day to day. Deals usually specify a normal level of working capital to be delivered at closing.
See also:Deal financing
Want this explained for your business?
Skip the jargon. Get a clear, confidential read on your options in a free consultation.