Reference

Lower middle market M&A glossary

Plain-English definitions of the valuation, diligence, and deal terms owners and buyers run into in a lower middle market transaction.

Built for owners, buyers, and operators who want the vocabulary before the conversation, not after.

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Glossary

Valuation and Earnings

Terms

Valuation and Earnings terms

EBITDA: EBITDA is earnings before interest, taxes, depreciation, and amortization. It strips out financing and accounting choices so a buyer can see what the business actually earns from running its operations. For most owner-led companies it's the number a buyer starts with when they think about value.
SDE (Seller's Discretionary Earnings): SDE is what the business earns once you add the owner's salary and personal perks back into profit. It answers a simple question a buyer cares about, which is how much money a single working owner takes home from this business in a year. It's the standard earnings measure on smaller owner-operated companies.
EBITDA Add-Backs: Add-backs are one-time or personal expenses that get added back to profit because they don't reflect the true cost of running the business. Common examples are the owner's above-market pay, a personal vehicle, or a legal bill that won't happen again. Legitimate add-backs raise the earnings a buyer values, but a buyer's accountant will challenge anything that looks like a normal operating cost dressed up as a one-off.
Valuation Multiple: A valuation multiple is the figure a buyer applies to your earnings to estimate what the business is worth, such as a multiple of EBITDA or SDE. Bigger, less owner-dependent, faster-growing businesses tend to earn higher multiples. The exact range depends on your industry, size, and how the business actually runs without you.
Enterprise Value: Enterprise value is the total value of the business itself, before adjusting for cash in the bank and debt owed. It's the figure buyers use to compare companies on equal footing. What you actually walk away with comes after subtracting debt and settling working capital, so enterprise value is the starting point, not the check.
TTM (Trailing Twelve Months): TTM means the most recent twelve months of actual results, no matter where that falls in the calendar. Buyers prefer it because it shows how the business is performing right now rather than relying on an old fiscal year. When someone asks for your TTM revenue or earnings, they want the freshest real picture.
SDE vs EBITDA: SDE adds the owner's salary and perks back into profit and fits smaller businesses run by a single working owner, while EBITDA assumes you'd hire a manager to replace the owner and fits larger companies. As a business grows past the point where one owner does everything, buyers shift from valuing it on SDE to valuing it on EBITDA. Knowing which one applies to you keeps a valuation conversation honest from the start.
Recast Financials: Recasting financials means restating your books to show what the business truly earns, by adjusting for owner pay, personal expenses, and one-time items. It gives a buyer a clear view of normal, ongoing profit rather than a tax-minimized picture. Honest, well-supported recasting helps a buyer see the real earning power behind the business.
Transaction Multiple: A transaction multiple is the actual multiple paid in a completed deal, used as a reference point for what similar businesses really sell for. Buyers and advisors look at recent transaction multiples in your industry to ground a valuation in evidence rather than opinion. Real closed deals carry more weight than asking prices, which is why these comparisons matter.

Glossary

Deal Process

Terms

Deal Process terms

Letter of Intent (LOI): An LOI is a written offer that lays out the price and main terms a buyer proposes before the deep diligence begins. Most of it isn't binding, but it sets the framework everyone negotiates inside of, and it usually starts an exclusivity window where you stop talking to other buyers. Signing one is a serious step, not a casual handshake.
Indication of Interest (IOI): An IOI is an early, non-binding signal from a buyer that they're interested and roughly where they think value lands. It usually comes before a formal LOI and gives you a sense of who's serious. Think of it as a buyer raising their hand, not making a firm offer.

Glossary

Diligence and Documents

Terms

Diligence and Documents terms

Quality of Earnings (QoE): A quality of earnings report is an independent review of your financials that a buyer orders to confirm your profit is real, repeatable, and clean. It tests whether your add-backs hold up and whether revenue is recurring or lumpy. Clean books that survive a QoE protect your price; messy ones invite a discount.
Non-Disclosure Agreement (NDA): An NDA is a confidentiality agreement a buyer signs before you share sensitive details about your business. It lets you open the books to a serious party while limiting what they can do with what they learn. It's the standard first document in almost any sale conversation.
Data Room: A data room is the secure online folder where you organize every document a buyer needs to review, from financials to contracts to leases. A clean, complete data room speeds up diligence and signals that the business is well run. A disorganized one slows the deal and gives buyers reasons to worry.
Due Diligence: Due diligence is the period after an offer where the buyer verifies everything about the business before they commit. They review financials, contracts, customers, operations, and legal records to confirm reality matches the story. The cleaner and more transferable your business is, the smoother this phase goes.
Purchase Agreement: The purchase agreement is the binding contract that actually transfers the business at closing. It spells out the final price, what's included, the promises each side makes, and what happens if something turns out to be wrong. It's the most important document in the deal, so it's worth reading carefully with good counsel.
Reps and Warranties: Reps and warranties are the formal promises you make in the purchase agreement about the state of the business, such as that the financials are accurate and there are no hidden lawsuits. If one of them turns out to be false, the buyer can come back for compensation. They're a major reason clean records and honest disclosure protect you long after the deal closes.

Glossary

Deal Structure

Terms

Deal Structure terms

Working Capital Peg: A working capital peg is the agreed amount of day-to-day operating capital the business needs to keep running after the sale, like enough to cover receivables, payables, and inventory. The deal sets a target, and the final price adjusts up or down depending on whether you deliver more or less than that target at closing. It's where a clean deal can quietly gain or lose real money, so it's worth understanding early.
Earnout: An earnout is part of the price that you receive later, only if the business hits agreed targets after the sale. Buyers like earnouts because they shift some risk onto the seller; sellers accept them to bridge a gap when the two sides disagree on value. The terms matter a lot, because a poorly written earnout can tie your payout to numbers you no longer control.
Seller Note: A seller note is when you finance part of the sale yourself, letting the buyer pay you over time with interest instead of all at once. It can help a deal close and often signals to the buyer that you believe in the business. The tradeoff is that you carry some risk until the note is fully paid.
Rollover Equity: Rollover equity is when you keep a piece of ownership in the company after the sale instead of cashing out completely. You take some money off the table now and stay invested in the upside if the new owners grow the business. It's common when a buyer wants you aligned and engaged through the next chapter.
Recapitalization: A recapitalization is a deal where you sell a portion of the business and take cash out without fully exiting. It lets an owner reduce personal risk, fund a goal, or bring in a partner while staying in the seat. Owners often use it as a halfway step between running the business and selling it outright.
Escrow: Escrow is when part of the sale price is held by a neutral third party for a set period after closing. It gives the buyer a cushion to draw from if a problem surfaces that breaks one of your promises in the contract. Once the period passes cleanly, the held funds are released to you.
Holdback: A holdback is an amount of the price the buyer keeps back for a while to cover any issues that come up after the sale. It's similar in spirit to escrow and protects the buyer if the business doesn't match what was promised. The size and length of a holdback are negotiable and affect how much you get at closing.
Indemnification: Indemnification is the part of the contract that says who pays if something goes wrong after the sale and a promise turns out to be untrue. It sets the rules for how a buyer can recover losses and how much exposure you carry and for how long. Negotiating these limits well can protect a meaningful slice of your proceeds.
Deal Structure: Deal structure is how the price actually gets paid and the risk gets shared, including cash at closing, seller notes, earnouts, rollover equity, and holdbacks. Two offers with the same headline number can be very different once you look at the structure. For most owners, how a deal is built matters as much as the price on the cover.

Glossary

Deal Types and Buyers

Terms

Deal Types and Buyers terms

Management Buyout (MBO): A management buyout is when your existing leadership team buys the business from you. It can be a clean way to reward the people who helped build the company and keep the culture intact. The challenge is usually funding, since managers often need outside capital to make the numbers work.
Search Fund: A search fund is a structure where an entrepreneur raises money to find and buy one good business to run themselves. The buyer is often a capable operator looking for a company exactly like yours to step into and lead. For the right owner, a search fund buyer can mean a hands-on successor rather than a financial firm.
Add-On Acquisition: An add-on is a smaller company a buyer purchases to fold into a business they already own. The goal is to combine the two and make the larger company more capable or more valuable. If your business is an attractive add-on, it can draw buyers who already understand your industry.
Platform Company: A platform company is the first, anchor business an investor buys in an industry, with the plan to grow it by adding more companies on top. Platforms are usually well-run businesses with solid leadership and room to scale. Being acquired as a platform often means the buyer sees your company as the foundation, not a bolt-on.
Growth Capital: Growth capital is money an outside investor puts into a healthy business to help it expand, rather than to buy it outright. You usually give up some ownership in exchange for fuel to grow faster than you could on your own. It's a path for owners who want a partner and more runway without selling the whole company.
Family Office: A family office is a private firm that manages the wealth of a single family and often invests directly in businesses. As buyers they tend to be patient, long-term, and less driven by a fixed timeline to flip the company. For many owners, a family office can be a steadier home for a business they care about.

Glossary

Exit and Readiness

Terms

Exit and Readiness terms

Owner Dependency: Owner dependency is how much the business relies on you personally to keep running, from key relationships to decisions only you can make. A buyer sees high owner dependency as risk, because the value can walk out the door when you do. Reducing it is one of the most direct ways to make your company easier to sell and worth more.
Customer Concentration: Customer concentration is how much of your revenue depends on a small number of clients. A buyer sees high concentration as risk, because losing one big account could shake the whole business. Spreading revenue across more customers makes the company steadier and easier to value.
Succession Planning: Succession planning is the work of preparing your business to run and transfer well when you step back, whether you sell, hand it to family, or pass it to your team. It covers who leads, how the business keeps running without you, and how ownership changes hands. Done early, it protects both your people and your price.
Exit Readiness: Exit readiness is how prepared your business is to sell well right now, from clean financials to documented processes to reduced owner dependency. A ready business attracts better buyers, survives diligence smoothly, and holds its price. Most of the value here gets built in the years before a sale, not in the final negotiation.

Glossary

Market and Positioning

Terms

Market and Positioning terms

Lower Middle Market: The lower middle market is the band of companies that are too big to be a typical Main Street sale but smaller than the deals large investment banks chase. These are real, established, owner-led businesses with meaningful revenue and earnings. It's the part of the market SilverShore works in, where most owners get less attention than the size of their business deserves.
Off-Market Deal: An off-market deal is a sale that never gets publicly listed or run through an open auction. The owner talks to a small set of qualified buyers instead of broadcasting that the business is for sale. It protects confidentiality and can lead to a calmer, more relationship-driven process.
Proprietary Deal Flow: Proprietary deal flow is a buyer's pipeline of opportunities that come from direct relationships rather than public listings. Buyers value it because they get to look at good businesses before anyone else does. For an owner, being part of a proprietary network can mean serious buyers find you without a public sale process.
Broker vs M&A Advisor vs Investment Bank: A business broker typically handles smaller, listed sales, an investment bank runs large transactions with formal auctions, and an M&A advisor sits in between, guiding owner-led companies through a more tailored process. SilverShore is not a registered broker-dealer or investment adviser, and in qualifying private-company transactions may operate within the federal M&A broker exemption defined under Section 15(b)(13) of the Securities Exchange Act. Knowing which kind of partner fits your size and goals saves you from paying for the wrong process.

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