Glossary of business sale terms

Selling a company comes with its own language, and buyers, brokers and lenders use it fast. This page explains each term in plain words, says why it matters to you as the seller, and points to the page on this site that goes deeper. The terms run A to Z. None of this is tax or legal advice; it is here so you can follow the conversation and ask better questions.

Add-backs

Add-backs are costs on your books that a new owner would not have, such as your personal truck, family on the payroll who do not work in the business, or a one-time lawsuit. They are added back to profit to show what the company really earns. Every dollar of add-back you can prove raises your earnings, but a quality of earnings provider will test each one. See the roofing add-backs checklist or try the add-back finder.

Add-on

An add-on is a company bought by a platform that already owns similar businesses, so it gets folded into a bigger group. If a PE-backed group buys you as an add-on, it will care about how well your crews, systems and customers fit with the companies it already owns. Read should I answer that private equity letter.

Adjusted EBITDA

Adjusted EBITDA is EBITDA after add-backs and after paying a market-rate manager to do the job you do today. Larger buyers price companies on it, and the manager salary is why it is lower than SDE for the same company. Read SDE vs EBITDA for a roofing company and how we calculate value.

Asset sale

In an asset sale the buyer buys your trucks, tools, customer list, name and goodwill, and you keep the company itself, with its old debts and history. Buyers often prefer it because it leaves old liabilities behind, and how the price is split across assets changes your tax bill. Read asset sale vs stock sale.

Backlog

Backlog is signed work you have not done yet, with its expected margin. Commercial buyers in particular look at backlog and commercial service contracts, because it shows revenue they can count on after closing. Bring a backlog list to due diligence.

Customer concentration

Customer concentration means a big share of your revenue comes from one customer or a handful, such as a builder, a general contractor or a property manager. Next Era Legal says buyers discount when the top 10 customers exceed 35% of revenue or any one exceeds 15%, because that customer could leave after you do. See what makes an HVAC company worth more.

Deferred revenue

Deferred revenue is money customers have paid you for work you have not done yet, such as prepaid maintenance visits. Buyers expect credit for it at closing, because they will have to do the work without being paid again. Read what maintenance agreements are worth.

Due diligence

Due diligence is the buyer's check of everything you told them, usually after you sign a letter of intent: books, tax returns, customers, staff, licenses, insurance and legal history. Anything you cannot show tends to come off the price or turn into a holdback. Read the due diligence checklist.

Earnout

An earnout is part of the price paid later, only if the business hits targets after the sale, such as revenue or profit. It is not guaranteed money: where an earnout paid anything, the median payout was 43 cents on the dollar, according to SRS Acquiom data cited by Salt Creek Advisory. Read how much is cash at closing.

EBITDA

EBITDA is earnings before interest, taxes, depreciation and amortization: roughly, profit from running the business before financing and accounting choices. It is the number larger buyers and lenders compare across companies. Read SDE vs EBITDA.

Equity injection

An equity injection is the cash a buyer must put into an SBA-financed purchase. Since June 2025 the SBA requires 10%, and a seller note counts toward it only if it is on full standby for the life of the loan, so you may wait years for that part. Read could my foreman or GM buy me out.

Escrow

Escrow is part of the price held by a neutral third party for a set time after closing, to cover claims if something you promised turns out wrong. It reduces your cash at closing, so agree the amount, the length and the release terms in the letter of intent. Read how much is cash at closing.

ESOP

An ESOP (employee stock ownership plan) is a retirement plan that holds company shares in a trust for your employees and buys your shares over time. It lets you sell to your whole team without one employee needing the cash, but it has setup and yearly costs. Read could my foreman or GM buy me out and your exit options.

Holdback

A holdback is part of the price the buyer keeps back for a period after closing, often to cover warranty callbacks, unknown claims or a shortfall in working capital. Like escrow, it is money you may or may not see, so count it separately from cash at closing. Read how much is cash at closing.

Illustrative estimate

An illustrative estimate is a value range built from published data and our own assumptions, not from verified closed deals or an appraisal. Every multiple our calculator uses is labelled illustrative until a trade's numbers are checked against verified deal data. See how we calculate value and where our numbers come from.

Indication of interest (IOI)

An IOI is a short, non-binding letter with a rough price range and structure, sent after a buyer's first look at your numbers. It is a starting point, not an offer, so compare IOIs on how much is cash at closing as well as the top number. Read how selling a business works.

Installment sale

An installment sale is a sale where you receive at least one payment after the year of the sale, as with a seller note. Under IRS rules you generally report the gain as you receive payments, which can spread the tax over years. Read taxes on selling your business.

Letter of intent (LOI)

An LOI is a letter from one buyer that sets the price, the structure, the deal type, your role after closing and a period when you agree not to talk to other buyers. Most of it is non-binding, but your bargaining power drops the day you sign, so settle the big points first. Read how selling a business works.

Maintenance agreement

A maintenance agreement is a plan where customers pay you every year or month for tune-ups and priority service. Next Era Legal calls these members the single most important multiple driver for HVAC companies. Read what maintenance agreements are worth to a buyer.

Multiple

A multiple is the number a buyer multiplies your earnings by to reach a price, written like "2.58x SDE". BizBuySell reports a 2021 to 2025 median sold multiple of 2.58x SDE for HVAC, but your multiple depends on your size, your people and your risks. See how we calculate value.

Non-compete

A non-compete is your promise not to start or work for a competing company in a set area for a set time after the sale. Buyers almost always ask for one, and in an asset sale part of the price may be allocated to it, which affects your tax. Read asset sale vs stock sale.

Normalization

Normalization means adjusting your earnings to what a normal year looks like: taking out one-off income, setting rent at a market rate, and averaging unusually good or bad years. Buyers do this to your numbers anyway, so it is better to do it first. Roofing owners should read will buyers discount my storm work.

Owner dependence

Owner dependence is how much of the business stops working when you are not there: sales, estimating, the license, the key customers. Next Era Legal calls it the factor that "most directly limits your valuation". Take the owner dependence test.

Phantom equity

Phantom equity is a cash bonus for key employees tied to the company's sale price or growth, with no real shares changing hands. Owners use it to keep their GM and lead techs through a sale. Read could my foreman or GM buy me out.

Platform

A platform is the first company a private equity firm buys in a trade, which then buys other companies as add-ons. Roofing platforms backed by private equity went from 17 at the start of 2023 to 56 at the end of 2024. See who buys roofing companies.

Private equity (PE)

Private equity firms raise money from investors to buy companies, grow them and sell them again, often within several years. Even with all the headlines, PE-backed groups run only about 0.9% of US HVAC and plumbing contractor locations, so most owners sell to someone else. Read should I answer that private equity letter.

Purchase agreement

The purchase agreement is the binding contract for the sale: the exact price and terms, what is included, your promises about the business, what you owe if a promise proves wrong, and any escrow or holdback. Your attorney earns their fee here. Read how selling a business works.

Qualifier

A qualifier is the licensed person whose license lets the company do the work. In Florida, if the only qualifying agent leaves, the company has 60 days to employ another, so a buyer will ask who qualifies the company on the day after closing. Read does my plumbing license transfer when I sell.

Quality of earnings (QoE)

A quality of earnings review is an outside accountant's test of your profit and every add-back, paid for by the buyer or by you before going to market. Add-backs that cannot be documented tend to come off the price. Read the due diligence checklist.

Recurring revenue

Recurring revenue is money that comes back every year without a new sale, such as maintenance plans and service contracts. Buyers pay more for it because it makes next year easier to predict. See what makes a plumbing company worth more and maintenance agreements.

Responsible Master Plumber (RMP)

In Texas, the Responsible Master Plumber is the licensed master whose license a plumbing company works under. An RMP can be the RMP of record for only one company at a time, so a buyer needs its own RMP in place at closing. Read selling a plumbing company in Texas.

RMO and RME

In California, a company qualifies its contractor license through a Responsible Managing Officer or Responsible Managing Employee. A licensed full-time employee who can serve as RME is a real asset to a buyer. Read selling a plumbing company in California.

Rollover equity

Rollover equity is part of your price taken as shares in the buyer's company instead of cash. It can pay off if the buyer later sells for more, but you cannot spend it at closing and it can lose value. Salt Creek Advisory found the price in PE deals is usually part cash and part rollover equity. Read how much is cash at closing.

SBA 7(a) loan

An SBA 7(a) loan is a bank loan partly guaranteed by the US Small Business Administration, often used by individuals buying a small company. These loans cap at $5M, and SBA lenders check seller numbers against IRS transcripts, so your books must match your returns. Read could my foreman or GM buy me out.

SDE (seller's discretionary earnings)

SDE is your profit plus your own pay, interest, depreciation and your accepted add-backs: what one owner-operator takes home from the business. Most small trade companies are priced on it. Read SDE vs EBITDA.

Seller note

A seller note is a loan you give the buyer for part of the price, paid back with interest over years. It can help a deal happen and spread your tax, but you are paid only if the business keeps doing well. Read how much is cash at closing and selling to family.

Stock sale

In a stock sale the buyer buys the company itself, with its history, contracts and liabilities. Sellers often prefer it for tax and simplicity, and buyers often push back because of the old liabilities. Read asset sale vs stock sale.

Strategic buyer

A strategic buyer is a company already in your trade or a nearby one, such as a local competitor or a regional company, buying you to grow. It may pay for customers, crews and territory it can fold into its own operation. See who would buy my plumbing business.

Transition agreement

A transition agreement sets your role after closing: what you do, for how long, and what you are paid. SBA rules cap how long a seller can stay when the buyer uses an SBA loan. Read should I stay on after selling, or walk away and after the sale.

WIP (work in progress)

WIP is jobs you have started but not finished, with what you have billed and what it has cost so far. Buyers check it to see whether you have billed ahead of the work or fallen behind, which changes the cash and working capital at closing. Read the due diligence checklist.

Working capital peg

The working capital peg is the normal level of receivables, inventory and payables the buyer expects you to leave in the company at closing. If you leave less, the price is usually adjusted down, so agree how the peg is set in the letter of intent. Read how much is cash at closing.