Exit-planning glossary.

The words that decide what your business sells for — defined plainly. If a buyer, broker, or advisor uses a term you'd rather not nod along to, it's probably here.

Exit planning: Exit planning is the multi-year work of making a business sell for the most it can — by building transferable value before a sale, not just listing the company once you're ready to leave. It runs years ahead of a business broker's transaction. Learn more
Enterprise value: Enterprise value is what a buyer will actually pay to own the whole business — typically its earnings multiplied by a multiple, adjusted for cash and debt. It's the number exit planning is built to raise.
Owner-dependence: Owner-dependence is the degree to which a business relies on its owner to function — the relationships, decisions, and knowledge that run through one person. It's usually the single biggest factor lowering what a buyer will pay. Learn more
Transferable value: Transferable value is the portion of a company's worth that survives the owner's departure — the systems, team, customers, and brand a new owner inherits intact. Buyers pay for transferable value; they discount the rest.
Seller's discretionary earnings (SDE): Seller's discretionary earnings (SDE) is a small business's profit with the owner's salary, perks, and one-time costs added back — the total financial benefit to a single owner-operator. It's the earnings base most often used to value owner-operated companies.
EBITDA: EBITDA is earnings before interest, taxes, depreciation, and amortization — a measure of operating profit used to value larger or manager-run businesses. Buyers apply a multiple to EBITDA (or SDE) to arrive at price.
Valuation multiple: A valuation multiple is the number a buyer applies to a company's earnings (SDE or EBITDA) to set its price — for example, 4× EBITDA. The multiple rises as risk falls, which is why reducing owner-dependence raises the price.
Recast (add-backs): Recasting is adjusting financial statements to show a buyer the business's true earning power — adding back the owner's discretionary expenses, one-time costs, and non-operating items. Clean, defensible add-backs can meaningfully raise the earnings a multiple is applied to.
Key-person risk: Key-person risk is the danger that a business depends too heavily on one individual — often the owner, but sometimes a top salesperson or technician. High key-person risk lowers the multiple because the value can walk out the door.
Customer concentration: Customer concentration is how much of a company's revenue comes from a few clients. When one customer represents a large share of sales, buyers see fragility and pay less — diversifying the base is a common pre-sale value lever.
Recurring revenue: Recurring revenue is income that repeats predictably — service contracts, maintenance plans, subscriptions. Because it's durable and forecastable, recurring revenue is one of the most reliable ways to lift a company's multiple.
Theory of Constraints: A body of management thinking originated by Eliyahu Goldratt: at any given time, one thing more than any other limits what a system can produce, so improvement effort pays off only when it's aimed there, in the right order. It is one of the two disciplines behind The Four-Year Exit Method. Learn more
Earnout: An earnout is part of a sale price paid later, contingent on the business hitting agreed targets after the deal closes. Buyers use earnouts to bridge price gaps and to keep a departing owner invested in a smooth handoff.
Add-backs: Add-backs are expenses removed from reported earnings to show a buyer the business's true profitability — the owner's above-market salary, one-time costs, and personal or non-operating expenses. Defensible add-backs raise the earnings a multiple is applied to.
Normalized earnings: Normalized earnings are a company's profits adjusted to reflect ongoing operations — after add-backs, one-time items, and owner-specific costs are removed. They give buyers a clean, comparable basis for valuation.
Letter of intent (LOI): A letter of intent (LOI) is a mostly non-binding document in which a buyer sets out the proposed price, structure, and key terms before formal due diligence. Signing an LOI usually starts an exclusivity period and the real diligence work.
Due diligence: Due diligence is the buyer's detailed investigation of a business after the LOI — financials, contracts, customers, operations, and legal exposure. Clean records and low owner-dependence make diligence faster and protect the agreed price.
Working capital peg: A working capital peg is the normal level of working capital a buyer expects to be left in the business at closing. If actual working capital is below the peg, the price is adjusted down — so the peg is a frequently negotiated deal term.
Rollover equity: Rollover equity is the portion of sale proceeds an owner reinvests into the buyer's entity instead of taking in cash. It keeps the seller partly invested in future upside and is common in private-equity deals — a potential "second bite at the apple."

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