When you sell a business you will hear a wall of jargon — EBITDA, SDE, multiple, earnout, add-backs, working capital peg. This glossary defines the terms that actually affect your price and proceeds, in plain English, so you can negotiate from understanding rather than nodding along.
Key takeaways
- Most exit jargon describes either how earnings are measured or how the deal is structured.
- Understanding the terms protects your price in negotiation and diligence.
- The two that matter most: the multiple, and what it's applied to.
Selling a business comes with its own language, and owners who do not speak it tend to get talked past. Here are the terms that actually move your price and proceeds, defined plainly.
How earnings are measured
EBITDA — earnings before interest, taxes, depreciation, and amortization. A proxy for operating cash flow used to value larger companies; it assumes the cost of a hired manager.
SDE (seller's discretionary earnings) — EBITDA with the owner's salary and perks added back. Used for smaller, owner-operated businesses where one person's compensation is significant.
Add-backs — expenses added back to profit to reveal true earning power: the owner's above-market pay, personal expenses, and genuine one-time costs. Legitimate ones raise value; unsupported ones get challenged.
Normalized earnings — earnings adjusted for add-backs and one-time items, so a buyer sees what the business really earns under normal operation.
How the price is set
Multiple — the number multiplied by earnings to get the price. It reflects risk and transferability. Raising it is multiple expansion.
Enterprise value — the total value of the business's operations (earnings × multiple), independent of how it is financed.
Customer concentration — the share of revenue from your largest customers. High concentration is a risk that compresses the multiple.
How the deal is structured
Cash at close — the portion of the price paid the day you sign.
Earnout — price paid later, contingent on the business hitting targets. (See how earnouts work.)
Seller note — a loan you extend to the buyer for part of the price, repaid with interest.
Rollover equity — a stake you keep in the business after the sale.
Working capital peg — the agreed amount of working capital that must be left in the business at close; deliver less and your proceeds are adjusted down.
Due diligence — the buyer's verification of everything you have claimed. Clean books and documented operations make it fast; messy ones make it expensive.
The two that matter most
Strip away the rest and two terms decide your outcome: the multiple, and what it is applied to. Everything in the years before a sale is about raising both — growing normalized earnings and earning a higher multiple by making the business transferable.
Frequently asked
Both measure normalized earnings. SDE (seller's discretionary earnings) adds the owner's salary and perks back in and is used for smaller, owner-operated businesses. EBITDA (earnings before interest, taxes, depreciation, and amortization) assumes a hired manager's cost and is used for larger companies. Which one applies affects your multiple.
Add-backs are expenses added back to profit to show a buyer the business's true earning power — the owner's above-market salary, personal expenses run through the business, and genuine one-time costs. Legitimate add-backs raise the earnings a buyer values; aggressive or unsupported ones get challenged in diligence.
Your move
Find the one thing capping your company’s value.