Buying a business
Glossary: business sale, acquisition and finance terms explained
Plain-English definitions of the terms used when valuing, buying, selling and funding an owner-managed business.
Lee Wallace, ACMA CGMA · Published · Last reviewed
Guide · 7 min read
In short
Plain-English definitions of the terms that come up when valuing, buying, selling and funding an owner-managed business, with links to the guides that explain each one in depth.
A–D
Acquisition criteria
The characteristics of the business a buyer is looking for – sector, size, location, the buyer's role, what they can fund, and their deal-breakers.
Asset purchase
Buying selected assets of a business (and only the liabilities agreed) rather than the company that owns them. Its legal and tax consequences differ from a share purchase; take advice. Read more: The complete guide to buying a UK business.
Cash-free, debt-free
A common basis for a price offer: the price assumes the business has no borrowings and no surplus cash. Borrowings are deducted and surplus cash added when the final price is calculated. Read more: Financial due diligence for buyers: a practical guide.
Cash conversion
How reliably a business turns its profit into cash. It is affected mainly by working capital and capital spending. Read more: Financial due diligence for buyers: a practical guide; Finance foundations that support business value.
Completion
The point at which a sale legally takes place: the documents are signed and the price (or the part payable at completion) is paid.
Completion accounts
A price mechanism in which the final price is adjusted using a balance sheet drawn up at completion. The choice of mechanism and the drafting are matters for legal advisers. Read more: Financial due diligence for buyers: a practical guide.
Completion fee
A fee payable to an adviser when a sale completes, agreed before the engagement begins.
Customer concentration
How much of a business's revenue and profit comes from a small number of customers. High concentration is a risk buyers usually reflect in price or terms. Read more: How does customer concentration affect the value of a business?
Debt capacity
The amount of borrowing a business's cash flows could support, after the costs of running it, set against the interest and repayments that borrowing would require. Read more: Funding a business acquisition: a practical guide to preparation.
Debt-like items
Liabilities that are not borrowings but are treated like debt when the price is calculated – for example overdue tax or liabilities relating to the period before completion. What counts is negotiated. Read more: Financial due diligence for buyers: a practical guide.
Deferred consideration
Part of the price paid at agreed later dates. It is a fixed amount: certain, but later. Compare earn-out.
Due diligence
The buyer's investigation of a business before completing a purchase. It covers financial, legal, tax and commercial areas. Read more: Financial due diligence for buyers: a practical guide.
E–L
Earn-out
Part of the price that is conditional on the business's performance after completion. It is uncertain as well as later. Compare deferred consideration.
EBITDA
Earnings before interest, tax, depreciation and amortisation – a measure of operating profit used as the starting point for many valuations. See normalised EBITDA. Read more: How to value a small UK business.
Enterprise value
The value of a business itself, assuming it is sold with a normal level of working capital and without its cash or borrowings. Compare equity value. Read more: How to value a small UK business.
Equity value
What the shares are worth: enterprise value adjusted for cash, borrowings, debt-like items and any working capital difference. It is broadly what the seller receives before deal terms, costs and tax. Read more: How to value a small UK business.
Exclusivity
A period, usually agreed in heads of terms, during which the seller agrees not to negotiate with other buyers.
Financial due diligence
The part of due diligence that tests the financial information: quality of earnings, working capital, debt-like items, cash conversion and forecasts. Read more: Financial due diligence for buyers: a practical guide.
Heads of terms
A document recording the main terms of a proposed deal – price, structure, conditions, exclusivity and timetable. Usually not legally binding, apart from certain provisions such as exclusivity and confidentiality; legal advisers confirm the position. Read more: The complete guide to buying a UK business.
Indicative valuation
A reasoned range, based on the information available, used for planning. It is not a formal valuation and not a price. Read more: How to value a small UK business.
Information Memorandum
The main document presenting a business to serious buyers after they have signed a confidentiality agreement. Read more: The complete guide to selling a UK business.
Locked box
A price mechanism in which the price is fixed by reference to an earlier balance sheet, with protections against value leaving the business in between. A matter for legal advisers. Read more: Financial due diligence for buyers: a practical guide.
M–R
Maintainable earnings
The profit a business can be expected to make in a normal year under new ownership, without the current owner's personal choices distorting it. Read more: How to value a small UK business.
Management accounts
Regular (usually monthly) financial statements prepared for running the business, rather than for statutory filing. Read more: Finance foundations that support business value.
Net debt
Borrowings less cash. It is usually deducted from enterprise value when the final price is calculated. Read more: Financial due diligence for buyers: a practical guide.
Normal level of working capital
The level of working capital a business needs to trade normally, agreed for a transaction. The price usually moves if the level at completion differs. Also called the "peg" or "target". Read more: Financial due diligence for buyers: a practical guide.
Normalised EBITDA
EBITDA adjusted to show what a business would earn under a new owner – removing one-off and personal items, and replacing the owner's actual pay with the market cost of their role. Read more: How to value a small UK business.
Owner dependency
How far a business relies on its owner for customers, decisions and know-how. A buyer usually reflects high owner dependency in price or terms. Read more: Preparing a business for exit: a practical guide.
Owner replacement cost
The market cost of the work a working owner does, including employer costs. It is deducted when normalising earnings. Read more: How to value a small UK business.
Quality of earnings
An assessment of whether reported or adjusted earnings reflect sustainable trading, testing each adjustment and looking for any not made. Read more: Financial due diligence for buyers: a practical guide.
Recurring revenue
Revenue that repeats – from contracts, subscriptions, retainers or regular custom. Buyers will generally place more weight on recurring revenue where it is contracted and supported by an established renewal or retention history. Read more: Does recurring revenue make a business more valuable?
S–Z
Sale agreement
The legal contract for the sale, setting out what is sold, how the price is calculated and paid, and the protections given to the buyer. Drafted and negotiated by legal advisers.
Share purchase
Buying the company itself, with all its assets and liabilities, including historical ones. Compare asset purchase. Take legal and tax advice. Read more: The complete guide to buying a UK business.
Sources and uses
A summary of the total cash a purchase needs (uses) and where it will come from (sources). Read more: The complete guide to buying a UK business.
Vendor due diligence
An independent review commissioned by the seller before going to market, to surface issues early and give buyers confidence. Read more: Preparing a business for exit: a practical guide; The complete guide to selling a UK business.
Warranties and indemnities
Protections in a sale agreement given by the seller to the buyer about the business. Matters for legal advisers.
Working capital
Broadly, normal trade debtors and stock less trade creditors and other agreed operating balances. The precise definition is agreed for each transaction. Read more: Financial due diligence for buyers: a practical guide.
This glossary is general information for owner-managed businesses, not advice on your circumstances.