Reference library
Investment glossary
Essential terms and definitions for small business acquisition, search funds, and entrepreneurship through acquisition (ETA).
58 terms
Accredited Investor
An individual or entity that meets SEC-defined financial thresholds ($1M+ net worth or $200K+ income) and is legally permitted to invest in unregistered securities like private equity, hedge funds, and search funds.
Legal and Regulatory
Also known as: Qualified Investor, Sophisticated Investor, High Net Worth Individual
Acquisition Thesis
A strategic framework defining what types of businesses to acquire, including industry focus, size criteria, and value creation plan.
Strategy
Add-Back
An expense added back to reported earnings to calculate adjusted EBITDA, typically representing one-time costs or owner-related expenses that won't continue post-acquisition.
Financial Metrics
Asset Purchase vs Stock Purchase
Two fundamental M&A structures: asset purchases buy specific business assets/liabilities while stock purchases acquire entire corporate entities, each with distinct legal, tax, and risk implications.
Deal Structures
Also known as: Asset Deal vs Stock Deal, Asset Acquisition vs Equity Acquisition
Bolt-on Acquisition
A smaller, complementary acquisition added to an existing platform company to expand capabilities, geography, or product offerings.
Investment Structures
Business Broker
A professional intermediary who facilitates the sale of small businesses, typically earning 8-12% commission on completed transactions.
People & Roles
Capital Call
A formal request from a fund manager for investors to contribute a portion of their committed capital, typically issued when investments are made.
Fund Operations
Carried Interest (Carry)
The share of investment profits paid to fund managers as performance compensation, typically 20% of profits above a preferred return hurdle.
Fund Economics
Churn Rate
The rate at which customers stop doing business with a company, a critical metric for recurring revenue businesses and a key due diligence focus area.
Metrics
Co-Investment
Direct investment alongside a search fund or private equity manager in a specific portfolio company, typically offering lower fees and higher alignment than traditional fund structures.
Investment Structures
Also known as: Side-by-Side Investment, Direct Co-Investment, Parallel Investment
Confidential Information Memorandum (CIM)
A detailed document prepared by sellers or brokers providing comprehensive information about a business for sale, including financials, operations, and growth opportunities.
Deal Process
Customer Concentration
A risk metric measuring revenue dependency on top customers. High concentration (>20% from one customer) is a red flag in acquisition due diligence.
Risk Assessment
Data Room
A secure repository for sharing confidential documents during M&A due diligence, typically organized by category with controlled access and activity tracking.
Due Diligence
Deal Flow
The pipeline of investment opportunities available to a buyer or fund, sourced through brokers, direct outreach, networks, and proprietary channels.
Deal Process
Debt Service Coverage Ratio (DSCR)
A lending metric measuring a business's ability to pay its debt obligations, calculated as cash flow divided by total debt service. SBA loans typically require 1.25x minimum.
Financing
Dry Powder
Uncommitted capital available for investment, representing the funds that private equity firms have raised but not yet deployed.
Fund Operations
Due Diligence
The comprehensive investigation process where buyers verify business information, assess risks, and validate assumptions before completing an acquisition, typically taking 30-60 days.
Deal Process
Also known as: Due Diligence Review, Business Investigation, Buyer Verification
Earnout
A contingent payment structure where sellers receive additional consideration based on future business performance, typically used to bridge valuation gaps and share risk between buyer and seller.
Deal Structures
Also known as: Contingent Consideration, Performance-Based Payment, Earnout Provision
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization - the primary profitability metric used to value small businesses, typically resulting in 3-5x EBITDA purchase price multiples.
Financial Metrics
Also known as: Earnings Before Interest, Taxes, Depreciation, and Amortization, Operating Cash Flow, Seller's Discretionary Earnings
EBITDA Multiple
A valuation metric expressing enterprise value as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization, commonly used to price small and medium-sized business acquisitions.
Valuation Metrics
Also known as: EBITDA Multiple, Earnings Multiple, Cash Flow Multiple, EV/EBITDA
Enterprise Value
The total value of a business including both equity and debt, representing the price a buyer would pay to acquire 100% of the company's operations.
Valuation
Entrepreneurship Through Acquisition (ETA)
Business strategy where MBA-educated professionals acquire and operate existing profitable companies rather than starting new ventures, popularized by Harvard and Stanford business schools through search fund programs.
Business Strategy
Also known as: ETA, Buy-Then-Build, Acquisition Entrepreneurship, Search Fund Model
Escrow
A neutral third-party arrangement where funds or documents are held until specific conditions are met, commonly used in M&A to hold purchase price deposits and holdbacks.
Deal Process
ETA (Entrepreneurship Through Acquisition)
A business strategy where entrepreneurs acquire existing companies rather than starting from scratch, reducing startup risk while gaining immediate cash flow and established operations.
Investment Strategies
Also known as: Acquisition Entrepreneurship, Buy-Then-Build
Exclusivity Period
A contractual period (typically 60-90 days) during which the seller agrees to negotiate only with one buyer, allowing focused due diligence without competition.
Deal Process
General Partner & Limited Partner (GP/LP)
The two main parties in a PE fund structure: the GP manages investments and operations, while LPs provide capital and have limited liability and involvement.
Fund Structure
Holdback
A portion of the purchase price held in escrow after closing to cover potential post-closing adjustments, indemnification claims, or seller obligations.
Deal Structure
Holdco (Holding Company)
A parent entity that owns controlling interests in one or more operating businesses, commonly used in search fund and SMB acquisition structures to separate ownership from operations.
Deal Structure
Illiquidity Premium
The additional return investors expect for holding assets that cannot be easily sold or converted to cash, typically 2-4% above comparable liquid investments.
Fund Economics
Indemnification
Contractual protection where the seller agrees to compensate the buyer for losses arising from breaches of representations, warranties, or specific known issues.
Legal
Indication of Interest (IOI)
A preliminary, non-binding proposal from a buyer expressing interest and approximate valuation range, typically submitted before receiving detailed financials.
Deal Process
Internal Rate of Return (IRR)
A metric measuring investment performance as an annualized rate of return, accounting for the timing and size of all cash flows. Search funds target 25-35% IRR.
Performance Metrics
J-Curve
The typical return pattern of PE funds showing initial negative returns as fees exceed gains, followed by positive returns as investments mature and exit.
Performance Metrics
Letter of Intent (LOI)
A non-binding preliminary agreement outlining the key terms of a proposed acquisition, including price, structure, timeline, and due diligence requirements before executing a definitive purchase agreement.
Legal and Documentation
Also known as: LOI, Term Sheet, Memorandum of Understanding, Intent to Purchase
LOI (Letter of Intent)
A preliminary agreement between buyer and seller outlining key deal terms including price, structure, timeline, and conditions before formal due diligence and definitive purchase agreement.
Deal Process
Also known as: Letter of Interest, Term Sheet, Indication of Interest
Lower Middle Market
Companies with $1-10 million in annual EBITDA, representing the sweet spot for search funds and smaller private equity investments with less institutional competition and higher growth potential.
Market Segments
Also known as: Small-Mid Market, SMB Market, Lower Mid-Market, Smaller Middle Market
Management Fee
An annual fee charged by fund managers to cover operational expenses, typically 2% of committed capital during the investment period and 2% of invested capital thereafter.
Fund Economics
Multiple
A valuation metric expressing business value as a multiplier of earnings (EBITDA or SDE), commonly ranging from 2-6x for SMB acquisitions.
Valuation
Multiple on Invested Capital (MOIC)
A performance metric showing total return as a multiple of original investment, calculated as total value divided by invested capital. Search funds target 3-5x MOIC.
Performance Metrics
Non-Compete Agreement
A contractual restriction preventing the seller from competing with the acquired business for a specified time and geographic area, typically 3-5 years.
Legal
Non-Disclosure Agreement (NDA)
A legal agreement protecting confidential business information shared during M&A discussions, required before accessing detailed company data.
Legal
Personal Guarantee
A legal commitment where a business owner agrees to be personally liable for business debt if the company cannot pay, commonly required for SBA loans.
Financing
Platform Company
An initial acquisition that serves as the foundation for a buy-and-build strategy, with bolt-on acquisitions added to create scale and value.
Investment Structures
Preferred Return (Hurdle Rate)
The minimum annual return LPs must receive before the GP earns carried interest, typically set at 8% in private equity funds.
Fund Economics
Proprietary Deal
An investment opportunity sourced directly without broker involvement, typically resulting in less competition and better pricing for the buyer.
Deal Process
Quality of Earnings (QoE)
A comprehensive financial analysis that verifies the accuracy, sustainability, and cash generation ability of a target company's reported earnings, identifying adjustments that impact valuation and deal structure.
Due Diligence
Also known as: QoE, QofE Study, Financial Due Diligence, Earnings Quality Analysis
Representations and Warranties Insurance (RWI)
Insurance that covers losses from breaches of seller representations in M&A transactions, increasingly common in deals over $20M.
Risk Management
Rollover Equity
When a seller reinvests a portion of sale proceeds into the acquiring entity, maintaining ownership stake and alignment with the buyer's success.
Deal Structure
SBA Loan
Government-backed financing that covers 70-90% of small business acquisition costs at below-market rates, requiring 10-15% buyer equity and personal guarantees from borrowers.
Financing
Also known as: SBA 7(a) Loan, Small Business Administration Loan
Search Fund
An investment vehicle where a searcher raises capital to find, acquire, and operate a single small business, typically generating 3-5x returns over 5-7 years.
Investment Structures
Also known as: Traditional Search Fund, Funded Search
Searcher
An entrepreneur who systematically searches for, acquires, and operates a small business, typically through a search fund or self-funded search model.
People & Roles
Self-Funded Search
A search model where entrepreneurs fund their own search for an acquisition target, often using personal savings or debt, rather than raising capital from investors.
Investment Structures
Seller Financing
A deal structure where the business seller provides a loan to the buyer for 10-30% of the purchase price, typically offering better terms than traditional financing while ensuring seller confidence in the business.
Financing
Also known as: Owner Financing, Seller Note, Seller Carryback
Seller's Discretionary Earnings (SDE)
A cash flow metric used to value small businesses, calculated as net income plus owner compensation, benefits, and discretionary expenses.
Financial Metrics
Stock Purchase
An acquisition structure where the buyer purchases ownership shares directly from shareholders, acquiring all assets and liabilities of the entity.
Deal Structure
Transition Period
The time after closing when the seller assists the buyer in transitioning the business, typically 30-90 days but can extend to 12+ months for complex businesses.
Deal Structure
Vintage Year
The year a private equity fund makes its first investment or closes on capital, used to benchmark fund performance against peers from the same time period.
Fund Operations
Working Capital
The operating liquidity of a business, calculated as current assets minus current liabilities. In M&A, working capital targets determine post-closing adjustments.
Financial Metrics
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