The deal terms owners meet, in plain English

A B C D E H I L M N P Q R S T W

A

Add-backs

Adjustments to reported profit for costs or income that would not continue under a new owner, such as owner pay above a market salary or a one-off legal bill. Also called normalisation. Read the guide

Adjusted EBITDA

EBITDA after add-backs. The profit figure a buyer usually multiplies to reach a price. Read the guide

Asset sale

A sale where the buyer buys the business's assets and trade, rather than the shares in the company that owns them. The seller's company keeps its liabilities unless they are expressly transferred.

B

Business Asset Disposal Relief

A UK tax relief, formerly Entrepreneurs' Relief, that reduces Capital Gains Tax on qualifying gains when you sell your business or shares in your trading company, up to a lifetime limit of £1 million. Read the guide

C

Cash-free, debt-free

The usual basis for pricing a UK deal. The buyer pays for the business as if it had no cash and no debt, then the price is adjusted: cash is added and debt deducted.

Completion

The day the deal legally happens: the documents are signed or become unconditional, ownership passes and money moves.

Completion accounts

Accounts drawn up as at completion, after the deal, to check the cash, debt and working capital actually handed over. The price is adjusted up or down to match. The alternative is a locked box. Read the guide

D

Data room

A secure online folder holding every document a buyer asks to see during due diligence. A well-organised data room shortens a deal.

Deferred consideration

Part of the price that is fixed but paid later, after completion. Unlike an earn-out, it does not depend on performance, but it does depend on the buyer being able to pay.

Director's loan account

The running balance of money between you and your company. Whichever way it is owed, it is usually settled at or before completion.

Disclosure letter

The seller's letter setting out exceptions to the warranties. Anything fairly disclosed generally cannot later be the subject of a warranty claim.

Due diligence

The buyer's investigation of the business before committing: financial, legal, tax, commercial and operational. Problems found here are the commonest reason prices fall late in a deal.

E

Earn-out

Part of the price that is only paid if the business hits agreed targets after the sale, usually over one to three years. It moves risk from the buyer to the seller.

EBITDA

Earnings before interest, tax, depreciation and amortisation. A measure of the profit a business's trading produces, before how it is financed and how its assets are written down. Read the guide

EBITDA multiple

The enterprise value divided by EBITDA. The buyer's view of risk, expressed as a number. Read the guide

Employee ownership trust

A trust that buys a controlling stake in a company for the benefit of all its employees, usually paid for out of the company's future profits. Read the guide

Enterprise value

The value of the business as a going concern, before adding cash and deducting debt. Usually adjusted EBITDA times a multiple. Read the guide

Equity value

What the shares are worth: enterprise value plus cash, less debt, adjusted for working capital. The figure that reaches the shareholders, before tax and fees. Read the guide

Exclusivity

A promise to negotiate with one buyer only, for a set period, usually agreed with the heads of terms. Your leverage is highest before you give it. Read the guide

H

Heads of terms

A short, mostly non-binding document setting out the main terms agreed in principle, such as price, structure and timetable, before lawyers draft the full agreement. Also called a letter of intent. Read the guide

I

Indemnity

A promise to repay a specific loss pound for pound if it arises, usually for a known risk such as a tax issue or a dispute.

L

Locked box

A pricing method where the price is fixed by reference to a past balance sheet, and the seller promises no value has leaked out of the business since. The alternative is completion accounts. Read the guide

M

Management buyout

A sale of the business to its existing management team, usually funded by a mix of the team's money, debt, investors and deferred payments to the seller. Read the guide

N

Non-disclosure agreement (NDA)

A contract a buyer signs before seeing anything that identifies your business, promising to keep it confidential and usually not to approach your staff or customers.

P

Personal guarantee

Your personal promise to repay a business debt, such as an overdraft, lease or finance agreement. Agree how each one is released at completion.

Q

Quality of earnings

A review, usually by the buyer's accountants, testing whether reported profit is real and repeatable, including whether your add-backs stand up. Read the guide

R

Restrictive covenants

Promises by the seller, for a set period after the sale, not to compete with the business or approach its customers and staff.

Retention bonus

A payment to a key person for staying through the sale and for a period after it.

S

Share purchase agreement

The main legal contract for the sale of shares, setting out the price, how it is paid, the warranties, the indemnities and what happens if something goes wrong. Often shortened to SPA.

Share sale

A sale of the shares in the company that owns the business. The company, with its history and liabilities, passes to the buyer.

T

Trade buyer

A company in the same or a related industry that buys a business to add to its own, often paying more where the fit is strong.

W

Warranties

Statements of fact the seller makes about the business in the sale agreement. If one proves untrue and the buyer suffers a loss, the buyer may claim.

Working capital

The money tied up in running the business day to day: stock and debtors, less creditors. Deals usually set a normal level, and the price moves if the business hands over more or less.

Working capital peg

The normal level of working capital agreed for the deal. If the business is handed over above it, the price goes up; below it, the price goes down, pound for pound.

General meanings to help you follow the conversation, not legal definitions. Your adviser will explain how each one applies in your deal.