GLOSSARY
The language of a deal.
Plain-English definitions for the terms buyers, attorneys, and accountants use when they look at your business. Written for founders, not finance people.
131 terms across 11 categories
These definitions are written in practical language to help founders understand the concepts that shape a deal — not with the black-letter precision of a statute or contract. Nothing here is legal, tax, or accounting advice. Before entering an exit process, founders should seek guidance from their own legal, financial, and tax professionals.
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A tax election (available in certain stock deals, typically S-corps or subsidiaries) that lets the buyer treat the purchase as an asset sale for tax purposes, giving the buyer a step-up in asset basis — future depreciation and amortization deductions — while the seller still reports it as a stock sale.
TaxDeal Structure
A
The risk that future acquisitions made by the new company dilute the founder's rollover equity, with no protections preserving their ownership percentage. Common in platform deals where the PE buyer uses the founder's business as the base for a roll-up.
Deal StructureValuation
The total revenue opportunity in the geography and segments where the business actually competes — defined by third-party data, not the founder's estimate.
Commercial
A deal condition requiring the seller to terminate legal and financial advisors at closing, often with a cooling-off period preventing re-engagement. The people who know the deal leave when post-close disputes begin.
LegalDeal Structure
A seller-friendly provision barring the buyer from claiming indemnification for a breach of a representation or warranty it already knew about before closing. Without it, the buyer can stay silent on a problem it spotted in diligence, close anyway, and sue you for it later.
LegalDeal Structure
The two fundamental transaction types. Asset sale: buyer picks specific assets and liabilities. Stock sale: buyer purchases the ownership interest in the entity. Tax implications differ by $2–3M.
LegalDeal Structure
B
Clauses that classify how a founder exits after closing and dictate what happens to their rollover equity. "Good leaver" events (death, disability, termination without cause) typically protect value; "bad leaver" events (for-cause termination, voluntary resignation, breach) can trigger forfeiture — sometimes even of vested equity.
LegalHuman Capital
A senior lender's right to prevent the borrower from making payments to junior creditors — including seller note holders — typically triggered by a covenant violation or declared default.
Deal StructureFinanceLegal
The gap between books built for tax filing and books built for a buyer's diligence team. Tax books manage cash. Sale books prove EBITDA. Most founders have the first and need the second.
FinanceDiligence
A binding agreement between business owners that specifies what happens to an owner's equity if they die, become disabled, want to retire, or get divorced. Without one, a triggering event becomes a lawsuit.
Legal
C
The buyer's contractual right to force the founder to sell their rollover shares back, at a defined price, time, or trigger. The mirror image of the founder's put — and where it cuts against the seller, since the buyer can call the equity away (often at a formula price) on its own terms.
Deal StructureLegal
Ordinary income a borrower owes when a debt is settled or forgiven for less than its face value. In a seller-financed deal the borrower is the buyer — so a written-down seller note creates income for the buyer, not the seller.
TaxFinance
The record of who owns what percentage of the company. Buyers need it clean and current. Gaps or disputes in the cap table can delay or kill a deal.
Legal
Specific matters pulled out of the indemnification cap, basket, or survival limits so the seller carries fuller — sometimes unlimited — liability for them. Common carve-outs include fraud, taxes, fundamental reps, and known pre-closing issues. They expand seller exposure, not limit it.
LegalDeal Structure
A provision in a contract that triggers a renegotiation, termination right, or consent requirement when the business changes ownership.
Legal
Having multiple interested buyers competing for your business at the same time. Creates leverage for the seller — if one buyer walks, others are still at the table.
Negotiation & Leverage
The total cost of acquiring a new customer — marketing spend, sales compensation, and overhead divided by the number of new customers in the period. A business that cannot produce this number cannot prove its growth is investable.
Commercial
When a disproportionate share of revenue comes from a small number of customers. Buyers treat it as a risk — if one relationship leaves, the revenue model breaks.
CommercialValuation
Buyer-initiated phone calls to the seller's customers during diligence. Tests whether revenue is real, relationships transfer, and customers were prepared — or whether the call is how they find out.
DiligenceCommercial
D
A 1–10 scoring framework applied to every PE deal term, measuring one thing: who controls whether the founder gets paid. A 1 means the founder controls the money. A 10 means the buyer does.
Deal Structure
The step-by-step breakdown of how a headline purchase price shrinks to the amount that actually hits your bank account — through deductions, escrow, fees, adjustments, and holdbacks.
Deal Structure
A complete inventory of every loan, line of credit, credit card, and lien against the business — with balances, guarantees, maturity dates, and lender approval rights over a sale.
FinanceLegal
The buyer's internal spreadsheet cataloging every risk, weakness, and gap found during due diligence — each one a line item that reduces what they'll pay or tightens the terms.
DiligenceValuation
The price reduction a founder absorbs when buyers know they have to sell — driven by a compressed timeline, no competing offers, and limited leverage at the negotiating table.
Negotiation & LeverageValuation
A documented plan specifying what is backed up, how often, where the backup lives, who owns the restore process, and the target time to recover. Without one, the buyer inherits continuity risk they cannot quantify.
Operations
A contractual provision that lets majority owners force minority owners (like founders with rollover equity) to sell their shares when the majority sells the company.
LegalDeal Structure
The buyer's formal investigation of the business before closing — financial, legal, commercial, operational, and technical. Typically runs 60-120 days.
Diligence
E
A portion of the purchase price paid only if the business hits specific performance targets after closing. Typically runs 1-3 years post-close and is tied to revenue or EBITDA.
Deal Structure
A contractual protection preventing the buyer from taking operational actions — account transfers, overhead allocations, revenue redirection — designed to suppress earnout performance.
LegalDeal Structure
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's operating profitability, used as the standard baseline for valuing mid-market businesses.
FinanceValuation
A PE strategy of acquiring a business primarily to maximize short-term cash extraction through aggressive cost-cutting and margin optimization, rather than investing in long-term growth.
Deal StructureValuation
A non-compete, non-solicit, and confidentiality agreement signed by senior employees as a condition of employment. Without them, the buyer prices the risk that talent and customer relationships walk out the door.
Human CapitalLegal
The contract governing the founder's role, compensation, and restrictions after the deal closes. Controls how long you stay, what you can do, and what happens if you leave.
LegalHuman Capital
The legal form of the business — S-corp, C-corp, LLC, or partnership. Determines whether the deal is an asset sale or stock sale, which can swing the net-to-seller by $2–3M.
Legal
A post-close equity allocation to management as a retention and alignment tool. Typically promised as a percentage of the new entity, but often delivered without documentation, modeling, or transparency on waterfall position.
Deal StructureHuman Capital
A portion of the purchase price held by a third party after closing to satisfy potential indemnification claims. Typically 5-15% of purchase price, held for 12-24 months.
LegalDeal Structure
The risk that a buyer can’t successfully execute its plan for the business after closing — driven by how much work it takes to bring a founder-run company up to institutional standard. The more operational lift required, the more the buyer discounts the price.
Diligence
The 12-to-36-month process of resolving risks, cleaning financials, removing founder dependency, and strengthening the business so it survives due diligence with fewer deductions.
Exit Planning
F
An acquirer, typically a private equity firm, who buys the entire operating business as a standalone investment. They need the founder's management team to stay and run the business post-close.
Deal StructureValuation
The financial tests — leverage ratios, minimum EBITDA, capex limits — the acquired company must keep meeting after closing under its credit agreement. A breach, often caused by the buyer's own decisions, can block seller-note payments, accelerate the debt, or trigger for-cause consequences for the founder.
FinanceDeal Structure
A subjective termination trigger in the founder's post-close employment agreement. Connected to forfeiture of equity, acceleration of non-competes, and loss of information access — making it a financial weapon, not just a personnel action.
LegalHuman Capital
A new vesting schedule applied to the founder's rollover equity or incentive grant after closing — restarting the clock on equity the founder believed was already earned, and tying it to continued employment or new performance hurdles under the buyer's control.
Deal StructureHuman Capital
H
An oral or undocumented business arrangement. Legally enforceable in many cases, but nearly impossible to transfer to a buyer. Conversion under diligence pressure always costs more.
Legal
I
The seller's contractual obligation to compensate the buyer for losses arising from breaches of the seller's representations and warranties, or from specific pre-closing liabilities.
LegalDeal Structure
The threshold below which a buyer cannot file indemnity claims against the seller. A true deductible absorbs early claims; a tipping basket lets the buyer recover from dollar one once the threshold is crossed.
LegalDeal Structure
A role that exists in practice but not on paper — typically a family member performing real work without a job description, employment agreement, or non-compete. At exit, the buyer can't evaluate, bind, or price it.
Human CapitalDiligence
The part of an installment-sale gain that can't be deferred: depreciation recapture is taxed in the year of sale, even though you collect the price over time. A buyer's later default does not accelerate tax on the unpaid balance — it leaves the seller with a limited bad-debt loss.
TaxFinance
The accumulated expertise — pricing logic, customer patterns, vendor terms, decision rules — that drives the business's competitive advantage. Worth full value when documented. Worth zero when it lives in one person's head.
OperationsHuman Capital
The agreement between a senior lender and subordinated creditor governing payment priority, blocking rights, and notice requirements. Controls whether the founder gets paid on their seller notes.
LegalDeal Structure
When seller notes are routed through a company the founder doesn't control rather than held directly by each seller, stripping individual enforcement rights and consolidating leverage in whoever controls the entity.
Deal StructureLegal
K
A life or disability insurance policy on the founder or other critical individual, owned by the company, sized to cover the revenue drop and cost of recruiting a replacement.
Human CapitalOperations
The risk that critical knowledge, relationships, or decision-making authority lives in one person. If that person leaves, the value they carry walks out with them.
Human CapitalValuation
L
A non-binding document that outlines the key terms a buyer proposes before full diligence begins. Signing an LOI typically starts an exclusivity period during which the seller can't negotiate with other buyers.
Deal Structure
The net present value of all future profit a single customer generates over the relationship — profit, not revenue. Paired with CAC, it tells a buyer whether the business's growth engine creates value or destroys it.
Commercial
The priority structure determining who gets paid first when a PE-owned company is sold again. The PE firm recovers their full investment plus a preferred return before the founder's rollover equity is worth anything.
Deal StructureValuation
How easily an asset can be turned into cash without losing value. A private business is highly illiquid — most of an owner's wealth is locked inside it until a sale.
FinanceExit Planning
A deal structure that fixes the purchase price at signing with no post-close working capital adjustment. The cleanest pricing mechanism for sellers — eliminates the buyer's ability to adjust the price after the wire.
Deal StructureFinance
The insurance industry's standard report showing every claim filed against the company over the past 5–7 years. Pulled by every buyer's risk team in week one of diligence.
DiligenceLegal
M
Whether revenue growth comes from a growing addressable market or from capturing a larger share of a shrinking one. Buyers pay full price for market gain and discount share gain.
CommercialValuation
A clause giving the buyer the right to walk away from the deal before closing if a defined negative event occurs. The breadth of that definition determines whether the buyer holds a reasonable protection or a free option.
Deal StructureLegal
The corporate record of board meetings, resolutions, and material decisions since formation. Buyers expect continuous maintenance. Gaps signal informal governance and trigger cleanup costs.
Legal
N
The provision in a letter of intent that prevents the seller from negotiating with other buyers for a defined period. Once signed, the founder's only real leverage — the ability to walk — evaporates.
Deal StructureNegotiation & Leverage
A contractual restriction preventing the seller from competing with the business they just sold, typically for 2-5 years within a defined geography and industry.
Legal
An indefinite restriction preventing the founder from making statements that could be construed as negative about the buyer or the deal. Limits what the founder can say about what was done to them.
Legal
A contractual restriction that bars the seller from recruiting, hiring, or soliciting employees or contractors of the acquired company for a defined period after closing.
LegalHuman Capital
EBITDA after removing one-time items, owner perks, personal expenses, and non-recurring adjustments to show what the business actually earns on a repeatable basis. The number buyers use to set the price.
FinanceValuation
O
The buyer's contractual ability to deduct indemnity claims directly from seller notes or earnout payments without court approval or independent review.
LegalDeal Structure
The degree to which a business depends on the founder for revenue, decisions, relationships, or day-to-day operations. High owner dependency dramatically reduces what a buyer will pay.
Human CapitalValuation
P
Latin for "on equal footing." In deal terms, it means two classes of debt share the same priority in the payment waterfall — neither gets paid before the other.
Deal StructureFinanceLegal
An equity structure where the PE firm recovers their full investment plus a preferred return, then also shares pro-rata in remaining proceeds. The founder needs an exceptional exit just to break even on rollover.
Deal StructureValuation
The founder's personal obligation on a business loan. Doesn't end when the business sells — the founder stays on the hook until the lender formally releases them, on the lender's timeline.
FinanceLegal
The EBITDA number the founder carries in their head — built on undocumented add-backs, optimistic normalizations, and personal expenses the buyer's QoE firm will reject.
Finance
The undefined, unpaid, and unacknowledged role a founder continues to fill after the deal closes — not the job in the employment agreement, but the one the buyer quietly depends on them to keep doing.
Human CapitalDeal Structure
The gap between when you're taxed and when you're paid. Deal structure can push your tax bill ahead of the cash, or leave you taxed on gain you reported before money that later disappears.
TaxFinance
When a PE firm acquires a company to serve as the foundation for a buy-and-build strategy in a specific sector. The platform company is the base; smaller add-on acquisitions are bolted onto it.
Deal Structure
A contractual obligation the seller carries after closing — things the seller must do or ensure during a defined post-close period, enforced through escrow holdbacks or other penalties.
LegalDeal Structure
The binding legal contract that finalizes the sale — price, structure, representations, warranties, indemnification terms, escrow, and every other negotiated condition.
LegalDeal Structure
The division of the purchase price across asset classes in an asset or deemed-asset sale. The split decides how much of the seller's gain is capital gain versus ordinary income — and how fast the buyer recovers cost.
TaxFinanceDeal Structure
Purchase price is the headline number a buyer names. Total consideration is the full gross value of everything the buyer gives — cash at close plus seller notes, rollover equity, earnouts, and assumed debt — so a $40M total-consideration deal might be only $20M cash at closing.
ValuationDeal Structure
A contractual right for the founder to force the buyer to repurchase rollover shares at fair market value after a defined period. Without one, rollover equity has no guaranteed path to liquidity.
Deal StructureLegal
Q
The gap between the founder's assumed EBITDA and the number the buyer's Quality of Earnings firm produces. It reduces the LOI before negotiations even start — same multiple, different EBITDA.
FinanceValuation
A detailed accounting analysis commissioned by the buyer (or sometimes the seller) to verify the sustainability and accuracy of reported EBITDA. Often uncovers adjustments that change the final purchase price.
FinanceDiligence
R
A post-LOI reduction in deal terms — typically after months of diligence have eliminated the seller's competitive alternatives. The buyer adjusts the price downward knowing the seller is unlikely to walk away.
Deal StructureNegotiation & Leverage
The maximum acceptable time between a system failure and full restoration of operations. The number that tells a buyer how long the business can be down before contracts, customers, or revenue are at risk.
Operations
The seller's formal legal statements about the condition of the business — financials are accurate, contracts are enforceable, there's no undisclosed litigation, etc. Breaches trigger indemnification.
LegalDiligence
An insurance policy that covers the buyer's losses from breaches of the seller's reps and warranties — shifting the risk from the seller to an insurance company.
LegalFinance
When a P&L combines different revenue streams into one blended number, masking the margin quality of each. Buyers split the blend and underwrite each stream separately at different multiples.
FinanceCommercial
Value the buyer finds during diligence but does not disclose — stale accruals, dead reserves, misclassified liabilities — captured silently with a post-close journal entry. The deduction the seller never sees.
FinanceDiligence
The seller's own investigation into the buyer — how they've treated prior portfolio companies, founders, earnouts, and escrows. The flip side of the buyer's diligence, and a founder's best defense against a buyer who looks good on paper but behaves badly after close.
DiligenceNegotiation & Leverage
A deal structure where the buyer comes out ahead by not paying deferred consideration on time — or at all. Subordination, offset rights, buyer-controlled earnout targets, and flat simple interest make non-payment low-cost and low-risk, so delay or default becomes the rational play rather than a failure.
Deal Structure
A live document listing every known exposure — pending claims, regulatory inquiries, insurance disputes — with current status and estimated cost. What the buyer expects to see and most founders don't maintain.
DiligenceOperations
A portion of the seller's proceeds that is reinvested as equity in the newly acquired company rather than taken as cash at closing. The seller becomes a minority owner under the buyer's control.
Deal StructureFinance
S
An independent accounting analysis the seller commissions before going to market — using the same forensic methodology the buyer's QoE firm will use. The only way to read your own books the way the buyer will.
FinanceDiligence
A portion of the purchase price that the seller effectively lends to the buyer, paid back over time with interest. Shifts risk to the seller because the buyer could default.
Deal StructureFinance
An independent third party with legal standing to enforce the seller's post-close rights — contesting non-payment, escrow claims, and earnout disputes — without the conflicts of being employed by the buyer.
Deal StructureLegal
The distance between the business the founder thinks they're selling and the business a buyer can actually verify in the numbers, contracts, team, and systems.
Exit PlanningNegotiation & Leverage
Applications, accounts, and tools employees adopt on their own — without company approval, without company access controls, and often without anyone in management knowing they exist.
Operations
The structural choice on seller notes determining whether unpaid interest accrues to the principal balance. Simple interest keeps the carrying cost flat; compound interest escalates it — creating urgency for the buyer to repay.
FinanceDeal Structure
Any single component — a person, system, supplier, or process — whose failure would halt the entire business, because no backup or redundancy exists. In founder-owned companies, that component is usually the founder.
OperationsHuman Capital
A negotiated time limit on how long a senior lender can block payments to junior creditors after invoking blocking rights. Without one, the block can run indefinitely.
Deal StructureFinanceLegal
The buyer's reset of acquired assets to fair-market value, creating depreciation and amortization deductions that lower the buyer's taxable income after closing. The step-up follows the price the buyer actually bears — deferred amounts add basis only as they become fixed or paid.
TaxFinance
An acquirer who already operates in your industry (or an adjacent one) and is buying specific assets — customers, technology, geography — to plug into their existing operation.
Deal StructureValuation
The priority ranking that puts seller notes behind the buyer's senior acquisition debt. The bank gets paid first from the company's cash flow — and can block principal payments to the founders entirely.
Deal StructureFinance
A documented plan naming who runs the company the day the founder isn't there — an actual person with actual authority that the board, the lender, and the team have already met.
Human CapitalOperations
The window after closing during which representations and warranties remain enforceable and the buyer can file indemnity claims against the seller. PE buyers routinely push for longer survival on tax, IP, and compliance reps.
Legal
The additional value a buyer expects to create by combining your business with theirs — shared customers, eliminated overhead, or cross-selling opportunities. Strategic buyers use synergies to justify paying a premium.
Valuation
T
A minority holder's right to participate in a sale on the same terms as the majority holder. Sounds protective but offers limited value when the majority controls every dimension of the transaction.
Deal StructureLegal
The unplanned tax cost created by deal structure rather than headline price — depreciation recapture taxed at ordinary rates, allocation choices that shift proceeds from capital gain to ordinary income, and interest on seller notes — that quietly shrinks net proceeds even when the price looks strong.
TaxFinance
The document a buyer sends outlining the proposed deal terms — price, structure, earnout, escrow, employment requirements, and key conditions. Not binding, but sets the framework for the final purchase agreement.
Deal Structure
Every recurring operating cost in the years before a sale gets multiplied by the deal multiple. A $26K annual savings is worth $182K at 7×. Founders do one-year math. Buyers pay seven-year prices.
FinanceValuation
The threshold above which a single customer's share of revenue triggers a discrete risk category in the buyer's model. Below 25%, concentration is a customer. Above it, it's a structural risk.
CommercialValuation
TO-original framework. When someone offers you a percentage of something they won't define, the percentage is a distraction. The value is whatever they decide it is, whenever they decide to tell you.
Deal StructureHuman Capital
TO-original framework. Dollar-one baskets, long survival periods, broad indemnity scopes, and offset rights turn the indemnity clause into a mechanism for reducing the purchase price after closing.
LegalDeal Structure
TO-original framework. The PE firm gets their money back first through liquidation preferences, then shares in what's left. The founder's rollover sits behind a wall that grows every year.
Deal StructureValuation
TO-original framework. When the only person who can enforce the seller's rights is employed by the buyer, enforcement is structurally impossible. The conflict isn't personal — it's architectural.
Deal Structure
TO-original framework. The earnout looks like real consideration. In practice, the buyer controls targets, measurement, and business decisions — making the stated amount and the actual payout two different numbers.
Deal StructureValuation
The four priorities every founder carries into a sale — Cash, Legacy, People, and Retirement. You can't turn all four to maximum. The founder who hasn't ranked them ends up with the buyer's default settings.
Exit Planning
TO-original framework. All-or-nothing escrow means one small claim holds millions hostage. The longer the money sits frozen, the weaker the seller's negotiating position.
Deal Structure
TO-original framework. Forced advisor termination erases the institutional knowledge that makes post-close enforcement efficient. New counsel can learn the deal — but learning costs time, money, and leverage.
LegalDeal Structure
TO-original framework. The employment agreement governs every dollar still on the table. For-cause termination triggers cascade across equity, deferred payments, and restrictive covenants — making the threat as powerful as the action.
LegalHuman Capital
TO-original framework. Every dollar flows through a priority stack. Senior debt drinks first. Seller notes drink second — if there's anything left. Subordination determines whether the founder ever sees the money.
Deal StructureFinance
TO-original framework. The interlocking web of non-compete, non-solicit, non-disparagement, and confidentiality restrictions. The two that expire are negotiated. The two that survive forever are the ones that do the most damage.
LegalDeal Structure
TO-original framework. Simple interest doesn't look aggressive. It quietly transfers value from seller to buyer every year the principal goes unpaid, through a structure the seller never modeled.
FinanceDeal Structure
TO-original framework. The gap between the right to receive money and the right to demand it. Holding a note and having the legal standing to enforce it are two different positions.
Deal Structure
TO-original framework. The founder thinks rollover is an investment. Without exit options, consent rights, or liquidity provisions, it's a number on a statement controlled by someone else.
Deal StructureValuation
A post-close contract under which the seller keeps providing certain services — IT, accounting, customer handoffs, systems support — to the buyer for a defined period. Routinely under-scoped and under-paid, it can keep a founder working long after they thought they were out.
LegalOperations
U
A public records search that reveals every loan, lien, and security interest filed against the business. Run by every buyer in week one of diligence to verify the seller's debt disclosure.
DiligenceLegal
V
The number applied to EBITDA to calculate the purchase price. A business with $4M EBITDA at a 7× multiple is priced at $28M. Every risk the buyer finds pushes the multiple down.
Valuation
A secure online repository where the seller uploads every document the buyer's diligence team needs. Its organization signals operational competence; its disorganization compounds every other finding.
Diligence
W
A contract specifying that creative or intellectual work produced by a contractor belongs to the company that commissioned it. Without one, the contractor may own the IP.
Legal
An adjustment to the purchase price based on the amount of working capital (cash, AR, inventory minus AP) left in the business at closing versus a pre-agreed target.
FinanceDeal Structure