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Understand the terms behind the deal

Twenty-four acquisition financing terms in plain English: what they mean, why they matter and where to put them to work.

Definitions reviewed

Use these definitions to read a term sheet, review a buyer’s finances or prepare a deal for a lender. The linked guides cover the details and exceptions. Loan documents, program rules and lender review determine how a term applies to your transaction.

How we use sources and examples →

A

Add-back

An expense added back to reported profit to estimate what the business could earn under normal operation.

Why it matters in a deal

Each adjustment needs evidence and a reason it will not continue in the buyer’s operation. Labeling an expense “one-time” does not mean a lender will accept it; replacement labor and recurring costs still need to be counted.

Sources and scope
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Amortization

Paying down the amount borrowed, called principal, through scheduled payments over time. The repayment schedule and the final due date can differ, leaving a balance to pay at the end.

Why it matters in a deal

A longer amortization can reduce regular payments while leaving more principal outstanding. If maturity arrives before the loan fully amortizes, the remaining balance must still be addressed.

Sources and scope
  • CFPB loan terminology

    Used for payment mechanics. The source discusses mortgages, not business-loan eligibility.

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B

Balloon payment

A large lump-sum payment, usually at maturity, that pays off a balance left by the earlier scheduled payments.

Why it matters in a deal

Small monthly payments can hide a substantial amount due later. Test the balloon alongside cash reserves and other debts, and confirm whether the proposed lender and program permit the structure.

Sources and scope
  • CFPB loan terminology

    Used for payment mechanics. The source discusses mortgages, not business-loan eligibility.

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Business debt schedule

A list of the business’s debts: who is owed, how much remains, the payment, interest rate, final due date and any property securing each loan. Include loans from owners and show which debts will remain after the sale.

Why it matters in a deal

Leaving out a loan can make the business look better able to repay debt than it is. Check the list against the balance sheet. Separate loans paid off at the sale from payments the business will keep making.

Try the numbers

Sources and scope
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C

Capital stack

Also called: Funding structure

The mix of loans and ownership money used to fund a purchase, including who has the right to be repaid first.

Why it matters in a deal

A purchase can combine the buyer’s contribution, a bank loan and a loan from the seller. The funding must cover the full purchase and related costs. The business must also be able to meet the payments after closing.

Sources and scope
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Collateral

Property offered as security for a loan. If the borrower does not repay, the lender may have the right to take or sell it under the loan agreement and applicable law.

Why it matters in a deal

Collateral provides a possible recovery source if repayment fails. Its value, ownership, existing liens and the lender’s security interest matter; collateral does not replace an assessment of cash flow.

Sources and scope
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D

Debt service coverage ratio (DSCR)

Also called: DSC · Debt coverage

A measure of how well a business can cover its loan payments. Divide the earnings or cash flow the lender accepts by the required principal and interest payments for the same period.

Why it matters in a deal

A ratio above 1.00 means the accepted earnings or cash flow exceed those payments. That alone does not mean a loan will be approved. Lenders and loan programs differ in how they measure earnings and which debts they count.

Try the numbers

Sources and scope
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E

Earnout

Also called: Earn-out

An extra payment to the seller that becomes due if the business meets agreed targets after the sale.

Why it matters in a deal

Part of the seller’s payment depends on what happens after the sale. SBA change-of-ownership rules prohibit seller earnouts. Refunds to the buyer and adjustments for working capital need separate review; renaming an earnout does not change how the rules apply.

Sources and scope
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EBITDA

Also called: Earnings before interest, taxes, depreciation and amortization

Net profit with interest, income taxes, depreciation and amortization added back. Depreciation and amortization are accounting charges that spread an asset’s cost over time. Further changes create adjusted EBITDA and should be listed separately.

Why it matters in a deal

It provides a starting point for comparing operating earnings. It does not deduct principal repayments, capital spending or changes in working capital, so it is not the same as cash available to the buyer.

Sources and scope
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Equity injection

Also called: Buyer contribution

The contribution a buyer must bring to meet the funding rules for a purchase. For SBA loans, the amount and permitted sources depend on the deal. Certain loans with payments put on hold may count under specific rules.

Why it matters in a deal

The required contribution can be based on more than the purchase price. Confirm the source of funds, evidence of payment and eligible project costs before treating an amount as the buyer’s injection.

Sources and scope
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I

Interest-only

A period when scheduled loan payments cover only interest. They do not reduce the amount borrowed, called principal.

Why it matters in a deal

The unpaid principal still has to be repaid. Model the payment increase or balloon after the interest-only period, and check how the lender assesses repayment rather than testing only the initial payment.

Sources and scope
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L

Letter of intent (LOI)

A preliminary document setting out proposed deal terms and the process for moving toward a purchase agreement. Some provisions can be binding even when the proposed purchase itself is not.

Why it matters in a deal

Price, funding assumptions, access to records for review and timing need to fit together early. Have counsel review the actual language, especially confidentiality, exclusivity and any binding obligations.

Sources and scope
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Liquidity

How readily funds can be accessed as cash. In a buyer review, the practical question is how much money is available for closing and reserves, after restrictions and existing commitments.

Why it matters in a deal

Home equity or a retirement balance may contribute to net worth without being immediately available to fund a purchase. Separate accessible funds from assets that require a sale, borrowing or a restricted withdrawal.

Sources and scope
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M

Maturity

The date when the remaining amount borrowed, plus any other amounts due under the loan agreement, must be paid.

Why it matters in a deal

A ten-year amortization with a five-year maturity does not provide ten years to repay. Model the balance due at year five and a credible repayment plan rather than assuming refinancing will be available.

Sources and scope
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N

Net worth

The value of what a person owns minus what they owe, measured on a stated date.

Why it matters in a deal

It describes a buyer’s overall financial position. A positive net worth does not establish how much cash they can contribute or how much acquisition debt the target business can repay.

Sources and scope
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P

Personal financial statement (PFS)

A dated summary of what a person owns, what they owe and other financial details. A lender uses it to understand the person’s finances and existing commitments.

Why it matters in a deal

A PFS organizes the buyer’s financial picture, but supporting statements and the lender’s required form still matter. SBA Form 413 is an official example; a preparation worksheet does not replace a requested signed form.

Sources and scope
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Personal guarantee

Also called: Personal guaranty

A person’s signed promise to repay a borrower’s debt if required under the guarantee. The document sets any limits on the amount owed and whether property secures the promise.

Why it matters in a deal

A guarantee can create personal exposure beyond the cash invested in the business. It is separate from the SBA’s guarantee to a lender; the latter does not release the borrower or personal guarantor.

Sources and scope
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Q

Quality of earnings (QoE)

A detailed review of whether a business’s reported earnings are accurate and likely to continue. It checks the financial records and the reasons for any adjustments to profit.

Why it matters in a deal

A QoE can change the earnings used to size acquisition debt. SBA requirements depend on the transaction, purchase price and applicable exceptions; the report is not a business valuation or a financing commitment.

Try the numbers

Sources and scope
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S

Seller note

Also called: Seller financing · Seller debt

A loan from the seller to the buyer that finances part of the acquisition price.

Why it matters in a deal

The note’s rate, payments, maturity and lender restrictions affect both closing cash and future debt service. It remains a debt even when an SBA rule allows a qualifying standby note to count toward equity.

Sources and scope
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Seller’s discretionary earnings (SDE)

Also called: Discretionary earnings

An estimate of earnings available to one owner who runs the business. It adds back income taxes, interest, depreciation, amortization, one owner’s pay and benefits, and eligible one-time or personal expenses.

Why it matters in a deal

SDE helps analyze an owner-operated business. The buyer still needs to account for their pay, debt payments, reinvestment and taxes; SDE is not automatically spendable cash or lender-accepted earnings.

Sources and scope
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Senior debt

Debt that has the right to be repaid before lower-priority debt and owners’ investments. The loan documents and agreements between lenders set the exact rights and any property securing the debt.

Why it matters in a deal

The senior lender’s requirements can constrain seller-note payments and other financing. Seniority describes priority, not a guarantee of repayment or a promise that every asset secures the loan.

Sources and scope
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Standby

Also called: Full standby

An agreement to put loan payments on hold or limit them. Under SBA acquisition equity rules, full standby means no payments of principal (the amount borrowed) or interest for the entire 7(a) loan term.

Why it matters in a deal

Delaying payments does not erase the debt. Check whether interest keeps adding up, when the balance is due and what the signed agreement allows. Paying only interest is not full standby.

Sources and scope
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Subordination

An agreement that puts one lender behind another in the right to receive payment or claim property securing a loan. The agreement sets the exact order and restrictions.

Why it matters in a deal

A subordinated seller note may still have scheduled payments if the agreements allow them. Review payment priority, lien priority and standby separately; they answer different questions.

Sources and scope
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W

Working capital

Short-term assets, such as cash, inventory and customer invoices, minus short-term amounts owed. In a business purchase, the agreement may use a specific version of this calculation to set what the seller must leave in the business.

Why it matters in a deal

The business needs money for payroll, inventory and the gap before customers pay. Specify which accounts are included and distinguish the closing target from additional cash needed to run the business.

Sources and scope
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Have a deal in front of you?

Whether you have a signed LOI, are preparing an offer or are still evaluating the opportunity, send us the basic numbers and where you are in the process. We’ll look at the business, buyer and proposed structure and determine what the financing path may look like.

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