M&A (mergers and acquisitions) is its own world. It has its own language, its own etiquette, its own set of procedures. For those who live and work in it every day, the terminology is second nature. But for business owners going through the process for the first (and likely only) time, it can feel disorienting; like being dropped into a foreign country with no translator.
You’re trying to make the biggest financial decision of your life, and suddenly you’re hearing acronyms and phrases that make it sound like you’re on the outside looking in. That feeling can lead to hesitation, confusion, and a lack of confidence in the process.
To help you take control, here are 10 essential terms and acronyms every potential seller should start getting familiar with.
1. EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA is a measure of your company’s earnings before accounting for financial decisions (interest), tax structure, and non-cash expenses (depreciation and amortization). It’s often the starting point for valuing a business because it gives buyers a view of your operating performance, stripped of outside variables.
2. Addbacks (also called Adjustments)
Addbacks are specific expenses that are added back to net income or EBITDA to show the true profitability of your business. These can include one-time costs, personal expenses run through the business, or non-operational costs. Buyers will scrutinize your addbacks, so they need to be legitimate, well-documented, and defensible.
3. Adjusted EBITDA
Also referred to Seller's Discretionary Earnings (SDE) in many cases, this is EBITDA plus all legitimate addbacks. In other words, it’s your business’s normalized earnings, the figure that buyers actually use to value your company. This number tells the story of what a buyer can realistically expect to earn from the business under normal operating conditions.
4. Working Capital (often called Target Working Capital, TWC)
In M&A, working capital is usually defined as Accounts Receivable – Accounts Payable + Inventory. The “target” part refers to the amount a buyer expects to be included in the sale so they can operate the business without immediately injecting more cash. This is a major part of negotiations and can significantly affect how much money you walk away with.
5. Fair Market Value (FMV)
This is the estimated price that an asset—such as equipment or real estate—would sell for on the open market. FMV plays a huge role in adjusting your business’s financials before going to market. For example, if your rent or equipment costs are well below market rate, we’ll need to “normalize” them to reflect what a buyer would realistically face post-sale.
6. Trailing 12 Months (T12 or TTM)
This refers to the most recent 12 months of financial performance, regardless of calendar or fiscal year. Buyers focus on T12 figures to see how the business is performing right now, not how it did in a prior tax year.
7. Letter of Intent (LOI)
An LOI is a non-binding document that outlines the buyer’s proposed terms for the acquisition. It’s the first formal step in getting a deal done and usually includes price, structure, conditions, and timelines. While not legally binding (with a few exceptions), signing an LOI means you’re moving forward with that buyer under those general terms.
8. Due Diligence
This is the buyer’s deep-dive into your business after the LOI is signed. They’ll examine your financials, contracts, systems, vendors, employees, and everything else needed to verify the claims made in your listing and CIM. Think of it as the buyer’s version of a home inspection, only more intense.
9. Exclusivity
Once an LOI is signed, most buyers will require a period of exclusivity. This means you agree not to negotiate or shop the deal to other buyers for a set amount of time, usually 90 days, while they complete due diligence. It protects the buyer from wasting resources while the seller looks elsewhere.
10. Post-Closing Adjustments
These are final changes made to the purchase price after the deal closes, based on things like final working capital, inventory levels, or accounts receivable. Even after the sale, there may be adjustments made up or down, depending on how actual values compare to the agreed-upon targets.
Conclusion
Understanding the language of M&A puts you back in control of your own deal. You don’t need to become an expert, but knowing the basics means you can ask better questions, spot red flags, and keep from being sidelined in conversations that affect your future. If you’re thinking about selling, now is the time to start learning the terms that will define the process.
