Reference
Exit Glossary
The terms a buyer, a broker or an accountant will use when you come to sell, explained plainly. Each one links to the dimension of the 7 Mills it belongs to.
-
Add-backs
Add-backs are costs in a company's accounts that a seller adds back to reported profit because they are one-off, personal, or otherwise not part of the true ongoing cost of running the business. The result is a normalised earnings figure, usually adjusted EBITDA, that buyers and their advisers use as the starting point for valuing the company.
-
Data room
A data room is a secure online repository where a business preparing to sell gathers and organises the documents a buyer needs to examine during due diligence (financial statements, contracts, leases, employee records, intellectual property and similar records), so that approved people can review everything in a controlled, access-logged environment.
-
Due diligence
Due diligence is the detailed investigation a buyer carries out before completing a purchase, examining a business's financial records, legal position, tax affairs, contracts, operations and people to confirm that what the seller has presented is accurate and to surface any hidden risks. It normally takes place after a price and outline terms have been agreed in principle, and its findings can change the price, adjust the terms or, in some cases, stop the deal altogether.
-
Earn-out
An earn-out is a way of structuring a sale in which part of the price is paid later, and only if the business meets agreed performance targets (such as revenue or profit) during a set period after completion, usually one to three years. It lets a buyer and seller bridge a disagreement over what the company is worth by tying some of the money to results the seller expects but the buyer wants to see proven first.
-
Earnings normalisation
Earnings normalisation is the process of adjusting a company's reported profit to remove one-off, non-recurring or owner-specific items, so the remaining figure reflects the true ongoing earning power a new owner would inherit. Typical adjustments include resetting the owner's pay to a market salary for the role, removing personal costs run through the business, and excluding exceptional items such as a legal settlement or a one-time grant.
-
EBITDA
EBITDA stands for earnings before interest, tax, depreciation and amortisation. It is a measure of a business's operating profit that removes financing costs, tax and non-cash accounting charges, so it shows roughly how much the core trading activity earns before those items are taken into account.
-
Escrow (retention holdback)
Escrow, also called a retention or holdback, is a portion of a business's sale price that is held back at completion rather than paid to the seller straight away, usually placed with a neutral third party such as a bank or law firm (and sometimes simply retained by the buyer). It is released to the seller after an agreed period, often once specified conditions are met and no valid claims have arisen against the warranties or risks the parties agreed it should cover.
-
Heads of Terms (Letter of Intent)
Heads of Terms, also called a Letter of Intent, is a short document setting out the main terms a buyer and seller have agreed in principle before the full sale contract is drafted, covering the price, deal structure, conditions and timetable. Most of it is not legally binding, but a few parts usually are, such as confidentiality and a period of exclusivity during which the seller agrees to deal with only that buyer.
-
Owner dependency (key-person risk)
Owner dependency, also called key-person risk, is the extent to which a business relies on its owner (or another single individual) to operate, win customers and make decisions. The more the day-to-day running, the main relationships and the critical knowledge sit with one person, the harder the business is to sell and the less a buyer will typically pay for it.
-
Seller's Discretionary Earnings (SDE)
Seller's Discretionary Earnings (SDE) is a measure of the total yearly financial benefit that a single owner-operator draws from a business. It is worked out by starting from net profit and adding back one owner's salary and benefits, interest, tax, depreciation, amortisation, and any genuinely one-off or personal costs, so a prospective buyer can see the full earnings available to one working owner.
-
Valuation multiple
A valuation multiple is a number applied to a business's profit (or sometimes its revenue) to estimate what the whole company is worth: a business making EUR 1m in adjusted annual profit, valued at a multiple of five, has an indicative value of around EUR 5m. The multiple used reflects how buyers of similar companies have recently priced risk, size and growth prospects.
-
Working capital adjustment
A working capital adjustment is a change to the final price paid for a business at completion, based on the amount of everyday operating money (stock, unpaid customer invoices and unpaid supplier bills) left in the business on the day of sale compared with an agreed normal level. Hand the business over with less than the agreed level and the price is reduced; hand it over with more and the price is increased.
Know the words. Know your score.
The free 7 Mills Score reads your business the way a buyer will. 15 minutes, results in writing.