The owner's private equity glossary

The first time a buyer calls, the words come fast. Adjusted EBITDA. LOI. Working capital peg. Rollover equity. The buyer uses them every day, so they roll right off. You've spent thirty years running crews and keeping customers happy, so half of them land like a foreign language. That gap isn't an accident. Vocabulary is one of the quiet ways a buyer who has done a hundred deals keeps an edge over an owner doing their first one.

This page closes the gap. Below are the private equity terms owners are most likely to hear during a sale process, each explained in plain English with a note on why it matters. No finance degree required. Skim it now, then keep it nearby for the day a letter arrives or a buyer reaches out. For a confidential starting point based on your business, run your free Exit Score.

A to D

Add-backs

Expenses on your books that a buyer agrees don't reflect the real cost of running the business: the truck that's mostly personal, a one-time legal bill, a family member on payroll who doesn't really work there. They get added back to profit before the multiple is applied. Documented adjustments can affect the earnings figure used in valuation. Recurring operating expenses should not be treated as add-backs merely to increase price.

Add-on acquisition

A smaller company a private equity firm buys and folds into a bigger one it already owns. Also called a bolt-on or tuck-in. An add-on is acquired into an existing platform. The label can affect the buyer's operating plan and valuation logic, but it does not create a universal pricing rule.

Adjusted EBITDA

Your EBITDA after add-backs and other adjustments. This may be the earnings measure used in a buyer's valuation, which is why every legitimate adjustment matters. Expect the buyer to challenge each one during diligence, so keep the paperwork behind them.

Cash-free, debt-free

Private M&A deals are typically priced on a cash-free, debt-free basis, but the purchase agreement determines the treatment of cash, debt, and working capital. The headline price assumes both. It usually travels with a working capital peg, defined below, which is the part that surprises owners.

Closing

The day the sale actually happens: documents signed, wires sent, keys handed over. It follows the LOI and varies with deal complexity. Until closing, nothing is final, which is worth remembering when a buyer talks about the deal as if it's done.

Confidential information memorandum (CIM)

The detailed, confidential book about your business that an advisor prepares for serious buyers who've signed an NDA. In smaller deals it may just be a short deck. A good one tells your story your way before buyers write their own version of it.

Data room

A secure online folder holding your financials, contracts, licenses, and records during diligence. Buyers quietly judge how well-run your company is by how organized this folder is. Organized records can reduce avoidable diligence delays, but the dossier does not establish a one-year preparation rule or a guaranteed faster closing.

Deal structure

How the total price actually gets paid: how much is cash at closing versus earnout, rollover equity, or a seller note. Two offers with the same headline number can be worth very different amounts once you look at structure. This is where deals are really won and lost.

Due diligence

The buyer's deep inspection of everything after the LOI: financials, taxes, contracts, licenses, fleet, employees, customer lists. It runs for the negotiated period. Diligence findings can affect price, structure, conditions, or the decision to proceed.

E to L

Earnout

A chunk of the price paid later, and only if the business hits agreed targets after the sale. Fine as a bonus on top of a fair price, risky as a big slice of it, because once you've sold, you may not control the things the targets depend on. We break this down fully in rollover equity, earnouts, and seller notes.

EBITDA

Earnings before interest, taxes, depreciation, and amortization. In plain terms, the profit your operations produce before financing costs and accounting entries. It's the yardstick most buyers measure with, and the number the multiple gets applied to, so small changes in EBITDA mean big changes in price.

Enterprise value

The value of the whole business, the headline number in an offer. It is not what lands in your account, which comes after paying off debt, transaction fees, and taxes. Ask to see the walk from enterprise value to your actual net proceeds.

Escrow

A slice of the purchase price held back by a neutral third party for a year or two after closing, in case something you promised about the business turns out to be wrong. An escrow may secure specified post-closing obligations. Its amount, duration, release conditions, and relationship to representations-and-warranties insurance depend on the transaction documents.

Exclusivity

Your promise, once you sign an LOI, to stop talking to other buyers for a negotiated period. Exclusivity limits discussions with competing buyers and can affect negotiating leverage. Get the terms that matter to you agreed in writing before you sign it.

Fund

The pool of money a private equity firm raises from investors like pensions and wealthy families, with a promise to return it with profit, over a long-term fund life. Investor.gov describes PE funds as having investment horizons typically of 10 or more years. That is a fund horizon, not a promise about how long any one portfolio company will be held.

Hold period

How long a PE firm plans to own your company before selling it again, for a period that varies by fund, asset, and market conditions. It matters even more if you keep rollover equity, because their sale is your second payday. It's a fair question to ask any buyer directly.

Independent sponsor

A dealmaker who finds a company to buy first, then raises the money for that specific deal afterward. The model is legitimate, but it means the money may not be committed when the offer is. Ask exactly where the funding comes from and how firm it is.

Indication of interest (IOI)

An early, non-binding letter giving a rough price range before the buyer has seen much detail. It's a screening step, not an offer. Treat it as a sign of interest and a starting point for questions, never as money in hand.

Letter of intent (LOI)

The document that sets the proposed price and main terms, and starts exclusivity and diligence. The proposed price is commonly non-binding, while exclusivity provisions may be binding. Review the document with qualified counsel. Signing an LOI is the high point of your negotiating power, so the terms you skip negotiating here get harder to win later.

Lower middle market

Lower middle market is an industry label whose boundaries vary by source. Define the revenue or enterprise-value range whenever using the term. Most HVAC, plumbing, and electrical shops getting buyer letters sit right here. It's the most active corner of the market, because buyers have been rolling up the trades for years now.

M to R

Management fee

The annual fee a PE firm charges its investors for running the fund, and sometimes a separate fee it charges the companies it owns. If you're keeping rollover equity, ask whether the new company will pay fees to the firm, because those come out before your share of any profit.

Multiple

The number your earnings get multiplied by to set the price, as in "five times EBITDA." A valuation multiple reflects the buyer's view of earnings quality, risk, growth, financing, and market conditions. The weight placed on any factor varies. See how private equity values a business for what actually moves it.

Multiple arbitrage

Buying small companies at low multiples, combining them, and selling the bigger group at a higher multiple. Multiple arbitrage is the strategy of acquiring businesses at one valuation multiple and later selling the combined platform at a higher multiple. The higher exit multiple is an investment thesis, not a guaranteed result. It's the engine of the roll-up model and a big part of why buyers keep calling your shop.

NDA (non-disclosure agreement)

A contract that keeps what you share confidential. Have one signed before your real numbers go to anyone, and before your name is attached to anything a buyer sees. A serious buyer signs without fuss; a buyer who resists is showing you something.

Non-compete

Your agreement not to start or join a competing business for a set number of years in a set territory after the sale. Sale-of-business noncompetes are governed by the transaction documents and applicable law. The FTC's federal Noncompete Rule is not in effect and is not enforceable. Read it closely if you're not sure you're done working, because it can quietly fence off your next chapter.

Platform company

The first, larger company a PE firm buys in an industry, the one it builds on with add-on acquisitions. Platform and add-on transactions can have different strategic and operating rationales. The dossier does not establish a universal pricing or terms advantage. Whether a buyer sees you as the platform or an add-on is one of the biggest single drivers of your price.

Purchase agreement

The long, fully binding contract that actually transfers the business, often called an asset purchase agreement or stock purchase agreement. This is where the reps and warranties, escrow, and fine print live. It's the document your deal lawyer truly earns their fee on.

Quality of earnings (QoE)

An accountant's deep review of your true, sustainable profit, ordered by the buyer during diligence to test your EBITDA and add-backs. Sellers can commission their own before going to market. Finding your own problems first is a lot cheaper than having a buyer find them for you.

Recurring revenue

Money that arrives on a schedule, like maintenance agreements and service contracts, rather than one job at a time. Buyers may value documented recurring revenue differently from project or one-time revenue. The effect on price depends on retention, margins, concentration, and the buyer. Growing your service agreement base is one of the most reliable ways an owner can raise their multiple before a sale.

Representations and warranties

The formal promises you make in the purchase agreement about the state of the business: taxes paid, no hidden lawsuits, equipment actually owned. If one proves wrong after closing, the buyer can claim money back, often from escrow. Answer them accurately, not optimistically.

Retrading

When a buyer cuts the agreed price late in the process, usually citing something found in diligence, right when you're deep in exclusivity and tired. Some price adjustments are justified; some are a tactic that counts on your exhaustion. Clean books and someone experienced in your corner are the defense.

Roll-up

The strategy of buying many small companies in one trade and stitching them into a big one, which is exactly what's happening across HVAC, plumbing, and electrical right now. It's why the letters keep coming. The full picture is in what is a private equity roll-up.

Rollover equity

Selling most of your company but keeping a stake, a negotiated minority stake, in the buyer's new, larger company. When it works, the "second bite of the apple" at their next sale can be substantial; when it doesn't, that stake can be worth little. The details that decide which way it goes are in our guide to getting paid later.

S to Z

SDE (seller's discretionary earnings)

Profit plus everything the owner personally takes out: your salary, benefits, perks, one-time expenses. SDE is an appraisal and brokerage convention used for some owner-operated businesses. It may differ from EBITDA because of owner compensation and discretionary adjustments, but it is not always higher. Confirm which earnings definition a quoted multiple uses before comparing offers.

Search fund

One person, backed by a group of investors, looking to buy a single company and run it personally, often for the long haul. It's a different animal from a PE fund: you're handing the keys to an individual, not a portfolio. Some owners love that; either way, ask hard questions about their funding and their operating experience.

Seller note

Part of the price you lend back to the buyer, repaid with interest over several years. You've become the bank, so judge the borrower like a bank would: what happens to your note if the business struggles, and who gets paid before you. Covered in depth in rollover equity, earnouts, and seller notes.

Strategic buyer

A company already in your industry, a big regional outfit or a PE-backed group acting like one, buying you for fit as much as for financials. A strategic buyer may pay more when it can realize synergies, but that is a generalization. The dossier does not support a shorter owner-transition rule. How they stack up against a fund is in private equity vs. strategic buyers.

Teaser

A one-page, anonymous summary of your business sent to test buyer interest without revealing who you are. It's how a well-run sale protects your confidentiality in the early rounds, so employees, customers, and competitors hear nothing until you choose.

Term sheet

A short document listing the key terms of a proposed deal, often used interchangeably with an LOI. Like an LOI, it's mostly non-binding, but the numbers in it set expectations that get harder to move later. Negotiate it like it counts, because in practice it does.

Transition services

Your agreed role after closing: staying on for months or a couple of years to hand off customer relationships, steady the crews, and train whoever steps in. Many buyers of an owner-run shop want a transition. Get the length, the pay, and the hours in writing before you sign.

Working capital

The everyday money the business runs on: roughly, what customers owe you plus inventory, minus what you owe suppliers. Buyers expect a normal amount of it to come with the business, the way a house comes with a furnace. That expectation is measured by the peg, next.

Working capital peg

The agreed normal level of working capital that must be in the business at closing. The purchase agreement defines how a closing working-capital amount is compared with the target and how any resulting adjustment is calculated. This single term quietly moves more money at closing than almost any other, so ask how the peg will be set early, not at the finish line.

How to actually use this list

Don't memorize it. Nobody quizzes you at closing. The way owners actually use a page like this: a letter arrives or a call happens, a term goes by that doesn't quite land, and you come back here to check what it means and, more important, what it means for you. The buyer's edge isn't that they're smarter. It's that they've heard these words a thousand times and you've heard them twice. That edge shrinks fast once you know the game, which is why the whole owner's guide to private equity exists.

When these terms start attaching to real numbers, context matters. Run your free Exit Score to estimate your valuation range, identify the factors supporting it, and see where buyer diligence may focus. You control whether and when to take another step.