Important Terms To Know When Selling A Company

If you're planning to sell your business, it's important to know some key terms to inform a smooth deal. Below, we'll dig into the four key terms you need to know when selling your business: Valuation, EBITDA, Structure, and Due Diligence.

VALUATION

Refers to the market price that your company will sell at, often expressed as a multiple of revenue or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This figure gives you an idea of where your business stands in the market. While it may differ from your expectations and seem overly focused on financials, it forms a vital part of the selling process.

EBITDA (earnings before interest, taxes, depreciation, and amortization).

This shows the cash earnings of your business, adjusted by to show normalized, or market-rate, expenses like salaries and leases. It's key in figuring out the sale price, which is often calculated as a multiple of this number.

Structure

Refers to the non-cash parts of your of your deal, like seller notes, rolled equity, or earn outs, and sometimes involving debt-financing. Knowing what structure is and how it is included in your proceeds can help you to grasp what your future payments and contingencies are post-sale.

Due Diligence

Once you've aligned on initial deal terms, the process of due diligence begins. This phase, following the Letter of Intent (LOI), is when the buyer begins assessing risks, reviewing internal information, and confirming your guidance about the business's financial and operational areas. While it can feel intrusive, remember to rely on your advisors and keep in mind that this is a key step toward a closing out the deal.