M&A Glossary:
Lower Middle Market Terms Explained

Valuation & Financial Terms

EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In plain terms, it is a measure of how much operating profit a business generates before the effects of financing decisions, tax situations, and accounting choices around large asset purchases. For most lower middle market businesses, EBITDA is the most common starting point for a valuation conversation. See our guide to EBITDA and valuation basics for a detailed breakdown.

Adjusted EBITDA

EBITDA after normalizing for items that distort how the business actually performs, such as owner compensation above or below market rate, one-time expenses, personal expenses run through the business, and non-operating income or expense. Adjusted EBITDA is what buyers typically use to apply a multiple and estimate a valuation range. Negotiations over which adjustments are reasonable and well-documented are a standard part of nearly every lower middle market deal. Our EBITDA guide walks through common categories of adjustments.

Add-back

An expense or item that gets added back to EBITDA to arrive at adjusted EBITDA. Common add-backs include owner compensation above market rate, one-time costs, and personal expenses that would not continue under new ownership. Sellers want to include every legitimate add-back to present the fullest picture of earning power, while buyers scrutinize each one to confirm it is real and well-documented.

Multiple

A number applied to EBITDA (or adjusted EBITDA) to estimate value. The concept is simple: EBITDA times a multiple equals an estimated enterprise value. Multiples vary widely by industry, growth rate, size, and risk profile, and a multiple that applies to one business says little about what applies to a different one, even in the same industry. See our valuation guide for what factors tend to push multiples higher or lower.

Enterprise Value

The estimated total value of a business, generally calculated as adjusted EBITDA multiplied by the applicable multiple. Enterprise value is where the actual offer starts in a sale process: it represents what a buyer is willing to pay for the operating business, before accounting for the seller's debt, existing cash, or other balance-sheet items.

Deal Structure & Process Terms

Indication of Interest (IOI)

A preliminary, non-binding expression of interest from a buyer, typically submitted early in a sale process before management meetings. An IOI outlines a proposed valuation range, deal structure, and other high-level terms, and it generally helps narrow the buyer pool to those with realistic and credible offers. See our guide to the M&A process for how IOIs fit into the timeline.

Letter of Intent (LOI)

A more detailed offer from a buyer that comes later in the process, usually after management meetings and buyer due diligence work. An LOI typically includes more specific terms than an IOI, though it is often still largely non-binding until the definitive purchase agreement is signed. Once an LOI is signed, it usually also triggers a period of exclusivity, meaning the seller agrees not to negotiate with other buyers. Our process guide explains how IOIs and LOIs fit into the broader timeline.

Due Diligence

The buyer's detailed review of the business after an LOI is signed, typically covering financials, contracts, legal matters, customer concentration, employee matters, and often a quality of earnings (QoE) analysis performed by an accounting firm. Due diligence is usually one of the longest and most document-intensive phases of a sale. See our timeline guide for how due diligence affects overall sale timing.

Quality of Earnings (QoE) Report

An accounting firm's detailed analysis of the business's financial statements and adjusted EBITDA, performed during the due diligence phase. A QoE report verifies that the financial records are accurate and that any EBITDA adjustments are legitimate, well-documented, and not expected to recur. This report is a standard part of most lower middle market transactions and helps both buyer and seller get aligned on the true earning power of the business.

Deal Terms & Payment Structure

Rollover Equity

When a seller reinvests part of their sale proceeds into the new ownership entity rather than taking the full purchase price in cash at closing. A private equity buyer may ask for rollover equity to align the seller's interests with the company's future performance and signal the seller's continued confidence in the business. Rollover equity gives the seller a continued stake in future upside, but it also shifts some risk back onto the seller. See our comparison of strategic and private equity buyers for how this structure typically works.

Earnout

A portion of the purchase price that is tied to the company hitting agreed performance targets after the sale closes. For example, a buyer might offer $10 million in cash at closing and an additional $2 million if the company hits a specific revenue target within two years. Like rollover equity, an earnout ties some of the seller's proceeds to future performance and is always negotiable. Both structures are covered in our buyer-type guide.

Working Capital Adjustment

A true-up in the purchase price based on the amount of working capital (cash, receivables, and inventory minus payables and other liabilities) the business has on the closing date. For example, if the deal assumes the business will close with $1 million in working capital and it actually closes with $1.2 million, the seller may owe back a portion of the overage, or vice versa. These adjustments are a normal part of deal documentation and are negotiated carefully between buyer and seller counsel.

Indemnification

Representations and warranties from the seller that certain facts about the business are true, along with a commitment to make the buyer whole if those facts turn out to be false. For example, a seller might represent that there are no pending lawsuits, that all contracts are in good standing, and that the financial statements are accurate. If a lawsuit does surface after closing or a customer leaves, the buyer may have a claim against the seller for damages up to the indemnification cap. This is a standard and heavily negotiated part of every purchase agreement.

Buyer Types & Acquisition Models

Strategic Buyer

An operating company (often a competitor, supplier, customer, or business in an adjacent industry) that acquires another company to advance its own operations. A strategic buyer looks for synergies: added market share, a new product line, entry into a new geography, proprietary technology, or a stronger talent base. See our strategic buyer vs. private equity buyer guide for how they differ on price, integration, and post-close arrangements.

Private Equity Buyer

An investment firm that raises capital to acquire businesses, typically with the goal of growing the company over several years and eventually selling it or recapitalizing it for cash flow. Private equity buyers are financial buyers first: their primary interest is in the return the investment can generate. They often use a platform-and-add-on model and may ask the existing owner or management team to stay involved post-close through rollover equity or an advisory role.

Platform vs. Bolt-On Acquisition

A framework used primarily by private equity buyers. A platform is the initial "anchor" acquisition in an industry, and bolt-on acquisitions are smaller companies acquired later and combined with the platform to create a larger operating entity. A business that is purchased as a platform may see more investment and longer-term independence, while a bolt-on is typically integrated into the existing platform company. Whether your business is positioned as a platform or bolt-on affects both price and your role post-close.

Sell-Side vs. Buy-Side

Sell-side refers to an M&A advisor working on behalf of the seller (the business owner), helping to market the company, manage buyer outreach, and negotiate the best terms. Buy-side refers to work done on behalf of a buyer or investor, evaluating acquisition targets and sourcing deals. Salt Creek Advisory focuses on sell-side advisory: representing business owners in their quest to find the right buyer and maximize value.

Key Preparatory Steps

Normalization of Earnings

The process of adjusting historical financial statements to reflect sustainable, recurring performance by adding back one-time items, owner-specific expenses, and non-operating items. Normalization produces adjusted EBITDA and helps both owner and buyer get a clear picture of what the business actually earns each year independent of temporary or non-recurring items. This work usually happens early in a sale process and is fundamental to any credible valuation.