Glossary - Financials, Metrics, Valuation
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A
Accounts Payables
Money a business owes suppliers for goods or services bought on credit. Shows up as a liability on the balance sheet.
Accounts Receivables
Money customers owe a business for goods or services already delivered. Shows up as an asset on the balance sheet.
Why it matters: Whether receivables transfer in a sale is a common friction point. Smaller deals usually leave receivables with the seller; larger deals may include them — there's no firm size cutoff, which is where buyer and seller expectations can clash.
Some businesses carry meaningful receivables (manufacturers, consulting firms); many small retail operations (restaurants, gas stations, salons) carry almost none, since customers pay at time of service. Receivables are a core piece of Working Capital — see that entry for how it factors into a deal.
Accrual Method of Accounting
Revenue and expenses are recorded when the transaction happens, not when cash actually moves. Contrast with the Cash Method of Accounting.
Why it matters: Buyers and lenders read financials differently depending on method, so knowing which one a business uses matters before comparing numbers across deals.
A quick tell: check monthly cost-of-goods-sold as a percentage of revenue across 12 months. Steady percentage points to accrual; swings point to cash. Differences between a tax return and an income statement often trace back to a mismatch in accounting method — look for the M-1 Reconciliation schedule on the tax return, which explains it. Under accrual accounting, the cost of each inventory unit stays on the balance sheet as an asset until that unit actually sells.
Add Backs
Expenses added back to profit to show the real cash benefit an owner gets from the business.
Why it matters: Add backs are where valuation negotiations get contentious — buyers, sellers, and lenders frequently disagree on what should and shouldn't count.
Common categories: non-cash items (depreciation, amortization), one-time expenses (a relocation, a legal settlement), non-operating costs (expenses tied to a different business or to real estate the owner also holds), and personal benefits run through the business (a vehicle, health insurance).
Adjusted EBITDA
(Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA with add backs applied on top. See Seller's Discretionary Earnings for how EBITDA is defined and how it compares to SDE.
Adjusted Net Income
Net Operating Income with add backs applied on top.
Amortization
An accounting method that spreads the cost of an intangible asset — like a patent, license, or lease — over its useful life, instead of expensing it all at once. It's a non-cash expense: it reduces taxable income on the P&L without any cash actually leaving the business.
Depreciation does the same thing for tangible assets. See Depreciation for the full side-by-side comparison.
B
Balance Sheet
A snapshot of a business's assets, liabilities, and equity at a single point in time — typically month-end, quarter-end, year-end, or a rolling 12 months.
It follows the equation assets = liabilities + equity, so it's always in balance: every asset the company owns is paid for by either debt or equity. It's one of the three primary financial statements used to evaluate a business, alongside the Income Statement and Cash Flow Statement.
Business Appraisal
The process of determining what a business is worth. Appraisers typically use several valuation methods — based on assets, profitability, comparable sales, and projected cash flow — the same general approach real estate appraisers use.
Why it matters: SBA loans require a third-party appraisal, and the loan amount can't exceed the appraised value — so financing terms are often capped by this number, not just by negotiated price.
"Business appraisal" and "business valuation" are usually used interchangeably. One school of thought draws a distinction — an appraisal as an informal pricing guide, a valuation as a more formal figure usable in legal contexts like divorce or ownership disputes — but this distinction isn't universally recognized.
C
CAC
See Customer Acquisition Cost (CAC).
Cash Conversion Cycle
The number of days it takes a company to turn cash spent into cash collected. Lower is better — it means less cash is tied up along the way.
It's a close cousin of Working Capital: the cash conversion cycle measures how long the cash is tied up, while working capital measures how much cash is needed to stay solvent during that stretch.
Cash Flow
The cash moving in and out of a business — the fuel that keeps operations running.
Why it matters: In a business-for-sale listing, "cash flow" almost always means the owner's total benefit from the business (salary, perks, and profit combined) — not a technical accounting term. BizBuySell, the largest business-for-sale marketplace, uses "cash flow" this way, as a synonym for Seller's Discretionary Earnings. Know which definition is being used before comparing listings.
(In real estate investing, "cash flow" instead means what's left each month after all expenses are paid — a narrower definition.)
Cash Flow Statement
A financial statement that tracks cash moving in and out of a business over a period of time, broken into three buckets: operations, investing, and financing.
Unlike the P&L, which measures efficiency, the cash flow statement measures timing — how much cash is actually on hand to cover debts, fund operations, and support growth. Negative cash flow can signal trouble, or it can simply mean the business is investing heavily in growth — context matters. It's one of the three primary financial statements used to evaluate a business, alongside the Income Statement and Balance Sheet.
Cash Method of Accounting
Revenue and expenses are recorded only when cash actually changes hands — unlike the Accrual Method of Accounting, which records revenue when earned and expenses when billed.
Why it matters: The cash method can understate both earnings and business value on a P&L, so it's worth knowing which method a business uses before trusting the numbers at face value. It tends to suit small businesses with little inventory or few receivables/payables.
Current Assets
See Working Capital.
Current Liabilities
See Working Capital.
Customer Acquisition Cost (CAC)
What it costs, on average, to land one new customer — factoring in sales, marketing, and related operating costs.
Why it matters: CAC only tells half the story. Weigh it against downstream value — repeat business, referrals, churn, and lifetime value — to know whether a given customer or channel is actually profitable. CAC is also useful for benchmarking a business against similar companies or comparing channels within the same business.
D
Debt Burden
Also called debt service — the total debt payments a company owes over a given period.
A company is overleveraged when its debt burden exceeds its operating cash flow and equity. (In real estate, a property is "underwater" when expenses and debt service together exceed income.)
Depreciation
Depreciation and amortization both spread the cost of an asset over its useful life instead of expensing it all at once, matching the cost to the period the asset actually benefits the business. Both are non-cash expenses — they lower taxable income without any cash leaving the business, spreading the tax benefit out over time rather than taking it all at purchase.
Depreciation vs. Amortization
| Depreciation | Amortization | |
|---|---|---|
| Asset type | Tangible | Intangible |
| Examples | Buildings, machines, equipment, vehicles | Patents, licenses, copyrights, trademarks, leases |
| Non-cash expense | Yes | Yes |
| Salvage value | Applies | Doesn't apply |
| Impairment write-down | Possible | Possible |
Discounted Cash Flows (DCF)
A valuation method that projects a business's future cash flows from its historical performance, then discounts those projections back to a present-day value.
Why it matters: DCF is more common in larger M&A deals than in Main Street business brokerage, since it depends on projections that are inherently uncertain — it works best when future cash flows are reasonably predictable.
E
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
See Seller's Discretionary Earnings for the full definition and how it compares to SDE.
EBITDA
See Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
(Related term: "EBITDAC" — Earnings Before Interest, Depreciation, Amortization, and Coronavirus — emerged after 2020 to describe pre-pandemic-adjusted earnings for businesses hit by COVID shutdowns and supply disruptions.)
Equity
Ownership in a property or business. For a business: Owner's Equity = Total Assets − Total Liabilities — what would be left if the business sold everything it owns and paid off everything it owes. An equity stake is a percentage of that ownership.
Equity is the same figure that anchors the Balance Sheet equation (assets = liabilities + equity), and it's the denominator in Return on Equity — how efficiently a business turns that ownership stake into profit.
F
Financial Statements
The three financial statements used to evaluate a business: the Income Statement and Cash Flow Statement (each covering a period of time), and the Balance Sheet (a snapshot at a single point in time).
Financial Statements at a Glance
Net Operating Income from the Income Statement flows into the Cash Flow Statement, which adjusts for non-cash items like depreciation and interest to show real cash movement, and also draws on beginning/ending Balance Sheet figures to measure investing and financing activity.
Why it matters: In a sale, most buyers ask for the income statement first, then the balance sheet — the cash flow statement often never comes up. Tax returns are almost always requested during diligence, but they aren't technically a financial statement (a single-member LLC, for instance, isn't required to include a balance sheet on its return).
| Income Statement | Cash Flow Statement | Balance Sheet | |
|---|---|---|---|
| Span | Period of time | Period of time | Point in time |
| Measures | Revenue, expenses, profit | Cash in/out by activity | Assets, liabilities, equity |
| Governing logic | Revenue − Expenses = Net Income | Adjusts net income for non-cash items | Assets = Liabilities + Equity |
G
GAAP
(Generally Accepted Accounting Principles)
A set of ten accounting principles, set by the Financial Accounting Standards Board (FASB), that govern clear, consistent, comparable financial reporting. Publicly traded U.S. companies are required to follow GAAP by the SEC; private businesses aren't required to, but many still do. GAAP only permits the accrual accounting method.
The ten principles: Regularity, Consistency, Sincerity, Permanence of Methods, Non-Compensation, Prudence, Continuity, Periodicity, Full Disclosure, and Utmost Good Faith — together, they add up to reporting financials accurately, consistently, and without hiding the bad news.
Goodwill
An intangible asset that can't be quantified precisely, sold on its own, or separated from the business itself. Customer loyalty, brand reputation, an experienced leadership team, and a track record of innovation all feed into goodwill.
In a sale or merger, goodwill is the gap between the price paid and the value of net assets (assets minus liabilities). It only shows up on a balance sheet once a merger or acquisition happens.
I
Income Statement
See Profit & Loss Statement (P&L).
Intangible Assets
Assets with no physical form but that are still identifiable — intellectual property, goodwill, and similar items.
Intangible Asset Types
Note: accounts receivable have no physical form either, but most treat them as tangible since they convert to cash within a year. See Tangible Assets for the physical-asset side of the comparison.
| Tangible Assets | Intellectual Property | Goodwill | Other Intangibles | |
|---|---|---|---|---|
| Can be sold separately | Yes | Yes | No | Varies |
| Useful life | Finite | Finite | Indefinite | Varies |
| Value method | Depreciation | Amortization | Not amortized | Amortization |
M
Multiple
A business's value expressed relative to its earnings — or, less commonly, its revenue.
Why it matters: The multiple is the single number buyers and sellers argue over most, and it moves with more than just size. Market position, earnings quality, recent trends, owner dependence, management strength, systems and processes, tangible and intangible assets, market conditions, buyer type, and deal structure all push it up or down.
Main Street businesses typically trade at low multiples of earnings — often 1–3x (a business earning $150,000 in adjusted net profit might sell around $300,000, a 2x multiple). Larger businesses with millions in adjusted profit often see 3–7x, and businesses with tens of millions in profit can approach or exceed 10x. A handful of industries — accounting practices, for example — conventionally price on a revenue multiple instead, when businesses are similar enough to compare that way.
Two things can quietly change the multiple without changing the underlying business: whether inventory is included in the asking price (excluding it lowers the multiple, which reads as more attractive to a buyer), and which accounting method is used (cash-basis accounting can inflate the apparent multiple relative to accrual, which buyers tend to discount).
N
Net Operating Income (NOI)
Income minus operating expenses — excluding interest, depreciation, amortization, capital expenditures, long-term capital gains, and one-time or unusual expenses. In real estate, NOI also excludes loan payments. Also called Net Ordinary Income.
NOI
See Net Operating Income (NOI).
O
Owner's Benefit
See Seller's Discretionary Earnings.
Owner's Discretionary Earnings (ODE) / Owner's Discretionary Income (ODI)
See Seller's Discretionary Earnings.
Owner's Employment Taxes
See Owner's Salary.
Owner's Health Insurance
See Owner's Salary.
Owner's Salary
An add back to net operating income that captures the total cash flow or benefit an owner draws from a Main Street business.
Why it matters: Owner's benefit is the number buyers actually use to compare opportunities against each other — it typically includes owner salary, payroll taxes on that salary, owner health insurance, personal perks run through the business (phone, vehicle), and profit.
On larger businesses, comparisons shift to adjusted EBITDA instead, which usually skips the owner's-salary add back — a new owner will likely need to pay themselves or a replacement executive a comparable salary either way, so it doesn't inflate the number the same way it does on a smaller deal.
P
P&L
See Profit & Loss Statement (P&L).
Profit & Loss Statement (P&L)
Also called an income statement. Covers a span of time — month, quarter, year, or rolling 12 months — and shows revenue, expenses, and resulting profit or loss over that period.
The P&L, tax returns, and balance sheet are the three documents most commonly used to value a business. It's one of the three primary financial statements, alongside the Cash Flow Statement and Balance Sheet.
R
Return of Capital (ROC)
The return of principal only — getting your original money back, no more, no less. Not a taxable event, since it's a return of your own cost basis rather than a gain.
Return on Assets (ROA)
ROA = Net Income ÷ Total Assets. Measures how efficiently a company turns its total assets into profit — especially relevant for asset-heavy businesses. A higher ROA means more efficient use of capital.
ROA accounts for debt in a way Return on Equity doesn't — since Assets − Liabilities = Equity, taking on more leverage raises ROE without necessarily raising ROA.
Return on Equity (ROE)
Net operating income divided by shareholder equity — a measure of how efficiently a business turns owner equity into profit. It can go negative if profit or equity is negative; a higher (or less negative) ROE is better. It's most useful compared within the same industry or against the same company over time.
Return on Investment (ROI)
Gain or loss over a period, expressed as a percentage of the original investment: (Current Value − Investment) ÷ Investment × 100. Doubling your money is a 100% ROI.
Why it matters: ROI cited without a timeframe is nearly meaningless — a 100% return means very different things over 1 year versus 10. It's also often confused with payback period ("the ROI is 3.5 years" is really describing payback period, not ROI). ROI doesn't account for inflation or the time value of money — use NPV or IRR when that matters.
Not to be confused with "Return of Investment," a distinct and far less common term — see Return of Capital.
ROA
ROAS
(Return on Ad Spend) — a marketing efficiency metric measuring revenue generated per dollar of ad spend.
ROC
ROE
See Return on Equity. (Outside this glossary's scope — categorized separately.)
ROI
See Return on Investment (ROI).
S
SDE
See Seller's Discretionary Earnings (SDE).
Seller's Discretionary Earnings (SDE)
The primary measure of cash flow used to value small businesses — it adds the owner's compensation back into the earnings figure. EBITDA plays the same role for mid-size and larger businesses but does not add back owner salary.
Both SDE and adjusted EBITDA add back depreciation, amortization, interest, and personal perks (auto, phone, travel). SDE typically carries more add backs than adjusted EBITDA, since smaller businesses tend to run more personal expenses through the company.
Seller's Discretionary Income
See Seller's Discretionary Earnings (SDE).
T
Tangible Assets
Physical assets — furniture, fixtures, equipment, vehicles, inventory, land, cash, and securities — that lose value through depreciation.
See Intangible Assets for the full comparison with non-physical asset types.
Trailing Twelve Months (TTM)
The most recent full twelve months of financial data, calculated on a rolling basis rather than tied to a fixed fiscal year.
TTM
See Trailing Twelve Months (TTM).
V
Valuation
The determination of what a business is worth. See Business Appraisal for how that process works and how the two terms differ.
W
Working Capital
A measure of a company's ability to cover its short-term obligations: current assets minus current liabilities.
Why it matters: M&A buyers on larger deals typically build working capital into the deal terms, often averaging 18 months of balance sheets to set a target. On smaller Main Street deals, buyers usually skip this step entirely — so whether it comes up at all is itself a signal of deal size and buyer sophistication.
Current Assets vs. Current Liabilities
| Current Assets | Current Liabilities |
|---|---|
| Cash and equivalents | Accounts payable |
| Inventory / stock | Wages payable |
| Accounts receivable | Current portion of debt/notes payable |
| Supplies | Accrued tax payable |
| Prepaid expenses | Dividends payable, customer deposits, unearned revenue |