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ETA Glossary
Plain-English definitions for the acquisition and financing terms used throughout the site, from SDE and EBITDA to seller notes and take rate.
- Annual Recurring Revenue (ARR)
- Monthly recurring revenue annualized. Commonly used as the basis for valuing subscription (SaaS) businesses, which are often priced as a multiple of ARR.
- Asset purchase vs. entity purchase
- The two basic ways to structure an acquisition. An asset purchase buys specific assets and liabilities of a business; an entity purchase buys the legal entity itself, liabilities included. The choice affects taxes, liability exposure, and how an SBA loan gets underwritten.
- Balance sheet
- A snapshot, as of one specific date, of what a business owns (assets), what it owes (liabilities), and what's left for the owner (equity). Assets always equal liabilities plus equity.
- Business broker
- An intermediary who represents a seller, pre-vetting and packaging a business for sale and running the sale process on the seller's behalf. Curated brokerages typically check a seller's financials before listing; self-serve marketplaces put more of that screening burden on the buyer.
- Buy box
- A written set of criteria (business model, price range, multiple range, minimum profit and margin, weekly time commitment) that defines what a searcher is actually looking for, turning a search from browsing into filtering.
- Cash flow statement
- A statement tracking whether cash is actually moving in and out of a business, since a business can be profitable on paper while still running short on cash if customers are slow to pay.
- Churn
- The rate at which customers cancel or stop paying. The single number that most determines whether a subscription business grows or shrinks, since new revenue has to outpace what churn takes away just to stand still.
- Cost of Goods Sold (COGS)
- The direct cost of producing or acquiring the products a business sells. A real, physical cost behind every e-commerce sale, but close to zero for a content site or SaaS product.
- Customer (or traffic) concentration
- How much of a business's revenue or traffic depends on a small number of customers, one channel, or one search ranking. Heavy concentration is a red flag that pulls a business's valuation multiple down, since losing that one thing could gut its earnings.
- Deferred revenue
- Money a business has already collected for something it hasn't delivered yet, recorded as a liability until it's earned. Common in subscription (SaaS) businesses.
- Due diligence
- The investigation a buyer runs on a business before closing, verifying that its financials, operations, and risks are what the seller represented. Typically runs during the exclusivity period after a letter of intent is signed.
- Earnout
- A portion of the purchase price paid contingent on the business's future performance after closing, rather than upfront. Shifts some risk from the buyer to the seller and can be used to bridge a gap in agreed valuation.
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization. Used instead of SDE to value larger businesses that could support a paid, non-owner manager rather than a single owner-operator.
- Entrepreneurship Through Acquisition (ETA)
- The practice of buying an existing business, usually a small, profitable one, and running it yourself instead of starting one from scratch. It sits between investing and entrepreneurship: you underwrite the deal like an investor, then operate the business like a founder.
- Equity injection
- The buyer's own cash contribution to an acquisition, on top of the loan, typically around 10% of the purchase price for an SBA-financed deal (more if the deal relies heavily on intangible assets as collateral).
- Exclusivity period
- The window, usually set in the letter of intent, during which the seller agrees not to shop the business to other buyers while the buyer runs due diligence. Commonly 30 to 90 days.
- Full standby
- A seller note structured with no payments for a set period, often required for the note to count toward the buyer's required equity injection on an SBA loan.
- Gross Merchandise Sales (GMS)
- The total dollar value of transactions flowing through a marketplace, before the marketplace's own take rate is subtracted. Marketplace revenue equals GMS multiplied by the take rate.
- Holdback / escrow
- A portion of the purchase price held back for a period after closing to cover post-closing surprises, like a customer refund spike or an undisclosed liability.
- Independent sponsor
- A buyer who sources and negotiates a deal without a committed fund behind it, then lines up capital (investors, lenders, or both) deal by deal rather than raising a fixed pool up front. Gives more flexibility than a traditional search fund, at the cost of less certainty that capital will be there for any given deal.
- Letter of Intent (LOI)
- The document that turns a negotiation into a real deal: price, structure, and terms, mostly non-binding, alongside a handful of sections (confidentiality, exclusivity) that do bind both parties from signature. It's common for a real share of an LOI's terms to shift once diligence findings land.
- Monthly Recurring Revenue (MRR)
- The predictable revenue a subscription business (typically SaaS) collects each month from active subscribers, watched alongside churn as the core health metric of the business.
- Multiple (valuation multiple)
- The number a business's price is quoted as relative to its earnings (SDE or EBITDA), rather than a flat dollar figure. A business with $300,000 in SDE at a 2.5x multiple is roughly a $750,000 deal. Multiples rise with deal size and vary by business model and risk.
- Non-compete
- A contract term restricting how long and how broadly a seller can start or join a business that competes with the one they just sold.
- Off-market sourcing
- Finding an acquisition target directly, before it's listed with a broker, usually through direct outreach, referrals, or a searcher's own network. Trades a slower, higher-effort search for less competition and more room to negotiate.
- Owner dependence
- How much a business relies on its current owner personally to keep running, whether for sales relationships, technical knowledge, or day-to-day decisions. A business that runs fine without the owner in the building every day commands a higher multiple than one that would fall apart without them.
- Personal guarantee
- A buyer's personal commitment to repay an acquisition loan if the business can't, putting personal assets at risk. Almost always required on an SBA loan regardless of how little cash the buyer puts in.
- Profit and loss statement (P&L / income statement)
- A statement covering a period of time that shows revenue minus expenses over that stretch, answering whether the business made money recently. Distinct from a balance sheet, which is a snapshot of what the business owns and owes on one specific day.
- Quality of Earnings (QoE) report
- A diligence report that rebuilds a business's real, recurring, cash-backed earnings from source data (bank statements, payment processor records, platform data) instead of trusting the seller's own summary. Checks revenue verification, addback scrutiny, concentration, trend, and off-book liabilities.
- Return on Ad Spend (ROAS)
- Revenue generated per dollar of advertising spend, used to judge whether paid customer acquisition is actually profitable. Worth tracking as a trend over 12-24 months rather than a single recent month.
- SBA 7(a) loan
- The Small Business Administration loan program most commonly used to finance small business acquisitions in the U.S. Lenders underwrite the target business's cash flow, and the loan almost always requires a personal guarantee from the buyer.
- Search fund
- A traditional ETA path where a searcher raises money from a small group of investors up front to cover a 1-2 year search salary and expenses, in exchange for equity in whatever business they eventually buy. Trades a larger personal equity stake for a salary, an investor group, and a well-worn process.
- Self-funded search
- An ETA path where the searcher covers their own search costs and finances the eventual acquisition with a mix of debt (often an SBA 7(a) loan) and equity, rather than raising a dedicated search fund. Keeps far more ownership, at the cost of more personal risk during an unpaid search phase.
- Seller financing (seller note)
- Financing where the seller acts as a lender for part of the purchase price, getting paid over time instead of entirely at closing. Seller notes commonly run 5-20% of the purchase price and are usually subordinated to a bank loan.
- Seller's Discretionary Earnings (SDE)
- Profit plus the owner's salary and personal expenses run through the business, used to value smaller businesses that assume a single owner-operator. The purchase price is typically quoted as a multiple of SDE.
- Take rate
- The share of transaction value a marketplace keeps as revenue, expressed as a percentage of gross merchandise sales. The core lever of a marketplace's business model, since it funds everything the marketplace does for both sides of a transaction.
- Third-Party Logistics (3PL)
- An outside company that handles warehousing, packing, and shipping on behalf of an e-commerce business, reducing the physical fulfillment workload but not the inventory-planning and cash-flow skill it still requires.
- Working capital
- The cash, inventory, or prepaid expenses a seller needs to leave in the business at closing so it can keep operating. The working capital target effectively adjusts the real price of a deal in either direction.
Related:Take rate
Related:GMS
Related:COGS