Reference
Lower-middle-market M&A glossary
Plain-English definitions of the terms you'll hear most when preparing a business for sale. Operator-written, no advisor spin. Each definition is the citation-ready short version; the "in practice" paragraph is the operator answer.
- EBITDA
- EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization — is a measure of a business's operating cash generation, used as the base on which a buyer applies a multiple to derive enterprise value.
- In practice —Lower-middle-market deals are almost always quoted as a multiple of trailing-twelve-month EBITDA, normalised for one-off and owner-discretionary items. The number a buyer pays a multiple of is rarely the same number on the income statement.
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- EBITDA multiple
- An EBITDA multiple is the ratio of enterprise value to EBITDA — the headline shorthand for what a buyer is paying for a business. A 5× multiple on $5M EBITDA implies $25M enterprise value.
- In practice —GF Data's Q1 2026 report puts the U.S. middle-market median at ~7.4× across the $10M–$250M EV range; below $10M EV, multiples typically compress to 4–6×. Industry, recurring revenue, owner independence and customer concentration explain most of the spread.
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- Quality of Earnings (QofE)
- A Quality of Earnings (QofE) report is an independent accounting analysis commissioned by a buyer to verify that reported EBITDA is sustainable, normalised, and free of one-off or owner-discretionary items. It is the single most important diligence document in lower-middle-market M&A.
- In practice —QofE providers test 24 months of monthly accounts, reconcile to bank statements, and adjust for non-recurring items. Productivity and AI claims that aren't logged with a measurable baseline get adjusted out. A clean QofE is what stops a 5× LOI from closing at 4×.
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- Owner dependency
- Owner dependency is the degree to which a business's revenue, customers, decisions and operations route through the founder personally. It is the most reliably-applied discount in lower-middle-market M&A — typically 20–40% versus comparable professionally-managed peers.
- In practice —Buyers price owner dependency as risk because the EBITDA they're paying a multiple of may not persist after the founder leaves. The discount is removed by replacing founder-only behaviours with documented systems, a real management layer, and a system-of-record other than the founder's memory.
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- Earn-out
- An earn-out is a portion of the purchase price paid contingent on the business hitting agreed performance targets after close. It transfers execution risk from the buyer back to the seller and typically appears when the buyer wants the headline multiple to look bigger than the cash-at-close justifies.
- In practice —Earn-outs commonly run 12–36 months post-close, tied to revenue, EBITDA or customer-retention targets. In strategic deals with synergy stories, integration risk often shows up as a wider earn-out band. Sale-readiness work materially compresses the earn-out portion.
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- EBITDA normalization
- EBITDA normalization is the process of adjusting reported EBITDA to remove one-off, non-recurring, and owner-discretionary items, producing the run-rate EBITDA a buyer applies a multiple to. Done by the seller's accountant pre-process and re-tested by the buyer's QofE provider.
- In practice —Common adjustments: above-market owner compensation, personal expenses run through the business, one-off legal or restructuring costs, and pandemic-era distortions. The credibility of the normalisation set is what determines whether the buyer accepts the headline EBITDA at all.
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- Letter of Intent (LOI)
- A Letter of Intent (LOI) is a non-binding written offer from a buyer setting out the proposed price, deal structure, exclusivity period and conditions to closing. It is the gate between marketing and diligence.
- In practice —Most lower-middle-market LOIs include 30–90 days of buyer exclusivity and a no-shop. The headline multiple in the LOI is rarely the multiple at close — diligence findings, normalisation disputes and undisclosed concentration commonly compress price 5–15%.
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- Strategic buyer
- A strategic buyer is an operating company in the same or adjacent industry, acquiring another business for synergies — combined cost base, cross-sell, geographic expansion, talent or technology — rather than for stand-alone returns.
- In practice —Strategics often pay a higher headline multiple than financial buyers when the synergy story is real, but tighten earn-outs on integration risk. Sellers should emphasise the assets that compound inside the strategic's platform: customer base, IP, regulatory licences, talent.
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- Financial buyer
- A financial buyer — most commonly a private-equity firm, family office or search fund — acquires a business as a stand-alone investment, holds for 3–7 years, and exits to another buyer. They value cash-flow predictability and growth optionality, not synergies.
- In practice —Financial buyers typically pay closer to a clean stand-alone multiple, with cleaner deal structure, faster close, and meaningful management-equity rollover. Founders frequently stay on as CEO post-close.
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- Customer concentration
- Customer concentration measures how much of a business's revenue depends on its largest customers. The standard buyer threshold is the top-10 share — above 50% it materially compresses the multiple; above 25% with a single customer it usually triggers earn-outs.
- In practice —Concentration is one of the four operational signals strategic buyers most reliably price. Reducing it pre-sale is structural work — it requires real go-to-market diversification, not just contract restructuring.
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- Recurring revenue
- Recurring revenue is contractually predictable revenue that renews automatically — subscriptions, retainers, multi-year service contracts. It earns higher multiples than transactional revenue because the cash flow is forecastable and the customer-acquisition cost has already been incurred.
- In practice —John Warrillow's Hierarchy of Recurring Revenue ranks revenue types by predictability — long-term contracts and auto-renewing subscriptions earn premium multiples; consumable resupply and standing orders sit in the middle; one-off transactional sits at the bottom.
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- AI governance
- AI governance is the set of policies, controls, logs, evaluation frameworks and escalation rules that make a business's AI usage controlled and auditable. The standard reference frameworks are NIST AI RMF (U.S.) and ISO/IEC 42001 (international).
- In practice —Buyers price uncontrolled AI usage as risk — hallucinations, customer-facing errors, regulatory exposure, IP leakage. The minimum viable governance is logged calls, weekly evals, written escalation rules, and a one-page AI policy aligned to one of the named frameworks.
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- Sale-readiness
- Sale-readiness is the operational state in which a business can survive a buyer's quality-of-earnings, IT and commercial diligence without material findings that compress the multiple or shift cash to earn-outs. It typically requires 12–36 months of structured work.
- In practice —Friction-level readiness (clean accounts, contracts, IP register) takes 6 months. Structural readiness — owner independence, recurring-revenue mix, management depth, four-quarter operational evidence — takes 24–36 months. Both move the close; only the structural work moves the multiple.
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