Key Terms Glossary for Arizona Owners! From Cox Business Brokers AZ

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Whether you're buying or selling a business for the first time, understanding the terminology used throughout the process is essential. Brokers, lenders, and attorneys all use specific financial and legal language—and having a clear grasp of these terms helps you make better decisions, ask the right questions, and avoid confusion.

Here’s a breakdown of the most common and important terms you’ll encounter in a business sale, rephrased for clarity by our team at Cox Business Brokers AZ.

Seller’s Discretionary Earnings (SDE), Discretionary Earnings (DE), Owner’s Benefit (OB), or Cash Flow

These terms all refer to the same core figure: the total income an owner can expect to take home from the business. This includes net profit plus any owner-specific benefits like salary, perks, or non-recurring expenses.

Buyers use this number to determine whether the business can support their personal income needs and pay off acquisition debt. The basic formula is: EBITDA + Owner’s Salary + Add-Backs = SDE

Add-Backs

Add-backs are personal or non-essential expenses that a new owner likely won’t inherit. These could include overpaid family members, personal car payments, or the owner's cell phone and health insurance. Removing these costs from the financials gives a clearer view of the business’s true earning potential.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA is a financial metric used to evaluate a business’s profitability. It reflects earnings before non-operating expenses are taken into account and is especially useful when comparing businesses.

To calculate EBITDA: Start with Net Income + Interest + Taxes + Depreciation + Amortization

This figure is widely used during the due diligence phase, especially for larger acquisitions.

Gross Revenue vs. Net Revenue

• Gross Revenue is the total amount generated from sales before returns, refunds, or discounts.

• Net Revenue is what remains after subtracting those allowances.

Understanding this distinction helps you assess how much actual income the business retains from its sales.

Gross Profit vs. Net Profit

• Gross Profit = Revenue – Cost of Goods Sold (COGS).

• Net Profit = Gross Profit – All Other Expenses (rent, salaries, marketing, etc.)

Net profit is a more accurate reflection of the company’s true profitability after operational costs are factored in.

Due Diligence

This is the in-depth evaluation process that buyers conduct before finalizing a purchase. It involves analyzing legal documents, contracts, financials, and operational details.

Tip: Secure a signed Letter of Intent (LOI) or purchase agreement before engaging accountants or attorneys for due diligence, so you’re not investing time or money prematurely.

Letter of Intent (LOI)

An LOI outlines the buyer’s proposed terms for purchasing the business, including price, structure, and timelines. While usually non-binding, it shows serious intent to move forward.

An LOI is often used to lock in basic terms before finalizing a binding asset purchase agreement.

Multiple

The “multiple” is a valuation tool used to price a business. It’s the ratio of the sale price to the business’s earnings (usually SDE or EBITDA).

For example:If a business is priced at $3 million and the SDE is $1 million, the multiple is 3x.

Multiples vary based on industry, business size, growth potential, and deal structure. They can also be impacted by how the deal is financed—bank loans, seller financing, or private equity.

Non-Disclosure Agreement (NDA)

An NDA (also called a confidentiality agreement) is a legal document signed by potential buyers before receiving sensitive information about a business for sale. It protects the seller by ensuring that private details—such as client lists, pricing, and employee info—aren’t shared or misused.

Opinion of Value vs. Business Appraisal

• An opinion of value is an estimate prepared by a business broker based on market trends, financials, and comparable sales.

• A business appraisal, on the other hand, is a formal valuation conducted by a licensed professional (such as a Certified Valuation Analyst). It often includes detailed analysis of industry conditions and the company’s tangible and intangible assets.

  
  

Owner (Seller) Financing

In some deals, the seller agrees to finance a portion of the sale by holding a note, allowing the buyer to make payments over time.

This can ease cash flow for the buyer and shows the seller has confidence in the continued success of the business. It’s also a common way to bridge gaps in financing when bank loans don’t cover the full price.

Private Equity

Private equity firms are investment groups that back and acquire businesses—typically those with strong financials and growth potential. Their goal is to scale the business further and eventually exit at a profit.

If you’re a seller, having a private equity firm at the table may result in a higher valuation, especially for larger or well-structured companies.

Final Thoughts from Cox Business Brokers AZ

Whether you're selling your business or exploring acquisition opportunities, knowing these key terms helps you communicate more effectively and navigate the process with confidence.

At Cox Business Brokers AZ, our team of seasoned business brokerage professionals specialize in guiding Arizona business owners and buyers through every step of the transaction—clearly, confidentially, and professionally.

Need help understanding the value of your business or preparing it for sale?Reach out for a free, confidential consultation.