23 terms · Plain English

Glossary

Plain-English definitions of the terms that come up when you’re validating a startup idea or buying a business. Each entry includes a real example, not just a dictionary line.

A

What is asset purchase agreement?

An Asset Purchase Agreement (APA) is a legal contract detailing the terms and conditions for a buyer to purchase specific assets and liabilities from a seller.

B

What is business valuation?

Business valuation is the process of determining the economic value of a business or company to assess its worth for sale, investment, or other financial reasons.

C

What is CAC?

CAC, or Customer Acquisition Cost, is the total expense incurred by a business to acquire a new customer.

What is churn rate?

Churn rate is the percentage of customers or subscribers who stop using a company's product or service over a specific period.

D

What is due diligence?

Due diligence is the comprehensive investigative process undertaken by a prospective buyer to evaluate the assets, liabilities, finances, and operations of a target business or franchise.

E

An earnout is a contractual agreement in an acquisition where a portion of the purchase price is contingent on the acquired business achieving specific financial or operational milestones after the sale.

What is EBITDA?

EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a critical financial metric used to assess a company's operational profitability and cash flow potential.

F

What is franchise disclosure document?

A Franchise Disclosure Document (FDD) is a legal document that franchisors are required to provide to prospective franchisees in the U.S., offering detailed information about the franchise system.

L

What is letter of intent?

A Letter of Intent (LOI) is a preliminary, non-binding document outlining the proposed key terms and conditions for the acquisition of a business.

What is LOI?

An LOI, or Letter of Intent, is a preliminary, non-binding agreement outlining the key terms of a proposed business acquisition between a buyer and a seller.

What is LTV?

LTV, or Customer Lifetime Value, is the predicted total revenue that a business can expect to earn from a single customer over their entire relationship.

M

What is market size?

Market size measures the total potential revenue or customer base achievable within a defined market for a particular product or service.

N

What is non compete agreement?

A non-compete agreement is a legally binding contract clause in a business sale that prevents the seller from immediately starting a similar business that could steal the customers, employees, or goodwill they just sold you.

P

What is personal guarantee?

A personal guarantee is a legally binding promise by an individual to repay business debt with personal assets if the business cannot fulfill its obligations.

What is PMF?

PMF, or Product-Market Fit, is the degree to which a product satisfies a strong market demand, indicating a viable and scalable business opportunity.

Q

What is quality of earnings?

Quality of Earnings (QoE) is a deep dive into a business's reported financial performance, assessing how sustainable, repeatable, and legitimate those earnings truly are.

S

What is SAM and SOM?

SAM (Serviceable Available Market) represents the portion of the total market that a business can realistically serve with its current offerings, while SOM (Serviceable Obtainable Market) is the share of SAM a business can realistically capture.

What is SDE?

SDE, or Seller's Discretionary Earnings, represents the total financial benefit a single active owner-operator receives from a business before income taxes and non-recurring expenses.

What is seller financing?

Seller financing is a debt arrangement where the seller of a business acts as the lender, agreeing to be paid for a portion of the purchase price over time rather than entirely upfront.

What is stock purchase agreement?

A Stock Purchase Agreement (SPA) is a legal contract outlining the terms and conditions when an acquirer buys the shares, and thus the entire entity, of a target company from its shareholders.

T

What is TAM?

TAM, or Total Addressable Market, is the total annual revenue opportunity a business could capture if it achieved 100% market share in its specific market, with no competitors, geography limits, or pricing constraints.

What is TAM SAM SOM?

TAM, SAM, and SOM are the three tiers of market sizing — Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market — used by startup founders to validate a business idea and by acquirers to pressure-test a target company’s realistic revenue ceiling before writing a check.

W

What is working capital?

Working capital (current assets minus current liabilities) measures whether a business has enough immediate cash and liquid resources to cover its bills and keep operating without needing a cash injection in the next 12 months.