Deal terms glossary for selling a practice

Your practice, carried forward.

Seller's discretionary earnings (SDE)

A measure of what a small, owner-run practice earns for one full-time owner. It starts with pre-tax profit, then adds back the owner's salary and benefits, interest, depreciation, amortization and one-time or personal expenses run through the business. Smaller practices are often valued on SDE.

Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization, adjusted for one-time, non-operating or owner-specific items. Unlike SDE, it counts a market-rate salary for the work the owner does. Larger practices are often valued on adjusted EBITDA.

Add-backs

Expenses added back to reported profit because a new owner would not carry them, such as personal costs run through the business, one-time legal or moving costs, or owner pay above a market salary. Buyers test each add-back in diligence, so keep receipts and records for every one.

Valuation multiple

The number a buyer multiplies earnings (SDE or adjusted EBITDA) by to arrive at a price. Multiples vary with growth, owner dependence, payer mix and size, so no single multiple fits every practice.

Letter of intent (LOI)

A short document in which a buyer sets out the main proposed terms of a deal, such as price, structure, timing and how long you agree to negotiate only with that buyer (exclusivity). Diligence and the final purchase agreement follow the LOI.

Quality of earnings (QoE)

A detailed review of a practice's financial records, usually by an accounting firm, that tests whether reported earnings and add-backs are accurate and likely to continue. Buyers often commission one during diligence, and some sellers order one before going to market.

Working capital peg

An agreed target for the working capital the practice hands over at closing, mostly receivables less short-term bills owed. If the actual amount at closing is above or below the peg, the price moves up or down to match.

Escrow and holdback

Part of the price set aside after closing for an agreed period to cover claims, such as a statement about the practice that turns out to be wrong. With an escrow, a third party holds the money. With a holdback, the buyer keeps it until the release date.

Earnout

Extra payment you earn after closing if the practice hits agreed targets, such as revenue or profit. Ask how targets are measured and who controls the decisions that affect them.

Rollover equity

Part of your ownership that you reinvest in the buyer instead of taking as cash. You share in future growth when the buyer sells, and your stake can also lose value.

Seller note

A loan you give the buyer for part of the price, repaid over time. Seller notes are common when an individual buyer finances the purchase with an SBA loan.

Asset sale vs stock sale

In an asset sale, the buyer purchases selected assets of the practice, such as equipment, contracts and its name, and your legal entity stays with you. In a stock sale, the buyer purchases the ownership of the entity itself (shares, or membership interests in an LLC), and the entity keeps its contracts, history and liabilities. The choice affects taxes, liabilities and how contracts and licenses move, so decide it with your attorney and CPA.

Representations and warranties

Statements of fact you make about the practice in the purchase agreement, such as the accuracy of its financial statements. If one turns out to be untrue, the buyer may have a claim against you, often paid from escrow or a holdback.

Confidentiality agreement (NDA)

An agreement a buyer signs before seeing details about your practice, promising to keep that information private and use it only to evaluate the deal.

General information, not legal, tax or investment advice. Your attorney and CPA can explain how each term applies to your deal.