The ETA Glossary: 50 Terms Every Searcher and Investor Should Know

A plain-English reference guide to the language of entrepreneurship through acquisition, search funds, and SME investing.

The ETA and search fund world has its own vocabulary. Some of it is borrowed from private equity. Some is specific to the search fund model. Some is plain financial terminology that gets used in particular ways in the context of SME acquisitions.

This glossary covers 50 of the most important terms you will encounter as a searcher, an investor, or anyone else engaging seriously with the ETA ecosystem. Definitions are written for clarity, not completeness. Where a term has nuance worth flagging, it is flagged.

A

Accelerator-Sponsored Searcher

A buyer who operates within a structured support organisation, sometimes called a studio or incubator, that provides infrastructure, mentorship, investor access, and in some cases capital during the search phase. In return, the accelerator takes an equity stake in whatever business the searcher eventually acquires. The model reduces the isolation and resource constraints of going it alone, at the cost of diluting the searcher's eventual equity position.

Add-On Acquisition (also: Bolt-On)

A secondary acquisition made after the platform business has been purchased. Add-ons are typically smaller than the platform and are bought to expand the group's revenue, customer base, geographic reach, or capabilities. In a buy-and-build strategy, add-ons are the primary mechanism of value creation beyond organic growth.

Adjusted EBITDA

See: Normalised EBITDA.

Asset Purchase vs. Share Purchase

The two primary legal structures for acquiring a business. In an asset purchase, the buyer acquires specific assets and liabilities of the business rather than the company itself. In a share purchase, the buyer acquires the entire legal entity, including all its historical liabilities. Share purchases are more common in SME acquisitions in the UK. The distinction has significant tax and legal implications for both buyer and seller.

B

Bolt-On

See: Add-On Acquisition.

Buy-and-Build

An acquisition strategy in which a buyer acquires a platform business and then makes a series of further acquisitions in the same sector to create a larger, more valuable group. Value is generated through operational integration, cost efficiencies, revenue synergies, and the multiple expansion that comes with increased scale. Distinguished from a roll-up by its typically more measured pace and deeper operational integration focus.

C

Capital Stack

The full structure of financing used to fund an acquisition, from the most senior (and least risky) tranche to the most junior (and most risky). In a typical SME acquisition, the capital stack runs from senior debt at the bottom, through seller loan notes and mezzanine finance where present, to equity at the top. Each layer has different security, return expectations, and priority in the event of distress.

Carried Interest (Carry)

The share of investment profits earned by a fund manager or investment vehicle above a defined return threshold, typically expressed as a percentage of gains rather than capital deployed. In co-investment syndicates, carry is the economic mechanism that aligns the interests of deal organisers with those of co-investors.

Confidential Information Memorandum (CIM)

A detailed document prepared by a seller or their adviser describing a business available for acquisition. A CIM typically covers the company's history, financial performance, market position, customer base, management team, and growth opportunities. Quality varies considerably in the SME market, where many businesses sell without professional advisers and documentation is informal. Also referred to as an Information Memorandum (IM).

Customer Concentration

The degree to which a business's revenue is dependent on a small number of customers. High customer concentration, where one or a handful of clients account for a disproportionate share of revenue, is a significant risk factor in SME acquisitions. The loss of a single large customer can materially impair the business's cash flow and, in turn, its ability to service acquisition debt. Most lenders and investors apply a concentration discount when evaluating businesses with this characteristic.

D

Debt Service Coverage Ratio (DSCR)

A measure of a business's ability to service its debt obligations from its operating cash flow. Calculated as EBITDA (or free cash flow) divided by total annual debt service (interest plus principal repayments). Lenders typically require a DSCR of at least 1.3 to 1.5 times for SME acquisition finance, meaning the business generates 30 to 50% more cash than is needed to cover its debt payments. A DSCR below 1.0 means the business cannot service its debt from operations.

Deferred Consideration

Any portion of the purchase price that is paid after the transaction closes, rather than at completion. The most common form in SME acquisitions is the seller loan note, where the vendor agrees to receive a portion of the price over time. Earnouts are another form of deferred consideration, where the amount paid depends on the future performance of the business.

Due Diligence

The structured investigation of a business prior to acquisition, covering its financial performance, legal standing, commercial position, operations, and key relationships. In owner-managed businesses, due diligence frequently surfaces issues that are not visible in the headline numbers: undocumented supplier arrangements, personal expenses run through the business, customer relationships dependent on the seller, or management accounts that do not reconcile cleanly with filed accounts. The quality of a buyer's due diligence is one of the most reliable indicators of their seriousness as an operator.

E

Earnout

A form of deferred consideration in which the seller receives additional payments after close, contingent on the business achieving specified financial targets over an agreed period. Earnouts are used to bridge valuation gaps between buyer and seller, but they are a frequent source of post-acquisition tension if targets are ambiguous or if the buyer's operational decisions affect the seller's ability to achieve them. Well-drafted earnout provisions are precise about the metrics used and the extent to which the buyer can influence them.

EBITDA

Earnings Before Interest, Tax, Depreciation, and Amortisation. The primary measure of operating profitability used in SME acquisitions. EBITDA is used as the basis for acquisition pricing (expressed as a multiple of EBITDA), lender underwriting, and investor return modelling. It is not the same as cash flow: a business with strong EBITDA can still have poor cash conversion if it has high working capital requirements or significant capital expenditure needs.

EBITDA Multiple

The ratio of the acquisition price to the business's EBITDA. A business acquired for £2 million with £400,000 of EBITDA is being bought at a five times multiple. Multiples in the SME market vary by sector, size, growth profile, and competitive dynamics. Smaller businesses typically trade at lower multiples than larger ones. Multiple expansion at exit, selling at a higher multiple than you paid, is one of the primary return levers in ETA.

Entrepreneurship Through Acquisition (ETA)

The practice of acquiring an existing, profitable business rather than building one from scratch, with the intention of operating it and generating value over a defined hold period. ETA encompasses several distinct models, including traditional search funds, self-funded searches, accelerator-sponsored searches, independent sponsor deals, and buy-and-build or roll-up strategies.

Equity Gap (Gap Equity)

The shortfall between the total capital available from senior debt, seller loan notes, and committed lead equity, and the full acquisition price. The equity gap must be filled before a transaction can close. It arises for several reasons: a deal price higher than anticipated, lender constraints, search investors passing on or reducing their commitment, seller note limitations, or, in the case of self-funded searchers and independent sponsors, the absence of any pre-committed equity at all. Filling the gap is often the final, most time-pressured challenge in closing an SME acquisition.

Exit

The event through which investors and operators realise the value created during the hold period, typically via a sale to a strategic buyer, a private equity firm, or another acquisition entrepreneur. The exit multiple relative to the entry multiple, combined with EBITDA growth during the hold period and the effect of leverage, determines the ultimate investor return. Exit timing and preparation are as important to final returns as operational performance during the hold.

F

First Refusal Rights (Right of First Refusal)

The contractual right held by search capital investors in a traditional search fund to participate in the acquisition financing before the searcher approaches outside investors. If a search capital investor declines to exercise their right, the allocation can be offered to others. First refusal rights are the primary economic incentive for investors to provide search capital in the early stage of the model.

Free Cash Flow

The cash generated by a business after meeting its operating costs and capital expenditure requirements. Free cash flow is the figure that actually services debt, funds growth, and is ultimately available to equity holders. A business with strong EBITDA but heavy capital expenditure requirements or working capital consumption may have significantly lower free cash flow than its headline earnings suggest. Buyers who focus exclusively on EBITDA without understanding cash conversion are taking on risk they may not have priced.

G

Gap Equity

See: Equity Gap.

H

HoldCo (Holding Company)

A legal entity that owns and governs one or more operating businesses without itself conducting trading activities. In buy-and-build and roll-up strategies, the HoldCo sits above the acquired businesses in the corporate structure, providing a consolidated governance layer, a clean framework for managing debt across the group, and a straightforward exit path for investors. The HoldCo structure also allows individual operating businesses to be sold or restructured without affecting the rest of the group.

Hold Period

The length of time between acquisition and exit. In traditional search funds, the hold period is typically five to seven years. In more aggressive buy-and-build or roll-up strategies, it may be shorter. The hold period is the window during which operational value creation, debt paydown, and earnings growth translate into investor returns.

I

Independent Sponsor

A buyer who identifies a specific acquisition target and then raises the equity capital needed to close the deal, rather than operating with a pre-committed pool of capital. Independent sponsors earn deal-by-deal economics: a transaction fee at close and carried interest on profits. The model requires strong deal origination capability, an existing investor network, and the financial resilience to work without a guaranteed salary until a transaction closes.

Information Memorandum (IM)

See: Confidential Information Memorandum.

Internal Rate of Return (IRR)

A measure of investment return that expresses the annualised rate at which capital grows over the life of an investment, accounting for the timing of cash flows in and out. IRR is the primary return metric used in ETA and search fund investing. A higher IRR achieved over a shorter hold period is generally preferable to the same IRR over a longer period, since capital is returned to investors sooner and can be redeployed.

K

Key Man Risk

The risk that a business is critically dependent on one individual, typically the founder or a single senior employee, whose departure would materially impair the business's performance or relationships. Key man risk is extremely common in owner-managed SMEs, where the founder may be the primary customer relationship holder, the technical expert, or the sole decision-maker. Identifying and mitigating key man risk is one of the central challenges in SME due diligence and post-acquisition transition planning.

L

Lead Equity

The primary equity capital committed to an acquisition, typically provided by the searcher's core investor group. Lead equity sits at the top of the capital stack, bears the most risk, and captures the majority of upside. In a traditional search fund, lead equity comes from the investor group assembled during the search phase. In self-funded and independent sponsor deals, it is raised directly for a specific transaction.

Letter of Intent (LOI)

A non-binding document that sets out the key proposed terms of an acquisition before formal legal agreements are drafted. An LOI typically covers the proposed price, deal structure, exclusivity period, and the key conditions to close. While non-binding on price and structure, an LOI typically includes a binding exclusivity clause that prevents the seller from negotiating with other buyers during the due diligence period.

Leverage

The use of debt to finance a portion of an acquisition, amplifying the equity return on invested capital. Because debt is cheaper than equity and is serviced by the business's own cash flows, leverage allows equity investors to achieve higher returns on a smaller capital outlay. However, leverage also amplifies downside: a business that underperforms may struggle to service its debt, putting equity value at risk. Appropriate leverage levels depend on the stability and predictability of the business's cash flows.

M

Management Accounts

Internally prepared financial statements, typically produced monthly or quarterly, that provide an up-to-date view of a business's performance. Unlike statutory accounts filed at Companies House, management accounts are not audited and their quality varies significantly in SME businesses. A buyer's ability to understand, challenge, and reconcile management accounts against filed accounts is a core due diligence skill.

Management Buyout (MBO)

An acquisition in which the existing management team of a business buys it from its current owner, typically backed by external investors and debt financing. MBOs share structural similarities with ETA deals but involve an incumbent management team rather than an incoming operator. They are more common in larger businesses where the management team has the resources and track record to attract institutional backing.

Mezzanine Finance

A hybrid layer of capital that sits between senior debt and equity in the capital stack. Mezzanine finance carries a higher interest rate than senior debt, reflecting its subordinate position and higher risk, and may include equity conversion rights or warrants. It is used to bridge the gap between what senior lenders will provide and what equity investors are willing to fund. Less common in smaller SME deals but increasingly relevant as deal sizes grow.

MOIC (Multiple on Invested Capital)

A measure of investment return that expresses the total value returned to an investor as a multiple of their original capital commitment. A 3.0 times MOIC means an investor received three pounds back for every pound invested. MOIC is complementary to IRR: a high MOIC over a short hold period generates a high IRR, while the same MOIC over a longer period generates a lower one. Both metrics are used in ETA investing, but MOIC is often more intuitive for first-time investors.

N

Non-Disclosure Agreement (NDA)

A confidentiality agreement signed before a seller shares detailed information about their business with a prospective buyer. NDAs are standard practice in acquisition processes and typically restrict the buyer from disclosing or using the information provided other than for the purpose of evaluating the transaction. In the SME market, NDAs are often lightweight documents, but their existence signals a baseline of professional conduct in the process.

Normalised EBITDA (also: Adjusted EBITDA)

EBITDA adjusted to reflect the true underlying earnings of the business by removing one-off, non-recurring, or owner-specific items. Common adjustments include: replacing the owner's above-market salary with a market-rate management cost, removing personal expenses run through the business, excluding one-off revenue or cost items, and adjusting for related-party transactions at non-market rates. Normalised EBITDA is the figure used for acquisition pricing and lender underwriting. Understanding and scrutinising normalisation adjustments is one of the most important skills in SME due diligence.

O

Operator

In the ETA context, the individual who acquires and actively manages the acquired business post-close. The operator is distinguished from a passive investor by their day-to-day involvement in running the business. In search funds, the searcher becomes the operator. In independent sponsor deals, the operator may or may not be the same person who sourced and structured the transaction.

Owner-Managed Business (OMB)

A business in which the owner is also the primary manager, typically a founder who has built the business over many years and is closely involved in its operations. Owner-managed businesses are the primary targets in ETA transactions. They are characterised by strong operational knowledge held informally by the founder, limited management infrastructure, personal customer and supplier relationships, and, frequently, significant operational upside for a professional incoming operator.

P

Platform Acquisition

The first, and typically largest, acquisition in a buy-and-build or roll-up strategy. The platform business serves as the operational and legal foundation for subsequent add-on acquisitions. Selecting the right platform is the most consequential decision in a consolidation strategy: it needs to be financially sound, operationally capable of absorbing add-ons, and positioned in a sector with sufficient fragmentation to support a meaningful acquisition programme.

Pro-Rata Rights

The right of an existing investor to maintain their proportional ownership in a business by participating in future funding rounds or deal tranches in proportion to their existing stake. In traditional search funds, search capital investors typically receive pro-rata rights to participate in the acquisition financing alongside their converted search capital.

Proprietary Deal Flow

Acquisition opportunities identified and pursued directly by a buyer, without going through a broker or formal sale process. Proprietary deal flow is widely considered the most attractive source of acquisition targets in ETA, because it typically involves less competition, more flexible deal structures, and sellers who are motivated by factors beyond maximising price. Generating proprietary deal flow requires sustained, systematic outreach to business owners, professional advisers, and sector contacts.

Q

Quality of Earnings (QoE)

A formal financial analysis, typically conducted by an accounting firm during due diligence, that examines the sustainability, accuracy, and composition of a business's reported earnings. A QoE report assesses normalisation adjustments, revenue recognition practices, working capital dynamics, and the reliability of management accounts. It is the primary tool for validating the EBITDA figure on which an acquisition price is based, and it is increasingly expected by lenders in SME acquisition financing.

R

Roll-Up

An aggressive acquisition strategy that involves buying multiple businesses in a fragmented sector in rapid succession, with the explicit objective of creating a larger entity that commands a premium exit multiple. The primary value driver is multiple arbitrage: acquiring businesses individually at lower multiples and selling the consolidated group at a higher one. Roll-ups require more capital, faster execution, and a clearer integration thesis than buy-and-build strategies, and carry correspondingly higher execution risk.

S

Search Capital

The initial funding raised by a traditional search fund searcher to cover the costs of the search phase: salary, travel, adviser fees, and deal evaluation costs. Search capital is not used to acquire a business. Investors who provide search capital receive preferential rights to participate in the acquisition financing when a deal is found, as compensation for bearing the risk that no deal may ever close.

Search Fund

A vehicle through which an individual raises capital from investors to fund a dedicated search for a single business to acquire and operate. The model was developed at Stanford Graduate School of Business in the 1980s and is the most extensively studied form of ETA. Stanford's biennial Search Fund Study tracks returns across nearly 700 funds since 1984.

Searcher

An individual pursuing a business acquisition through one of the ETA models: traditional search fund, self-funded search, accelerator-sponsored search, or independent sponsor. The term is most commonly used to describe someone actively in the search phase, though it is sometimes used more broadly to encompass all acquisition entrepreneurs regardless of model.

Self-Funded Searcher

A buyer who funds their own search period rather than raising institutional search capital. Self-funded searchers bear more personal financial risk during the search but retain more equity at acquisition and operate with greater autonomy. The model is particularly well suited to buyers with sufficient personal financial runway and a clear sector focus.

Seller Loan Note (Vendor Loan Note)

A form of deferred consideration in which the seller agrees to receive a portion of the purchase price over time, at an agreed interest rate, rather than in full at close. The seller loan note reduces the immediate cash requirement at completion and aligns the seller's interests with a smooth transition. It sits in the capital stack between senior debt and equity. Not all sellers will accept one, and those who do typically want to see a credible debt service plan and a clear understanding of their priority position if the business underperforms.

Senior Debt

The most secure and lowest-cost tranche of acquisition financing, provided by a bank or specialist lender and secured against the assets and cash flows of the acquired business. Senior debt is repaid first in the event of a business failure, which is why lenders accept a lower return than equity investors. The amount of senior debt available is constrained by the lender's assessment of the business's ability to service the debt from its existing earnings, typically expressed as a multiple of EBITDA.

Special Purpose Vehicle (SPV)

A separate legal entity created for the specific purpose of holding an investment or conducting a transaction. In ETA co-investment structures, an SPV is frequently used to aggregate multiple investors into a single legal entity that then participates in the acquisition. The SPV simplifies the cap table of the acquired business, limits individual investor liability, and provides a clean legal structure for managing distributions and exits.

Step-Up

A mechanism by which an investor's capital converts into equity at a higher value than the original investment, as compensation for bearing early-stage risk. In traditional search funds, search capital investors receive a step-up when their initial investment converts into equity at acquisition, reflecting the risk they took during the search phase before any business was identified.

Succession Gap

The structural mismatch between the large number of owner-managed businesses whose founders are approaching retirement and the limited availability of credible internal or family successors to take them over. The succession gap is the fundamental market condition that makes ETA attractive: it creates a sustained supply of profitable, well-established businesses that need a transition partner rather than a buyer motivated purely by price.

V

Vesting

The process by which a searcher earns their equity stake in the acquired business over time, typically tied to continued involvement as operator. Vesting schedules protect investors against the risk of the operator leaving shortly after acquisition with a full equity stake. A typical vesting schedule might vest 25% of the searcher's equity at the end of year one (a cliff), with the remainder vesting monthly or quarterly over the following three to four years.

W

Working Capital

The capital required to fund a business's day-to-day operations: the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term obligations). Working capital is frequently misunderstood in SME acquisitions. A business that looks profitable on an EBITDA basis may require significant ongoing capital to fund its operations, particularly if it has long payment cycles, seasonal revenue patterns, or high inventory requirements. Changes in working capital at close, and the level included in the acquisition price, are a common source of post-completion disputes.

A Note on Usage

Some of these terms are used consistently across the industry. Others, particularly those specific to search funds, carry different nuances depending on whether you are speaking to a US or European practitioner, an institutional search fund investor, or an independent sponsor. Where terms are used differently in different contexts, the definitions above reflect the most common usage in the UK and Western European ETA market.

This glossary will be updated as the market evolves and new terminology emerges.

Alexander Kalis is the Founder and CEO of Archimax Global Solutions (archimax.solutions). Archimax is an information and deal-discovery platform for the entrepreneurship-through-acquisition and search fund community, at archimax.io.