The Language of the Deal: Decoding the Acronyms

Transcript

SPEAKER_1: Last time we landed on this idea — buying gives you proof instead of a hypothesis. Now I want to get into the actual vocabulary, because when someone opens a listing, it's a wall of acronyms. SPEAKER_2: And the dangerous part is sellers know those terms better than most buyers do. The key idea is that each acronym is a specific lens on the business's health. Get them wrong and you overpay. SPEAKER_1: So start with SDE. Why is that the gold standard for deals in the five-to-ten-thousand-dollar range? SPEAKER_2: SDE stands for Seller's Discretionary Earnings. You take net profit, then add back the owner's salary and any discretionary expenses — think a personal phone bill run through the business. It answers the real question: what does this put in the owner's pocket each year? SPEAKER_1: Right, because a solo-run SaaS tool doesn't have a formal management salary baked in. What about EBITDA — that comes up too. SPEAKER_2: EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortisation — is used in larger private company deals as a proxy for operating performance. But it doesn't strip out the owner's personal costs, so it understates true earnings for a one-person operation. SDE is the cleaner number at this scale. SPEAKER_1: Now MRR keeps appearing. How does someone actually calculate it, and why does it matter more than just looking at annual revenue? SPEAKER_2: MRR is Monthly Recurring Revenue — active subscribers multiplied by average subscription price. The reason it beats annual revenue is speed of signal. MRR captures churn or upgrades almost immediately. Annual figures can hide a business that's quietly bleeding customers month by month. SPEAKER_1: So ARR is just MRR times twelve? SPEAKER_2: Essentially. ARR — Annual Recurring Revenue — is the normalised yearly view, useful for forecasting. But for a small acquisition, most buyers watch MRR because it's more granular. ARR gives the normalised yearly picture; MRR shows short-term movements like churn or upgrades more quickly. SPEAKER_1: That's a clean way to frame it. Now churn — what's a healthy number, and how much does it actually move the valuation? SPEAKER_2: Churn rate is the percentage of customers or recurring revenue lost in a given period. For a small SaaS business, monthly churn below two percent is generally considered healthy. High churn compresses LTV — Customer Lifetime Value — and buyers will pay a lower multiple as a result. SPEAKER_1: So a seller boasting about new signups without mentioning churn is actually a red flag. SPEAKER_2: Exactly — and here's the counterintuitive part. Suppose a business adds twenty new customers a month but loses eighteen. That looks like growth on the surface. A business growing slowly with almost no churn is far more stable and commands a higher multiple than a leaky bucket growing fast. SPEAKER_1: What about ecommerce specifically? SDE and MRR make sense for SaaS, but ecommerce is more transactional. What are the key metrics there? SPEAKER_2: Two big ones. LTV — Customer Lifetime Value — estimates the net profit a business expects to earn from a customer over the entire relationship. CAC — Customer Acquisition Cost — is the average marketing spend to win one new customer. Together they reveal whether growth is actually profitable or just expensive. SPEAKER_1: And that connects to the LTV:CAC ratio. What's the benchmark listeners should remember? SPEAKER_2: Many investors look for a ratio significantly above one — often three-to-one as a rough benchmark — as a signal that growth economics are attractive. For example, if a business spends thirty dollars acquiring a customer who only ever spends twenty-five dollars total, that's a structural problem no marketing fixes. SPEAKER_1: Now the question everyone would want answered — why might a high valuation multiple still be a trap rather than a steal? SPEAKER_2: Because a high multiple reflects expectations, not guarantees. Revenue might be concentrated in two or three customers — lose one and the SDE calculation collapses. Or growth looks explosive because of a one-off promotion that won't repeat. The multiple is the market's opinion. Due diligence is how you test whether that opinion is earned. SPEAKER_1: And DD — due diligence — that's the formal investigation period, not just a quick look at a spreadsheet. SPEAKER_2: Correct. DD is the buyer's systematic investigation of financial, legal, operational, and regulatory aspects of the target. For small businesses it typically runs four to eight weeks. The takeaway for our listener: SDE tells you what the business earns. MRR and churn tell you how reliably it earns it. LTV and CAC tell you whether growth is sustainable. Master those, and every listing starts to speak clearly.