Economic uncertainty, volatility in the capital markets, and financing restrictions have created a challenging environment for committed buyers and sellers in the lower middle market. Foremost, valuations have come under deep scrutiny. Having reached all-time highs prior to the pandemic, buyers and sellers may find it difficult to align valuation expectations. Some considerations for both parties to creatively bridge the valuation gap:
- Earnouts – arguing for “COVID add backs” due to the extraordinary, one-time nature of the pandemic, sellers may obtain the full value for their business through an earnout. A simple, well-defined package, including performance metrics, time frame, and strategic plan, will align the buyer’s business objectives with the seller’s incentives.
- Buyer’s Stock – to preserve cash, buyers may consider using their own stock to fund a purchase. Sellers may benefit from the future growth of the business, and if structured properly, may realize some tax advantages.
- Seller’s Note – to preserve cash or if access to capital is an issue, buyers may request a Seller’s Note. Often loathed, a Seller’s Note may protect the purchase price, provide interest on the note, and have favorable tax consequences for sellers.
Despite the unprecedented circumstances of the current market, a knowledgeable M&A team can help you navigate the process and deliver a viable solution.