Recently, I was discussing with a good friend and long-time client the past financial successes of her company. Its continued annual growth in revenues, net income, and earnings before interest taxes depreciation and amortization (EBITDA) was extraordinary. Should she continue with the Company’s compounding growth and ride it to the glass ceiling of mid-size companies or sell?

Determining the right time to sell a Company at its maximum value is not a luxury afforded to many owners; however, it is not entirely out of the question. The inconsistent phenomena of a business positioned in the right place at the right time, a bubble, cycle, or roll-up does occur. Value multiples increase to 7 – 10 times EBITDA versus the historic valuation multiples of 3 – 6 times EBITDA. Value is best determined in the context of the business’ strategic fit, growth strategy, industry specifics or timing.

Owners must seriously consider the opportunity to sell out when premiums in value may be realized.  Investment professionals should be able to provide guidance on identifying the occurrence and duration bubbles, cycles and roll-ups.


he due diligence process in an M&A transaction involves a legal, financial, and operational review of all the seller’s documents, including contractual relationships, operating history, and organizational structure. Due diligence is a process and a test of the value proposition underlying the transaction to ensure that the seller’s company meets the expectations created before the signing of the Letter of Intent.

Due diligence begins with a standard comprehensive due diligence checklist; however, sellers should expect any perceived risks identified by the buyer to be investigated thoroughly with several follow-up checklist in tow.

Due diligence work is divided between two efforts:

  1. Financial and operational due diligence – confirmation of past financial performance; synergies and economies of scale to be achieved; integration of the human and financial resources of the two companies; and collection of information necessary for financing the transaction.
  2. Legal due diligence – legal issues and problems that may serve as impediments to the transaction; the transaction structure; and the contents of the transaction documents, representations and warranties.

An experienced M&A Team understands the invasive nature of due diligence and can assist sellers throughout the process.


Most private companies have an opportunity to double their value over a 3 – 5 year period by adopting a disciplined approach to reducing risk and increasing quality. A preliminary valuation performed by an experienced M&A professional will identify many of these “risk areas,” and may be used as a road-map to strengthen the business, prepare it for long-term growth, and maximize its sales value.

As a general framework, consider the following:

  • Planning – strategic planning, target market, competition, product/market development
  • Leadership – board of directors, senior management team, corporate culture
  • Sales – team, strategy, operations, projections, geography served, customer base
  • Marketing – team, strategy, positioning, branding, financial resources
  • People – organizational structure/strategy, incentives, policies/procedures, scalability
  • Operations – team, strategy, efficiencies, supply chain, quality assurance, scalability
  • Finance – team, strategy, sustainability, balance sheet, internal controls
  • Legal – litigation, intellectual property, contracts/agreements, licenses, filings

The most significant financial transaction of an owner’s life may be the sale of his/her company. Early planning for maximizing the sales value of a company is the first step in a successful exit plan.


For business owners, there is a subtle balance between making the necessary decisions to successfully run their business day-to-day and focusing on the long-term value of their business. The actual realization of that value, an eventual exit, should always be present in the owner’s current strategies. The objective is for owners to make decisions that are good for today’s success, but also preserve the company’s long-term value.

Business owners should make periodical analysis of the value drivers of their business. Owners should consider obtaining a preliminary valuation with detailed analyses of the business’s value drivers to provide a more strategic and tactical plan for current operations. Preliminary valuations/analysis not only establish value, but also provide a tool for owners to re-engineer their businesses, even when a sale of the business is not imminent.

Informal valuations are a very valuable tool for running a business. Experienced mergers and acquisitions advisors agree that what makes a business valuable upon its sale is also what makes it valuable while it is being run. Business owners, who are willing to take the long view, will find this approach very successful.

Hire an M&A Advisor?

Upon engaging an M&A Advisor to sell their business, a seller can expect an Advisor to find a buyer for the business at the highest possible price with the most advantageous terms. An M&A Advisor would provide the following services to accomplish this goal:

  • Provide the seller with a preliminary business valuation; confirming the expectations of the seller with the realities of the marketplace. M&A Advisors are a great source of information on current market conditions, issues related to pricing and financing, and many other facets of the transaction process.
  • Develop a Confidential Information Memorandum of the company; detailing the business and market for potential buyers.
  • Prepare a marketing strategy for conducting buyer searches and marketing the business to prospective buyers. Qualify and pre-screen buyers for their ability to financially complete the purchase.
  • Coordinate negotiations and provide deal structuring advice; making the sale progress smoothly.
  • Facilitate the transaction until the sale is complete.

Most importantly, an M&A Advisor ensures confidentiality of the sale and provides the seller with the ability to stay focused on their business during the entire sale process.

Valuations: To Sell or To Grow?

The uses of business valuations are almost unlimited: buy/sell agreements, fairness opinions, purchase price allocations, estate planning, gift taxes, charitable contributions, shareholder transactions, Employee Stock Option Plans (ESOPs), solvency and insolvency opinions, collateral valuations, litigation support, etc.

In the context of selling one’s business, clarifying the seller’s goals, and measuring those goals’ financial needs with the proceeds from selling the business may best be determined by a valuation of the business. An impartial sell-side valuation may determine the need for the owner’s further preparation of the company for sale or give the “green light” to proceed with the sale of the company.

Buyers in most acquisitions attempt to acquire companies at a price no greater than its fair market value. The buy-side valuation of a target company may result in a quick decision to proceed with the acquisition or move to a new target.

Valuation analysts use two types of engagements, a Valuation or a Calculation, to estimate a company’s value. The analysts may render his or her conclusions in a verbal or written report; a valuation report communicates results as a conclusion of value, and a calculation report communicates results as a calculation of value.

First Date

In Merger & Acquisition activity, the anticipation of the first meeting with a potential Buyer may be very intimidating for the Seller. The Seller must be relaxed, open, honest and friendly; however, the Seller must be prepared and rehearsed to answer several questions:

  • Why are you selling?
  • What are you going to do after the sale?
  • Does the culture of the two companies fit?
  • How good is the future?
  • What are the hidden opportunities and risks?

The first meeting does constitute a preliminary negotiation and impressions are being made that will inform the parties throughout the transaction. There is a certain amount of irony in the first meeting in that the prospective Buyer will do most of the selling. The Seller must listen carefully and answer factual questions but does not need to aggressively sell. In the words of Jack Welsh, the Seller “might as well tell the truth, since everyone knows it anyway.”

The inevitable question will arise as to “how much you want for the company.” The answer should be left to the investment banker. The success of the first meeting for the Seller should be measured by the deepen interest of the Buyer to purchase the Company.


Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA, is one indicator of a company’s financial performance, and is often used to calculate the earnings potential of a business.

Earnings are measured in terms of the approximate cash flow of the business to the owner(s) before income taxes and interest expense. Eliminating the tax effects and cost of debt allows prospective buyers to compare alternative investments and disregard the current financing structure of the business. In addition to income taxes and interest expense, depreciation and amortization have no immediate impact on the cash flow of the business, and therefore, must be included in earnings. As such, the formula for EBITDA is:

EBITDA = Net Profit + Interest Expense + Income Taxes + Depreciation + Amortization

Although Charlie Munger, Warren Buffet’s longtime business partner, stated that, “every time you see the word EBITDA, you should substitute the word ‘BS Earnings,’” EBITDA continues to experience widespread use. An experienced M&A Team understands the shortcomings of EBITDA and will be able to assist buyers and sellers in their decision-making process.


Sellers of middle market companies rarely receive all cash offers for their companies, and therefore, must compare multiple offers by weighing each component of consideration in accordance with its cash equivalency as a baseline. The two most common standards for weighing the components of consideration include: the time value of money and the probability of collection.

The time value of money standard states that a dollar in the bank today is worth more than a reliable promise or expectation of receiving a dollar at some future date. The calculation considers interest rates, number of periods, payments, present value, and future value. The probability or likelihood of collection is reduced most significantly by:

  • Post-transaction buyer remorse
  • Bumps and bruises acquired from pre-transaction negotiations
  • Miscommunication and misunderstanding of earnout agreements
  • Post-transaction manipulation of company’s financial performance

With a weighting protocol established, these basic financial management concepts allow sellers and their M&A Team to calculate the respective cash equivalencies of the multiple offers on the table. The collective team may then discuss, rank, and identify the best offer.


Executing a Letter of Intent (LOI) constitutes a critical juncture in merger and acquisition (M&A) activity, so why is an LOI for the most part nonbinding? A seller simply cannot afford the distraction, time and expense involved in having multiple prospective buyers simultaneously reviewing the seller’s confidential documents and performing due diligence.

The fact that LOIs are nonbinding gives rise to three very serious considerations on the seller’s part:

  1. Thoroughness of the business terms.
  2. Assessment, evaluation and disclosure of all risk.
  3. Accuracy of the data that the LOI is based.

When the seller of a business receives an inadequate Letter of Intent (LOI), the seller should not hesitate to create a “Reverse LOI” that eliminates the original LOI’s shortcomings. In the absence of serious changes in the context of a transaction, attempts to change a LOI terms after signing reflect poorly on the seller and/or buyer’s acumen and integrity.

Successful M&A transactions should be win-win events that produce value for both buyer and seller. Although celebrated, the signing of the LOI signifies the beginning of the negotiations to close the deal when the value and significance of the buyer and seller’s M&A teams will be earned.