Communicate To Close!!

Successful transactions of lower middle market businesses have open, honest communication between the buyers and sellers. Business owners tend to be the greatest resource for information concerning the day-to-day operations of their company, and this information is ‘mission critical’ for serious, qualified buyers. Therefore, sellers should not hesitate to disclose on the front-end of the M&A process the strengths and weaknesses of their company, local market dynamics, and future growth prospects. No surprises should be the modus operandi, and often, the perceived weaknesses of sellers may be viewed as opportunities to buyers. Unsurprisingly, full disclosure builds trust between the two parties.

However, sellers should lean on their M&A Team of investment bankers, CPAs, and attorneys for nonoperational buyer-concerns. On behalf of the sellers, an experienced M&A Team will manage and execute the details of a formal sales process, including (but not limited to):

  • Negotiating the purchase price, its allocation, and deal terms;
  • Addressing potential M&A legal matters;
  • Deferring/eliminating ordinary income, capital gains, and inheritance tax;

Honest communication throughout the M&A process will deliver a successful close for everyone.


Lackadaisical buyers waste everyone’s time and money and should be avoided whenever possible. These casual buyers may be curious but lack the commitment to close, lack the resources to make an acquisition, have the resources but are unsure of the type of business, looking for a deal but far below market value, or just plain snooping with no intention of acquiring a business at all.

With the assistance of an experienced M&A Team, sellers can be certain that potential buyers will be vetted for their commitment to close. On the front end of a deal, potential buyers should:

  • Define their criteria for a purchase decision
  • Identify their sources of funding
  • When would they like to close the deal?
  • Are there any deal-breakers?
  • Other companies under consideration?

A committed buyer or ideal prospect knows exactly what they want, should be able to give specific reasons for the acquisition, can run the business effectively, has the financial capacity to acquire, and is willing to sign a nondisclosure agreement.


In merger & acquisition (M&A) transactions, the valuation and purchase price of a company normally assumes a going concern business which implies that the company will have an appropriate level of working capital to continue operations and support future growth. A purchase price adjustment is often used to assure both buyer and seller that a mutually-agreed upon level of working capital is delivered at closing.

True-Up Payments are based on the difference between the actual working capital at closing and the “Working Capital Target” agreed upon in the closing documents.

Addressing True-Up Payments in sufficient detail at the letter of intent stage adds value in many ways:

• Decreases the risk that the transaction will not close at the price expected by each of the parties.
• May eliminate pre-closing tension resulting from the parties’ differing expectations as to the impact of the adjustment.
• Buyer will have a tougher time seeking, in good faith, to use the adjustment as a purchase price reduction tool.

Experienced M&A professionals understand the advantages and disadvantages of True-Up Payments to both the buyers and sellers.


Transactions between buyers and sellers of middle market businesses are often complicated. Driven by opposing motivations and interests, both parties want the most advantageous deal for their side. Sellers must be sure to consider every offer, especially offers that are less than the asking price of their business. A “lesser” offer in hand will not only encourage other prospective buyers to the table, but structured properly, may produce the equivalent or more after-tax proceeds for the sellers.

Consider an offer from a motivated buyer for the assets of a business at a purchase price less than its asking price. By converting this offer to a stock sale, a win-win scenario can be created for both parties, whereas:

  • Buyers maintain a reduced purchase price
  • Sellers avoid corporate-level taxes (C-Corp.)
  • Buyers reduce risk of losing contracts, copyrights, or patents
  • Sellers benefit from capital gains versus ordinary income tax rates
  • If personal goodwill, buyers may record an amortizable asset

Working with an experienced M&A Team, buyers and sellers will navigate the intricacies of a transaction seamlessly, maximize their value, and reduce the tax collector’s share of the deal.


In company sell transactions, secured and unsecured promissory notes, public and private company stock, short and long term earn-outs, all consideration has to be measured to its equivalent value in cash. Equivalent cash measurements allow for the meaningful comparison of offers by Sellers, and it is necessary to enable Sellers to make rational and informed decisions.

Today, after selling their business, many Sellers wish to remain active in their industry, and have shown a willingness to accept the private company stock of Buyers. In many transactions, the stock of the Seller may be rolled-over into the ownership of the Buyers’ acquiring company, tax-free, deferring the liability until a later date.

Sellers have to seriously consider all deals offering 5% to 15% of the consideration in the Buyers’ stock. A “put option” at an acceptable strike price allows the Seller to sell the stock back to the company for cash, a liquidity guarantee. When properly structured, the Buyers’ stock may also provide the original Seller with a second opportunity to “swing for fences.”


Technology has disrupted nearly every sector of the economy, and there appears to be no slowing down or looking back from this trend. Due to the uniqueness of each deal, the numerous and varied complexities, and the amount of “hands-on” hours required to complete a transaction, the investment banking industry has proven to be a difficult sector to disrupt with technology. For these reasons, it will likely remain unchanged in these capacities, but the investment banking industry has not escaped the grasp of innovation completely.

For investment bankers, especially those selling a business, it’s no longer a question of “who you know” or the size and quality of your Rolodex, but about Big Data, access, and creativity. With access to extensive databases of qualified prospective buyers and a creative approach, boutique investment banks are now competing with regional and national players on some of the best deals.

People and relationships will always be the driving force of business, but technological advances in the investment banking industry have leveled the playing field and have forever changed the art of the deal.

Teamwork Makes the Dreamwork!

Selling a middle market business is a multifaceted process that requires tremendous preparation, patience, and strategic positioning. With the uncertainty of capital markets, the unpredictability of prospective buyers, and a business to run, business owners will find themselves well-served by assembling an experienced M&A Team to manage and execute a formal sales process. At a minimum, a solid team of advisors should include and be most helpful with the following:
  • Investment Banker – calculate a business valuation range, advise on timing the sale, provide recent comparable sales, present a list of buyers (both, strategic and financial);
  • Deal Attorney – understand M&A issues, well-versed in potential legal matters, access to business, estate planning, and tax specialists;
  • Knowledgeable CPA – provide accurate and timely financial statements; develop the most tax advantageous deal terms and allocation of purchase price; defer/eliminate ordinary income, capital gains, and inheritance tax;
Business owners with a skilled M&A Team increase their likelihood of a favorable transaction exponentially by executing the process as planned, reducing uncertainties, mitigating risks, and increasing post-tax value.


When a buy/sale deal closes, many times the interests of the buyer and seller differ. Most sellers want to take all the consideration due to them immediately, and disappear. It is rare for a buyer to not want the seller to provide a seamless transition of the operations of the business just sold by remaining involved with the company for sometime after the sale. Often times a significant part of the total cash received in a transaction will be tied to the seller’s future involvement in the business.

After-sale arrangements can take a number of different forms; the most common are:

  • employment contracts,
  • consulting agreements,
  • non-compete agreements,
  • financing a part of the deal, and
  • earn-out arrangements.

In addition to defining an after-sale role, these agreements can also serve to compensate the seller in connection with the sale, with potential tax advantages to the buyer and seller. M&A advisors must understand the potential advantages of after-sale arrangements for the client and provide for the early discussions and planning in defining the negotiating terms of the transaction for their benefit.


The physical appearance of a business’ equipment and facilities, including office, manufacturing, and warehousing space, weighs heavily with prospective buyers and must be consistent with the purchase price. Business owners who are determined to receive a premium for their business have to consider the inherent value of a fresh coat of paint, clean workspaces, an organized warehouse, and well-maintained equipment prior to the initiation of the sales process. This may also be a great time to review and update the business logo, website and marketing materials. Simply stated, a business being sold for millions of dollars should look like a million bucks!

Organized facilities and systematically-maintained equipment conveys the message that the business’ routine affairs are in order. This includes but is not limited to inventory counts, receivables/payables, financial records, and compliance records. It also suggests to prospective buyers that the necessary capital investments have been made to sustain the future growth of the business.

A small investment towards the appearance of a business improves its marketability and increases its appeal to prospective buyers.


Business owners must “build a wall” around their businesses to avoid advances from would-be competitors, and reinforce their position in the market. Barriers to entry deter new competitors from entering a market, secure the revenues and profitability of established companies, and increase the value of protected businesses. Consequently, businesses with high barriers to entry reduce their perceived risk and command premium prices from prospective buyers. To sideline aspiring competitors, consider the following barriers to entry:

  • Exclusive Agreements – with key suppliers, distributors or retailers; problematic for new entrants;
  • Economies of Scale – operational efficiencies, new technologies/processes, bulk pricing for materials; declines in unit cost allows price/profit flexibility;
  • Product Differentiation – brand identification, customer loyalty; requires major advertising spend from prospective competitors to overcome;
  • Intellectual Property – patents, trademarks, copyrights, trade/brand names, proprietary products/services, customized databases/designs, innovative product technology;
  • Switching Costs – difficult/expensive for customers to switch providers;
  • The Network Effect – value of product or service increases with each additional new/existing customer;

When updating your business plan, consider evaluating the barriers to entry with the assistance of your investments banker for the purposes of maximizing the current and future value of your business.