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.

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.

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.

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.”

• 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;