Tag Archive for: DealProcess

What Business Owners Should Know About Private Equity Buyers

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Since Allston Advisory Group’s founding in 2010, the private equity landscape has changed considerably. Around 2010, the United States had approximately 2,300 private equity firms. By 2024, that number had increased to approximately 6,000 firms. The number of private equity backed companies has also grown substantially. PitchBook data indicates approximately 6,400 U.S. companies had private equity backing in 2010. That figure approached 12,000 by 2024. For business owners considering selling to private equity, this growth has created a larger and more diverse universe of potential buyers.

Over the intervening years, private equity also expanded further into the lower middle market. Firms developed increasingly specialized strategies based on industry, geography, company size, and transaction type. For business owners, this expansion has created a much larger and more diverse universe of potential financial buyers.

However, more private equity firms do not necessarily mean more qualified buyers for every company. Each firm has a specific investment criteria, capital requirements, and return expectations. An experienced M&A advisor must therefore identify firms whose strategies align with the company and seller’s objectives.

Platform and Add-On Acquisitions

Private equity firms generally pursue acquisitions as either platform investments or add-on acquisitions. Understanding the distinction may help sellers evaluate the buyer’s strategy and potential transaction structure. A platform acquisition establishes or expands the private equity firm’s primary investment within a particular industry. The platform typically has sufficient scale, management, infrastructure, and market position to support future growth.

After acquiring a platform, the private equity firm may invest additional capital to expand the business. Growth may occur organically or through subsequent acquisitions. As the platform develops, management may pursue geographic expansion, new services, additional customers, or complementary capabilities. The private equity firm may also provide strategic resources and acquisition expertise.

An add-on acquisition involves purchasing a company that complements an existing platform investment. The platform company often participates directly in evaluating and completing the acquisition. Add-ons may provide new customers, geographic markets, employees, services, technology, or specialized capabilities. They may also create purchasing efficiencies or other operating benefits.

For the seller, the distinction may materially affect the transaction. A platform buyer may expect the existing management team to continue operating and growing the company. An add-on buyer may have different plans. It could integrate accounting, technology, purchasing, human resources, sales, or other functions into the existing platform.

The seller should therefore understand the buyer’s integration strategy and expected post-closing role before accepting an offer. The distinction may also affect value. A platform or add-on buyer may identify synergies unavailable to other financial buyers. Those benefits may influence how much a particular buyer is willing to pay.

Where rollover equity is involved, the buyer’s strategy becomes even more relevant. Sellers may retain an ownership interest in the platform rather than only their former company. If the platform grows and later sells successfully, the seller may participate in that additional value creation. This potential outcome is sometimes called the “second bite of the apple.” However, rollover equity also carries investment risk and reduced control. Sellers should evaluate both the initial transaction and their continuing investment before committing capital.

Transaction Structures May Vary

Selling to private equity does not necessarily require an owner to exit completely. Private equity can support several transaction structures and seller objectives. An owner may pursue an outright sale and transition toward retirement. Another may complete a recapitalization while retaining meaningful equity ownership.

Likewise, private equity can provide capital for growth, acquisitions, or ownership transitions. It can also support management teams purchasing businesses from existing owners. Rollover equity can give sellers another opportunity to participate in future growth. However, sellers exchange immediate liquidity for continued investment risk.

Evaluating More Than Purchase Price

Private equity firms may differ substantially in structure, risk, and post-closing expectations. Sellers should therefore evaluate more than headline purchase price. Beyond the economics, owners should understand the firm’s investment philosophy and expected holding period. They should also evaluate governance, management expectations, and plans for the business. The portfolio company’s role may also matter when an add-on buyer leads the transaction.

An experienced M&A advisor will identify firms whose investment criteria match the company and seller’s objectives. The advisor may also create competition among qualified financial and strategic buyers. For the right owner, selling to private equity may provide liquidity while creating opportunities for continued growth and participation. The right structure depends on what the seller wants the transaction to accomplish.

Quality of Earnings from Both Sides of an M&A Transaction

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Reported EBITDA often plays a central role in determining business value. However, buyers need confidence that those earnings are accurate and sustainable. A Quality of Earnings analysis examines the financial performance underlying reported earnings. It helps distinguish recurring operating results from unusual or nonrecurring activity. The analysis commonly examines revenue recognition, expenses, accounting policies, working capital, and normalized EBITDA. It may also evaluate customer trends and other financial risk. Both buyers and sellers may commission a Quality of Earnings, or QofE, analysis. However, each side approaches the process with different objectives.

Buy-Side Quality of Earnings

After signing a Letter of Intent, buyers typically conduct extensive confirmatory due diligence. A buy-side QofE often becomes a significant component of that review. The buyer’s accounting professionals test the financial information presented during the sale process. They also evaluate whether normalized EBITDA provides a reasonable measure of ongoing earnings. Their analysis may address:

  • Revenue recognition and revenue trends
  • Gross margins and sales mix
  • Customer concentration and retention
  • Owner and management compensation
  • Nonrecurring income and expenses
  • Accounting policies and estimates
  • Working capital requirements
  • Monthly and trailing twelve month performance

At this phase, unexpected findings may materially affect negotiations. A buyer may challenge EBITDA adjustments, purchase price, or the working capital target.

Sell-Side Quality of Earnings

A sell-side QofE reverses the timing. The seller commissions the analysis before entering the market or before receiving an LOI. Ahead of buyer scrutiny, this process allows the seller to identify financial issues before prospective buyers discover them. The analysis may also validate normalized EBITDA and strengthen support for legitimate adjustments. In addition, management may correct reporting inconsistencies and prepare explanations for unusual results. With greater visibility, the M&A advisor may present the company’s financial performance more confidently and anticipate likely buyer questions.

Quality of Earnings and SBA Financing

Quality of Earnings analysis has also become increasingly relevant in SBA-financed business acquisitions (i.e., deal size <$5M). SBA lenders must carefully evaluate historical financial performance and the borrower’s ability to repay acquisition debt. For change-of-ownership transactions, SBA procedures require lenders to verify seller financial information against tax records. This process places additional scrutiny on the earnings supporting the acquisition.

Within this lending environment, some SBA lenders may require or strongly encourage an independent QofE report for certain acquisitions. The requirement may depend on the transaction size, complexity, lender policy, and the quality of the seller’s financial records. A QofE helps lenders evaluate normalized EBITDA, revenue trends, working capital requirements, and unusual financial adjustments. It may also identify differences between reported earnings, tax returns, and the cash flow available for debt service.

For sellers, this development reinforces the value of early financial preparation. A sell-side QofE may identify potential issues before the buyer submits financial information to its lender. If SBA financing represents a likely source of acquisition capital, sellers should anticipate increased scrutiny of their financial statements. Clean reporting and supportable adjustments may make the financing process more efficient.

Preparing for Financial Due Diligence

A sell-side QofE does not eliminate the buyer’s financial due diligence. Buyers will still perform their own independent analysis. Instead, it prepares the seller for that level of scrutiny. Early preparation may reduce surprises, improve financial credibility, and limit opportunities for unnecessary retrading (i.e., price reductions). Quality of Earnings serves different purposes for buyers and sellers. Buyers use it to validate the earnings they expect to acquire. Sellers use it to understand and support the earnings they intend to sell. When both sides understand the financial story, negotiations can focus on informed transaction economics.

Managing Confidentiality Throughout a Business Sale

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Selling a privately held business requires sharing sensitive information with prospective buyers and their advisors. At the same time, premature disclosure may create significant disruption. Employees may worry about their jobs. Customers may question future relationships, while competitors may use the information to their advantage.

For these reasons, protecting confidential business information requires more than signing a nondisclosure agreement. Confidentiality should guide the entire sale process.

Controlling the Initial Disclosure

The M&A advisor should initially approach prospective buyers without identifying the seller. A blind teaser may describe the opportunity while protecting the company’s identity. Interested buyers should then demonstrate sufficient credibility before receiving additional information. Qualified buyers typically execute a confidentiality agreement before learning the company’s identity.

Once that threshold is met, the advisor may provide the Confidential Information Memorandum and other appropriate materials. Even then, sellers should not disclose every sensitive detail immediately. Information should become progressively more detailed as buyers advance through the process.

Managing Employees and Business Relationships

Employee disclosure requires particular care. Some owners involve selected executives early, while others maintain confidentiality until much later. Neither approach fits every transaction. The appropriate strategy depends on management responsibilities, transaction needs, and the potential consequences of premature disclosure.

Customers and vendors generally require similar discretion. Early disclosure could create uncertainty and potentially affect valuable business relationships. For competitive buyers, confidentiality requires additional attention. Customer lists, pricing, margins, proprietary processes, and other competitive information may require restricted access. The seller may delay particularly sensitive disclosures until later due diligence. Redacted information or aggregated data may also provide buyers with necessary information while reducing exposure.

Maintaining Confidentiality Through Closing

Confidentiality does not end after a buyer signs an agreement. Sellers should continually evaluate who receives information and why they need it. A Virtual Data Room may provide controlled access and maintain an organized record of shared information.

As the transaction progresses, disclosure naturally expands. However, each stage should provide only the information reasonably necessary for the buyer’s evaluation. An experienced M&A advisor helps manage this progression while coordinating with the seller’s legal counsel. Protecting confidential business information requires discipline from initial buyer outreach through closing. The objective is simple: provide buyers what they need without unnecessarily exposing the seller’s business.

Analyzing a Financial Report Together

Controlling the Flow of Information During a Business Sale

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Selling a privately held business requires sharing sensitive information with prospective buyers. However, premature disclosure may create unnecessary risk for the seller. Employees may become concerned about their jobs or begin exploring other opportunities. Customers may question future services, while suppliers may reconsider credit terms or existing relationships. Competitors may also use knowledge of a potential sale to create uncertainty in the marketplace. A disciplined transaction disclosure strategy helps the seller balance confidentiality with the information buyers need to evaluate the opportunity.

Limit Knowledge at the Beginning

Most employees do not need to know about a potential sale during the early stages. The owner should initially involve only those employees necessary to prepare the company or support the transaction. This group may include senior management, the controller, or other employees responsible for providing requested information.

Within this limited group, everyone should understand the confidential nature of the process. The seller and M&A advisor should also establish procedures for transaction communications and document requests. Prospective buyers should not contact employees, customers, suppliers, or other business relationships without written authorization from the seller. Limiting early disclosure reduces unnecessary disruption while allowing the business to continue operating normally.

Control Buyer Communications

The M&A advisor should initially approach prospective buyers without identifying the seller. A blind teaser can describe the industry, size, geography, financial characteristics, and investment highlights without revealing the company’s identity. Interested buyers should then undergo qualification before receiving additional information. After qualification, the advisor will require a signed confidentiality agreement before identifying the company. The buyer may then receive the Confidential Information Memorandum and other appropriate materials.

As buyer commitment strengthens, the seller may gradually provide more detailed information. Highly sensitive information, including customer names, pricing, proprietary processes, employee compensation, and other sensitive information may remain restricted until later stages of the transaction. This approach becomes particularly relevant when prospective buyers compete directly with the seller.

Plan Employee Disclosure Carefully

Employees may become one of the most sensitive aspects of transaction confidentiality. Early disclosure may create uncertainty about compensation, responsibilities, benefits, or continued employment. Key employees may eventually need to participate in management meetings, due diligence or transition planning. The seller should determine when their involvement becomes necessary and prepare the communication before that point. Retention arrangements may also become appropriate for employees considered essential to completing the transaction. When disclosure becomes necessary, management should provide employees with clear information rather than allowing rumors to define the situation.

Prepare for Customers and Suppliers

Customers and suppliers generally should not learn about the transaction from rumors or unauthorized buyer contact. Premature disclosure may cause customers to consider competitors or suppliers to reconsider credit terms. Accordingly, buyers should contact these relationships only when necessary and with the seller’s written approval.

Customer calls sometimes become appropriate during confirmatory due diligence. However, sellers should carefully control their timing and scope. The seller and buyer should agree on who participates, what questions may be asked, and how the transaction is presented. A coordinated communication plan can emphasize continuity, service, relationships, and expectations after closing.

Prepare for an Unexpected Disclosure

Even a carefully controlled process may experience a confidentiality breach. An employee may notice unusual meetings. A customer may receive an unintended communication. Market participants may also recognize buyer activity. The seller should therefore prepare a response before a leak occurs. Should information surface unexpectedly, management should avoid speculation and communicate consistently with affected parties. Having an agreed response allows the seller to address concerns quickly without revealing unnecessary transaction details.

Maintain Control Through Closing

Perfect secrecy may not always be possible. The objective is controlled disclosure rather than an unrealistic guarantee of complete confidentiality. An experienced M&A advisor should manage the transaction disclosure strategy from initial buyer outreach through closing. The advisor can coordinate communications among buyers, employees, customers, suppliers, and the seller’s professional team.

A Virtual Data Room may further control document access and maintain an organized record of information shared with buyers. As the transaction advances, disclosure will naturally expand. However, each recipient should receive information appropriate for that stage of the process. Confidentiality works best when information reaches the right people, for the right reason, at the right stage of the transaction.

Negotiating the LOI Before Granting Exclusivity

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The Letter of Intent represents a major turning point in the sale of a business. Until this stage, multiple prospective buyers may still compete for the opportunity. Once the seller signs an LOI, the dynamics change significantly. The selected buyer typically receives exclusivity and begins confirmatory due diligence. For this reason, sellers should use their LOI negotiating leverage before committing to a single buyer.

Establish the Major Economic Terms

Although most LOI provisions remain nonbinding, the document establishes the framework for the transaction. Reopening major business terms later may erode trust and create unnecessary tension between the parties. It may also cause either party to question whether previously negotiated terms remain settled.

Therefore, the LOI should clearly address the purchase price, transaction structure, and form of consideration. It should also define other significant economic terms. These terms may include working capital, seller financing, earnouts, rollover equity, escrows, and other holdbacks. Before exclusivity begins, sellers should resolve as many significant economics issues as reasonably possible.

Address the Seller’s Post-Closing Role

Many sellers remain involved after closing through employment, consulting, or transition agreements. Others may retain an economic interest through an earnout or rollover equity. The LOI should address these arrangements when they represent a meaningful part of the transaction. At this point, the seller still has meaningful negotiating leverage. Postponing difficult issues or conversations may shift that leverage toward the buyer.

Provide Accurate Information Early

Sellers should provide accurate financial and operational information before accepting an LOI. Material inconsistencies discovered later may give the buyer grounds to renegotiate. Sellers should also disclose known weaknesses that could materially affect the transaction. Surprises during the confirmatory due diligence may damage credibility and threaten the deal.

Understand What Changes After Signing

Signing an LOI does not complete the transaction. However, it usually removes the seller from the competitive marketplace for a defined period. From that moment forward, the buyer will devote substantial resources to diligence and definitive agreements. Meanwhile, the seller’s alternatives become temporarily limited.

An experienced M&A advisor should negotiate the LOI with the definitive transaction already in mind. The advisor should identify unresolved issues before the seller grants exclusivity. Effective LOI negotiating leverage comes from addressing significant terms while buyers still compete. Sellers should use that leverage before choosing the buyer who moves forward.

Preparing Your Business for Sale

Selecting the Right Approach to Sell a Business

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Preparing a company for sale establishes the foundation for a successful transaction. The next decision involves determining how to approach prospective buyers. The appropriate business sale strategy depends on the company, buyer universe, confidentiality concerns, market conditions, and seller objectives.

Some businesses benefit from broad exposure to prospective buyers. Others require a more selective approach because only certain buyers represent credible acquisition candidates. The M&A advisor should design the process around these circumstances rather than automatically following one approach.

Broad Auction

A broad auction introduces the company to a relatively large group of qualified prospective buyers. The M&A advisor typically distributes standardized information and establishes a coordinated transaction schedule. Interested buyers receive the Confidential Information Memorandum after signing a confidentiality agreement. The advisor then establishes deadlines for indications of interest, management meetings, and Letters of Intent.

Across the buyer universe, this structure creates a consistent process for evaluating interest and comparing proposals. A broad auction works particularly well when numerous strategic and financial buyers have credible reasons to pursue the company. The wider exposure may generate significant competition. However, it also requires careful management of confidentiality and buyer communications.

Targeted Auction

A targeted auction focuses on a smaller group of buyers with compelling strategic or financial reasons for pursuing the company. The advisor develops the buyer list through industry research, transaction experience, and discussions with the seller. Rather than emphasizing reach, this approach emphasizes buyer quality and strategic fit.

The advisor may still establish deadlines for indications of interest, management meetings, and final proposals. Qualified buyers therefore compete within a controlled process despite the smaller buyer universe. A targeted auction often balances meaningful competition with greater confidentiality.

Limited or Negotiated Process

A limited or negotiated process involves discussions with one buyer or a very small group of prospective buyers. The seller or advisor may pursue this approach when a small number of buyers have a clear strategic interest in the business. This approach offers greater flexibility because the parties do not need to follow a formal auction schedule.

With fewer participants involved, the seller may also maintain tighter control over confidential information. However, reduced competition provides less market evidence about value and transaction terms. The advisor must therefore evaluate each proposal carefully and preserve negotiating leverage throughout the discussions.

Preemptive Sale

A preemptive sale usually begins when a buyer approaches the owner before the company formally enters the market. The buyer may present an attractive proposal designed to persuade the seller to avoid a competitive process. Such an offer may provide advantages, including speed, confidentiality, and reduced transaction disruption. The proposal may also include favorable price, structure, or closing terms.

Before accepting exclusivity, the seller should consider what they give up by foregoing broader market exposure. Without competing buyers, the seller has limited information about whether another buyer would offer greater value or better terms. An M&A advisor should evaluate the proposal against the company’s value, likely buyer universe, and seller objectives. The seller may accept the offer, negotiate improved terms, or decide to pursue a competitive process.

Match the Process to the Opportunity

No single business sale strategy works for every company. A broad auction provides extensive market exposure. A targeted auction creates competition among a carefully selected group of buyers. A limited process provides greater flexibility and discretion. A preemptive sale offers an opportunity to negotiate directly with an interested buyer.

An experienced M&A advisor should evaluate the buyer universe before recommending an approach. The advisor should consider confidentiality, buyer interest, transaction timing, negotiating leverage, and the seller’s objectives.

The objective is not to contact the most buyers. It is to create the right marketplace for the seller’s business.

What Sellers Should Expect After the Deal Closes

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Business owners often spend months preparing, negotiating, and completing the sale of their companies. Closing can therefore feel like the finish line. For many sellers, however, closing represents the beginning of an entirely new chapter.

The buyer may immediately begin implementing changes designed to integrate the acquired company. Sellers should understand what this post-acquisition transition may involve before signing the purchase agreement.

From Owner to Former Owner

The most significant change occurs immediately at closing. The seller no longer controls the company. Even when a seller remains as an employee or consultant, the buyer now makes the final decisions. That adjustment can prove difficult for entrepreneurs accustomed to complete operating authority.

The buyer may change reporting relationships, approval processes, budgets, compensation plans, or operating procedures. It may also introduce new financial controls and performance expectations. Once ownership changes hands, sellers must recognize that familiar practices may change quickly.

What Integration May Look Like

The level of integration depends on the buyer and its acquisition strategy. A strategic buyer may combine substantial portions of the acquired company. A private equity-backed platform may also integrate systems, operations, or administrative functions. Other buyers may preserve much of the company’s existing structure. Changes may involve:

  • Management responsibilities and reporting relationships
  • Accounting and financial reporting systems
  • Employee compensation and benefits
  • Technology and operating systems
  • Sales and marketing activities
  • Customer and supplier relationships
  • Purchasing and vendor arrangements
  • Company branding and identity
  • Facilities and administrative functions

During the early months, employees may look to the former owner for answers. Sellers should understand what the buyer expects them to communicate.

Preparing Before Closing

The seller’s post-closing role should not remain an afterthought. The parties should address responsibilities, authority, compensation, and transition expectations during negotiations. This becomes particularly significant when the seller will remain employed by the buyer. Difficult negotiations can create tension before the new working relationship even begins.

At this intersection, the M&A advisor may serve as a valuable buffer between the seller and their future employer. The advisor may negotiate sensitive economic and transaction issues while allowing the seller to preserve the developing relationship. That separation may prove especially helpful when negotiating compensation, working capital, earnouts, employment terms, or other contentious provisions.

The advisor should also help the seller understand the buyer’s integration plans before completing the transaction. The seller needs realistic expectations about authority, responsibilities, reporting relationships, and potential operational changes.

When consideration includes an earnout or rollover equity, these discussions become even more significant. The buyer’s post-closing decisions may directly affect the seller’s remaining economic interests. Before ownership transfers, the seller should understand both the financial terms and the working relationship that begins after closing.

Closing Is Only The Beginning

Closing represents a major accomplishment, but it does not necessarily end the seller’s involvement with the company. For many sellers, it begins a new professional relationship and a significant change in responsibilities. The transition from owner to employee, consultant, or minority investor can require a different mindset. Decisions that once belonged entirely to the seller may now require approval or come from someone else.

A well-prepared seller enters this post-acquisition transition understanding that change will occur. Accepting that reality can make the transition smoother for the seller, employees, customers, and new owner. The transaction may end at closing, but the seller’s transition often begins there.

Operating the Business Between LOI and Closing

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Signing the Letter of Intent represents a significant transition in the sale process. The buyer receives exclusivity, but the seller still owns the business. During this period, the seller must continue operating the company while the parties complete due diligence and negotiate definitive agreements. For that reason, LOIs often require the seller to operate within the ordinary course of business. The purchase agreement will typically address these obligations in greater detail.

What Does Ordinary Course Mean?

The ordinary course of business generally means operating consistently with the company’s established practices. Management should continue serving customers, paying vendors, managing employees, and making routine operating decisions. The objective is not to prevent management from running the business. Rather, the provision protects the company underlying the buyer’s offer. The buyer expects substantially the same business at closing that existed when the parties signed the LOI.

Decisions That May Require Additional Attention

Certain actions may change the company’s financial condition, operations, or future earnings. Therefore, sellers should carefully evaluate significant decisions during the period before closing. Depending on the transaction, these actions may include:

  • Making significant capital expenditures
  • Increasing owner or employee compensation
  • Hiring or terminating key employees
  • Entering significant customer or vendor contracts
  • Discontinuing products or service lines
  • Changing accounting policies or practices
  • Incurring additional indebtedness
  • Selling significant operating assets
  • Making unusual distributions to owners
  • Changing pricing or customer credit policies

During this interval, sellers should communicate unusual decisions to their M&A and legal advisors before taking action.

Protecting the Transaction Economics

Ordinary course operations may also affect the balance sheet delivered at closing. Working capital provides a common example. The parties may establish a normalized working capital target during negotiations. Changes in receivables, inventory, payables, or accrued expenses may affect the closing adjustment. Against this standard, sellers should avoid manipulating working capital to increase cash distributions before closing. Buyers will examine whether the company maintained normal operating practices. The same principle applies to earnings. Delaying necessary expenses or accelerating revenue may create diligence concerns and undermine buyer confidence.

Managing the Period Before Closing

Operating within the ordinary course of business does not require freezing the company. Businesses must continue making decisions and responding to changing conditions. Instead, sellers should maintain consistency and communicate material deviations before acting.

An experienced M&A advisor will coordinate these issues with transaction counsel and the seller’s accounting professionals. This coordination helps protect the negotiated economics and reduces unnecessary closing disputes.

Finding the Buyers Most Likely to Value Your Business

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Identifying prospective buyers represents a critical part of the business sale process. However, building a buyer list involves much more than searching databases for companies within the seller’s industry. Developing the buyer universe requires understanding the business, its competitive position, and the strategic reasons another company might pursue it.

The M&A advisor should begin by asking a fundamental question: Who has the strongest reason to own this business? The answer often produces a broader and more thoughtful group of prospective buyers.

Begin With the Most Logical Buyers

Companies operating within the seller’s industry provide a natural starting point. These buyers already understand the market, customers, competitors, and operating environment. They may seek additional market share, customers, employees, locations, products, or production capacity.

Existing relationships may also identify potential buyers. Competitors, suppliers, customers, and industry contacts sometimes have established familiarity with the seller. An M&A advisor’s proprietary relationships may provide additional opportunities that database research alone would not uncover.

Look Beyond the Seller’s Industry

The strongest buyer does not always operate within the seller’s exact industry. Companies in adjacent industries may view an acquisition as an efficient way to enter a new market. A supplier may pursue vertical integration. A customer may seek greater control over a critical product or service. Other buyers may want access to the seller’s geography, distribution network, technology, intellectual property, or specialized workforce. By widening the perspective, the advisor may identify buyers whose strategic rationale produces significant interest in the company.

Include Financial Buyers

Private equity firms, family offices, and other financial buyers may also belong in the buyer universe. Some seek new platform investments. Others pursue add-on acquisitions for existing portfolio companies. The advisor should evaluate each financial buyer’s investment criteria, industry experience, transaction size, and existing portfolio. A well-funded individual buyer may also represent a credible candidate for certain lower middle market companies.

Qualify the Buyer List

Identifying a prospective buyer does not mean that buyer belongs in the sale process. The advisor should evaluate financial capacity, acquisition history, strategic rationale, transaction experience, and decision-making authority. Previous acquisitions may also reveal how actively a company pursues growth through acquisition.

Following this review, the advisor and seller should approve the prospective buyer list before outreach begins. This step also provides an opportunity to remove competitors or other parties that create unacceptable confidentiality concerns.

Build a Marketplace, Not Just a List

Developing the buyer universe combines research, transaction experience, strategic thinking, and careful qualification. Databases provide useful information, but they do not determine which buyers will place the greatest value on a company.

An experienced M&A advisor looks beyond obvious names and identifies the economic reasons different buyers might pursue the business. The objective is not to create the longest buyer list. It is to identify qualified buyers with compelling reasons to compete.

Building the Investment Story in a Confidential Information Memorandum

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A successful M&A process requires more than presenting financial statements to prospective buyers. Buyers need to understand the business behind those numbers. At the outset, the Confidential Information Memorandum, or CIM, provides that understanding. It organizes detailed company information into a clear and credible M&A investment story.

Developing the Company Story

Developing the CIM requires close collaboration between the business owner and M&A advisor. Management understands the company, while the advisor understands how buyers evaluate acquisition opportunities. To develop that perspective, the advisor must learn how the company operates and creates value. This process requires detailed discussions with owners and key management. Those discussions typically address:

  • Company Overview: History, ownership, locations, products, services, and business model.
  • Core Operations: Processes, capabilities, technology, facilities, and other operational resources.
  • Competitive Position: Differentiators, market position, competitors, and barriers to entry.
  • Customers and Contracts: Major relationships, recurring revenue, concentration, and contractual arrangements.
  • Management and Employees: Organizational structure, key personnel, responsibilities, and management depth.
  • Growth Opportunities: Expansion initiatives, new markets, additional services, acquisitions, and other opportunities.
  • Financial Performance: Historical results, normalized EBITDA, margins, trends, and relevant operating metrics.
  • Risks and Challenges: Material weaknesses, obligations, dependencies, and other issues buyers should understand.

From that analysis, the advisor may identify the themes that distinguish the company from other acquisition opportunities.

Creating a Credible Presentation

Therefore, the CIM should connect those themes throughout the presentation. Financial performance should support the company’s operating story, competitive position, and growth opportunities. Just as importantly, the document must remain balanced and credible. Buyers may question an overly promotional presentation that ignores obvious risks or challenges.

At this stage, the CIM should not disclose every piece of information available about the company. Highly sensitive information may remain reserved for later due diligence. Instead, the document should provide enough information for qualified buyers to evaluate the opportunity and formulate informed offers.

Positioning the Business for Buyers

Looking ahead, a compelling M&A investment story helps buyers understand where additional value may exist under new ownership. Different buyers may recognize different strategic or financial opportunities. In this setting, the M&A advisor may use those differences to position the company across a competitive marketplace. Strong positioning may encourage multiple buyers to pursue the opportunity and submit competing offers.

Supporting a Competitive Sale Process

The CIM also provides a consistent presentation of the business to prospective buyers. Each qualified buyer receives the information necessary to evaluate the company from a common starting point. As discussions progress, the advisor can build upon the CIM through management meetings, supplemental information, and buyer-specific conversations.

Altogether, a well-prepared CIM does more than describe a business. It explains how the company creates value, why buyers should care, and where future opportunities may exist.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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