Tag Archive for: Negotiation

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.

The Value of Intangible Assets in M&A Transactions

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Intellectual capital and intangible assets often represent the most valuable components of a successful business. Yet many business owners underestimate their importance during a merger and acquisition (“M&A”) transaction. Consequently, sellers often fail to identify, protect, and maximize the value of these assets before beginning the sale process.

Unlike machinery, equipment, or real estate, intangible assets derive their value from the economic benefits they generate. Their value depends on the buyer, the transaction structure, the competitive environment, and the intended use after closing. Therefore, these assets cannot be valued in isolation. Instead, they must be evaluated within the context of a specific transaction and a particular buyer.

For many lower middle market companies, intangible assets drive a business’s competitive advantage and often represent its greatest source of enterprise value. These assets may include proprietary processes, technical expertise, trademarks, patents, copyrights, trade secrets, customer relationships, supplier agreements, distribution networks, software, databases, and recognized brand names. In addition, an experienced workforce, effective training programs, and strong management systems often contribute significant value. Together, these assets frequently distinguish one business from another in a competitive sale process.

Not every buyer values intangible assets equally. Strategic buyers may place greater value on intellectual property, customer relationships, or complementary technologies that create operational synergies. Conversely, private equity groups often emphasize recurring cash flow, management depth, and scalable operating systems. Accordingly, sellers should understand which value drivers matter most to their targeted buyers before entering the market.

Early preparation plays a critical role in maximizing value of intangible assets. Business owners should identify, organize, document, and protect those assets well before beginning the sale process. Formal intellectual property registrations, documented operating procedures, transferable customer contracts, and well-developed management systems all strengthen buyer confidence during due diligence.

An experienced M&A advisory team can help identify the intangible assets that create the greatest shareholder value. More importantly, advisors may position those assets effectively throughout the sale process to attract qualified buyers, increase competition, and maximize transaction value.

The First Buyer-Seller Meeting: An M&A First Date

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The first M&A buyer-seller meeting often feels remarkably similar to a first date. Both parties arrive with expectations, questions, and some uncertainty about what comes next. This initial conversation may influence the relationship throughout the entire sale process.

For sellers, preparation for an M&A buyer-seller meeting matters. However, the meeting should feel like a conversation, not a rehearsed sales presentation. The seller should remain relaxed, open, honest, and confident when discussing the business. Most importantly, the seller should prepare to answer several fundamental questions:

  • Why are you selling the business?
  • What do you plan to do after the sale?
  • What makes the company successful?
  • Where are the opportunities for future growth?
  • What challenges or risks does the business face?

The first meeting also represents an early stage of negotiation. Both parties form impressions that may influence discussions about value, structure, management, and other transaction terms. Therefore, sellers should understand that seemingly casual conversations may have lasting implications. Interestingly, the prospective buyer often does much of the selling during the first meeting. Buyers may discuss their acquisition strategy, financial resources, operating philosophy, management approach, and plans for the company. Sellers should listen carefully and determine whether the buyer’s objectives align with their own.

At the same time, sellers should answer questions directly and factually without aggressively promoting the business. Credibility matters more than enthusiasm. Buyers will eventually test important statements through financial, operational, and legal due diligence. Accordingly, transparency during the first meeting helps establish trust for future discussions.

One question requires particular care: “How much do you want for the company?” Sellers should avoid establishing a negotiating position during an introductory meeting. Instead, the M&A advisor should manage discussions involving valuation, purchase price, transaction structure, and other financial terms.

The first buyer-seller meeting does not need to produce an agreement. In fact, trying to accomplish too much may work against the seller. A successful first meeting creates trust, confirms mutual interest, and encourages both parties to continue the conversation.

Like a successful first date, the best outcome is often quite simple: both sides want a second meeting.

True-Up Payments and Working Capital in M&A

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True-up payments in M&A help ensure that buyers receive the agreed level of net working capital at closing. They also protect sellers when actual working capital exceeds the negotiated target.

Most M&A transactions value a company as a going concern. Accordingly, the purchase price generally assumes the seller will deliver sufficient working capital to support normal operations. Buyers should not need to contribute additional capital immediately after closing simply because working capital was depleted before the transaction.

However, working capital changes continuously as a company operates. Accounts receivable, inventory, accounts payable, accrued expenses, and other current accounts may fluctuate significantly before closing. Therefore, buyers and sellers typically establish a targeted net working capital amount before completing the transaction.

At closing, the parties compare actual net working capital with the agreed target. If actual working capital falls below the target, the purchase price generally decreases by the shortfall. Conversely, the seller generally receives additional consideration when actual working capital exceeds the target.

For example, assume the parties establish a $1.0 million working capital target. If closing working capital equals $900,000, the purchase price could decrease by $100,000. If closing working capital equals $1.1 million, the seller could receive an additional $100,000.

Although the concept appears straightforward, the calculation may become contentious. Buyers and sellers may disagree about account classifications, accounting policies, reserves, accruals, or unusual balances. Furthermore, the parties may calculate certain accounts differently after closing.

For these reasons, sellers should address true-up payments in M&A during the Letter of Intent negotiations. The parties should clearly define working capital, the target amount, calculation methodology, and applicable accounting principles. They should also establish procedures for resolving disagreements.

Addressing these matters early provides several benefits:

  • Reduces uncertainty surrounding the final purchase price
  • Establishes consistent expectations before closing
  • Limits disagreements over accounting classifications and methodologies
  • Reduces opportunities to use working capital adjustments as a renegotiation tool
  • Provides a defined process for resolving post-closing differences

An experienced M&A advisor may help sellers understand working capital targets and evaluate proposed adjustment mechanisms. Careful negotiation before closing reduces surprises and helps preserve the economics negotiated between buyer and seller.

The Seller’s Role After an M&A Transaction

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Closing a business sale transfers the ownership, but it does not always end the seller’s involvement. The seller’s role after the sale often becomes an important component of the transaction structure and negotiations. Many sellers understandably want immediate liquidity and the freedom to pursue their next chapter. Buyers, however, often want continuity during the transition to new ownership. They may rely on the seller’s relationships, industry knowledge, operating experience, and institutional knowledge during this period.

Accordingly, buyers and sellers should define post-closing expectations well before completing the transaction. A clearly defined transition plan may reduce uncertainty and help both parties avoid disagreements after closing. The seller’s role after the sale may take several forms:

  • Employment Agreement: The seller remains an employee and continues managing or supporting the business.
  • Consulting Agreement: The seller provides defined services for a specified period without remaining a full-time employee.
  • Transition Agreement: The seller helps transfer relationships, responsibilities, knowledge, and operational control to the buyer.
  • Noncompetition Agreement: The seller agrees to certain restrictions regarding competitive activities following the transaction.
  • Seller Financing: The seller finances part of the purchase price and retains an economic interest in the buyer’s performance.
  • Earnout Arrangement: The seller receives additional consideration if the business achieves defined post-closing objectives.
  • Rollover Equity: The seller retains an ownership interest and participates in the future performance of the business.

These arrangements may create alignment between buyers and sellers. However, each arrangement also introduces different responsibilities, risks, and financial considerations. For example, an earnout may require the seller to remain involved because future payments depend on company performance. Rollover equity may also encourage continued participation because the seller retains an investment in the business.

Importantly, sellers should understand exactly what buyers expect after closing. The parties should define responsibilities, authority, compensation, time commitments, performance expectations, and the duration of any continuing involvement. Sellers should also consider whether the proposed role fits their personal objectives. Someone planning immediate retirement may view a three-year employment agreement very differently from an owner seeking continued involvement.

An experienced M&A advisor should address the seller’s role after the sale early in the M&A process. Clear expectations help align the parties, support an orderly transition, and reduce the potential for post-closing disputes. Most importantly, early planning helps ensure the seller’s continuing involvement reflects their financial and personal objectives.

Preparing the Physical Business for Sale

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First impressions matter when selling a lower middle market company. The business appearance before a sale may influence a buyer’s initial perception of quality, organization, and value. Prospective buyers often visit facilities after reviewing financial information and learning about the company’s operations. At that point, the physical business should reinforce the investment story already presented to them.

Facilities should appear clean, organized, and properly maintained. Offices, manufacturing areas, warehouses, equipment, and exterior spaces should reflect the quality expected from a successful business. Importantly, business owners do not need to undertake unnecessary renovations before entering the market. Instead, they should address obvious maintenance issues that could create negative impressions or raise questions about deferred investment.

A fresh coat of paint, organized warehouse, clean workspace, and well-maintained equipment may make a meaningful difference. Owners should also repair damaged fixtures, remove unnecessary clutter, and dispose of obsolete equipment. Simply stated, a business being sold for millions of dollars should look like a million bucks!

However, business appearance before a sale involves more than physical facilities. Buyers also evaluate the company’s website, logo, marketing materials, signage, and other visible elements of the brand. Outdated materials may create an impression that the business has not invested in its market presence.

Organizations may also provide buyers with clues about how management operates the company. Clean facilities and orderly workspaces suggest discipline and attention to detail. Likewise, properly maintained equipment indicates that management has invested appropriately in the business.

Owners should apply that same discipline behind the scenes. Inventory records, financial information, contracts, compliance records, and other documentation should remain current and organized. Buyers will examine these areas during due diligence.

Equipment condition deserves particular attention. Deferred maintenance may raise concerns about future capital expenditures and operational reliability. Therefore, owners should review maintenance schedules and address reasonable repairs before buyers inspect the facilities.

Owners should evaluate the business appearance before a sale as part of their broader exit preparation. Relatively modest improvements may strengthen marketability without requiring significant capital investment. Ultimately, appearance will not overcome weak financial performance or fundamental business risks. However, a well-maintained and organized company reinforces the seller’s message that the business has been managed with care and discipline.

Net Working Capital: A Negotiated Target

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Net working capital (“NWC”) plays a critical role in nearly every merger and acquisition (“M&A”) transaction. Although buyers primarily value a business based on its future, transferable cash flow, discounted for risk, they also expect the seller to deliver an appropriate operating balance sheet at closing. Consequently, negotiating a targeted net working capital amount can significantly affect the seller’s final proceeds.

The purchase agreement typically establishes target balances for selected balance sheet accounts. These targets often include cash (if any), NWC, and, in some transactions, specific net assets. Unless otherwise negotiated, transactional working capital generally excludes cash, cash equivalents, and interest-bearing debt. Instead, it represents the operating capital required to support the business after closing.

Defined as current assets less current liabilities, NWC frequently becomes the most negotiated balance sheet target. Although the concept appears straightforward, determining an appropriate target rarely is. Working capital fluctuates throughout the year because of seasonality, growth, customer collections, inventory levels, vendor payments, and other operating factors. Therefore, buyers and sellers often reach different conclusions regarding the amount required to operate the business normally.

Accordingly, the parties must negotiate a target that reflects the company’s ordinary course of business. Common approaches include calculating average NWC over a specified historical period. Other transactions establish the target as a percentage of annual, monthly, or quarterly revenue. In certain industries, buyers and sellers may also consider comparable company data or industry benchmarks when evaluating an appropriate target.

The negotiated target directly affects the purchase price. If actual net working capital exceeds the target at closing, the seller generally receives an upward purchase price adjustment. Conversely, if actual net working capital falls below the target, the purchase price decreases. As a result, even modest differences in the negotiated target can materially impact the transaction’s economics.

An experienced M&A advisory team understands these complexities and addresses them early in the transaction process. Thoughtful planning, careful financial analysis, and disciplined negotiations help establish a reasonable net working capital target while reducing the risk of costly post-closing disputes.

Maintaining Negotiating Leverage With a Single Buyer

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M&A professionals often say that having only one buyer is similar to having no buyers. The expression highlights the value of competition. Multiple qualified buyers give a seller alternatives and strengthen negotiating leverage. However, even a well-managed sale process may eventually narrow to one credible buyer. When that happens, the seller’s strategy must change.

When the Competitive Process Narrows

A competitive sale process may begin with numerous strategic and financial buyers. Some buyers will decline, while others may withdraw after reviewing the opportunity. Eventually, one buyer may emerge with the strongest interest, strategic fit, financial capacity, and willingness to complete the transaction.

At this point, single buyer negotiating leverage depends less on competing offers. Instead, it depends on understanding the motivations and limitations of both parties. The seller should first understand why the buyer remains interested. Strategic objectives, growth opportunities, synergies, or market expansion, may create compelling reasons to complete the acquisition. Those motivations may become meaningful sources of leverage.

Establish the Seller’s Position

Before advancing negotiations, the seller should define acceptable transaction terms. Purchase price represents only one consideration. Payment structure, working capital, seller financing, earnouts, employment, and closing conditions may materially affect the transaction’s economics.

Above all, the seller should establish a walk-away position before negotiations become emotional. An unacceptable transaction does not become acceptable simply because it represents the only current offer.

Negotiate From a Position of Patience

With only one buyer, the seller should avoid unnecessary urgency. Pressure to complete the transaction may transfer additional leverage to the buyer. Under these circumstances, patience becomes particularly valuable. The M&A advisor should maintain a disciplined process and evaluate each proposed change on its merits.

The advisor should also understand the buyer’s constraints. Buyers may face internal deadlines, financing requirements, acquisition objectives, or other pressures. Seen in that light, negotiating leverage does not disappear simply because competing buyers have left the process.

Protect Leverage Before Exclusivity

The seller generally retains greater flexibility before signing a Letter of Intent. After execution, the buyer receives exclusivity and the negotiating environment changes. Therefore, the parties should resolve major economic terms before signing the LOI whenever possible. Doing so reduces opportunities for unnecessary renegotiation during due diligence.

A single buyer negotiating leverage strategy cannot recreate a competitive marketplace. However, disciplined negotiations may still protect the seller’s objectives. One buyer can produce a successful transaction. The seller simply needs to understand where leverage remains and remain willing to reject an unacceptable deal.

Creating Buyer Competition in a Business Sale

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A business owner negotiating with one buyer has limited information about what the broader marketplace may offer. The buyer knows this as well. A competitive buyer process changes that dynamic by creating alternatives for the seller. Multiple qualified buyers strengthen negotiating leverage and provide meaningful comparisons among offers. However, generating a long buyer list does not create competition by itself. The M&A advisor must identify buyers with the interest, resources, and strategic rationale to complete the transaction.

Build the Right Buyer Universe

The process begins by understanding the company and identifying potential sources of buyer demand. Strategic buyers may seek new customers, geographic markets, products, employees, technology, or operating capabilities. Private equity firms evaluate opportunities based on their investment criteria, portfolio strategies, expected returns, and available capital. Well-funded individual buyers and family offices may also represent credible candidates for certain companies.

At the buyer-development stage, the advisor should look beyond obvious industry participants. Buyers from adjacent markets may identify opportunities that direct competitors overlook.

Qualify Buyers Before Sharing Information

More buyers do not necessarily create a better process. Qualified buyers do. An experienced M&A advisor should evaluate financial capacity, acquisition criteria, transaction experience, strategic rationale, and decision-making authority. This qualification helps separate serious prospects from tire kickers.

After establishing credibility, qualified buyers receive the Confidential Information Memorandum (CIM) following execution of a confidentiality agreement. The CIM should present the company’s financial performance, operations, competitive position, and growth opportunities clearly.

Create Competition Through Process

Competition requires more than contacting buyers. The advisor must manage those buyers through a coordinated process. Deadlines for indications of interest encourage buyers to make decisions within a defined timeframe. Comparable offers also allow the seller to evaluate price, structure, certainty, and post-closing terms.

As buyer interest develops, the advisor negotiates from a position supported by credible alternatives. One buyer may offer the highest price. Another may provide more cash, fewer contingencies, or better terms for the seller.

Preserve Competition Until the LOI

The seller’s leverage generally reaches a critical point before granting exclusivity to one buyer. An experienced M&A advisor should use the competitive buyer process to resolve significant economic terms before that occurs. The objective is not simply to generate multiple buyers. It is to create a marketplace where qualified buyers compete for the opportunity.

Competition gives the seller alternatives, and alternatives create negotiating leverage.

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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