Question

What issues are most contentious when selling a mid-market business?

Answer
By Kenneth H. Marks | Last updated: February 23, 2021
So, the easy answer is that it depends on a bunch of things, but to be specific, that doesn’t help you too much. Let’s break it down into kind of two sections: One is before the letter of intent or getting to the letter of intent, and then issues beyond the letter of intent.

First, in getting to the letter of intent, the most contentious issue is the classic determining value and agreement on the basis for the valuation of the business. So, what the basis is, and then what’s the drivers or the multiple that the buyer is willing to pay versus what the vendor is willing to sell for.

The other issue that goes right along with valuation is deferred or contingent consideration. I will put the caveat here that we deal with a lot of lower middle market companies between $3 million to $50 million in sales. In many cases, transactions that will have some kind of consideration beyond the close, so an earn out, holdback, or seller's note. So, the second most contentious piece in getting to that LOI tends to be what the terms are around that contingent consideration. Those are the two that tend to be most contentious in getting to an LOI.

On the second part, beyond the letter of intent, from my experience in middle market deals, negotiating the working capital tends to be the next most contentious area. As much as we like to have the working capital defined pre letter of intent in many cases, that is very difficult to determine.


Share this Q&A

  • Facebook
  • LinkedIn
  • Twitter

Tags

Valuation Sale Process Enterprise Value Earnouts Negotiation

Written by Kenneth H. Marks

Profile Picture of Kenneth H. Marks
Mr. Marks is the founder and Managing Partner of High Rock Partners, Inc. He is the lead author of Middle Market M&A: Handbook of Investment Banking Business Consulting and Handbook of Financing Growth: Strategies, Capital Structure and M&A Transactions, 2nd Edition both published by John Wiley Sons, and he authored the publication Strategic Planning for Emerging Growth Companies: A Guide for Management.

More Q&As from our experts

Related Articles

Term of the Day

Buyout

A buyout is a transaction by which one party purchases shares of a business to acquire a controlling interest in that...
Read Full Term

Subscribe To the Divestopedia Newsletter!

Stay on top of new content from Divestopedia.com. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.

Resources
Go back to top