7 Steps to a Successful Sale of Your Midsize Business With Middle Market M&A Brokers


Bill Grunau

Technology Business Broker In Orange County

Midsize (Middle Market) businesses, those between $5 million and $100 million of annual revenue, are stuck in the middle when it’s time to sell. They are too small for the large investment bank M&A firms and too big for main-street business brokers that sell small businesses. Pacific Business Sales’ primary focus is midsize industrial businesses in the LMM (Lower Middle Market) M&A niche. LMM M&A transactions are more complex than main-street business sales, and different from very large M&A transactions.

When considering the sale of your lower-middle market business you need a M&A Broker that specializes in both your size of business and industry. Pacific Business Sales is highly experienced and has a proven track record of facilitating successful transactions in your specific market niche, ensuring maximum value and seamless execution throughout the entire process.

  1. Exit Strategy
    • Below is a brief outline of developing an exit strategy. Contact us and ask for our free ebook Developing an Exit Strategy for a more comprehensive explanation and detailed steps.
    • Earnings Drive Value. The EBITDA (Earnings Before Interest Taxes Depreciation & Taxes) is by far what determines the value of your business. To maximize the value of your business, focus on growth in revenue and EBITDA.
    • CPA and financials
      • Review your P&Ls, balance sheet, A/R, and tax returns with your CPA to make sure they are ready for review by the Buyer’s CPA and finance team after an offer is accepted.
      • Review your owner’s benefits and non-business expenses that are run through the company to ensure they are well-documented and properly accounted for.
      • If you have been pushing revenue into the next tax year or pulling in expenses to the current tax year STOP NOW! While this reduces taxes, it reduces your business value by far more than what you save in taxes. You may save say $0.40 on the dollar of reduced revenue, but you will lose $3 to $4 of value for each dollar of reduced EBITDA as a result of reduced revenue.
      • For larger companies, it may be worthwhile to have your CPA prepare Reviewed or Audited financials. This will cost more money in accounting fees, but PE Groups and industry investors trust Reviewed or Audited financials and it makes the Due Diligence process easier. It also makes the LOI (offer) process faster and easier since the buyer can trust the accuracy of the financial statements.
    • Staff
      • Staff is an important part of your exit strategy. Minimize owner dependency in your business, develop good managers and supervisors, and a well-trained team to run the day-to-day business.
      • Staff stability, tenure, and experience are important.
    • Customer Concentration
      • If your business has customers that represent more than 30% of sales this can be a concern and customers representing more than 50% of sales are a concern to prospective buyers and lenders.
      • High customer concentration does not necessarily make a business unsellable, but it does increase the risk for the buyer and makes the transaction more difficult to close.
      • If your business has high customer concentration there are two options:
        • 1) reduce the customer concentration through revenue growth
        • 2) reduce the risk of losing the key customer with long-term contracts or demonstrate the risk of losing this customer is minimal because of your company’s unique capabilities (e.g. other companies cannot easily duplicate your product or services).
    • Tax Planning
      • While developing your exit strategy you should meet with tax advisors familiar with tax strategies to minimize and defer taxes on the sale of the business. Implementing a tax strategy can defer up to 90% of the taxes due at closing as well as minimize taxes. If you do not have a tax strategy advisor we can refer you to several our firm works with.
  2. Prepare the Business to Go to Market & the Transaction
    • If you didn’t review your tax returns, P&Ls, and balance sheet as part of your Exit Strategy, now is the time to meet with and have your CPA review your internal P&L and balance sheet and make the necessary adjustments and corrections to have them match your tax returns.
    • Review your owner’s benefits and expenses (add-backs) with your CPA and ensure they are well documented and properly accounted for on your P&Ls and tax returns.
    • If your internal financial statements are not Reviewed or Audited by your CPA you should discuss the cost of your CPA providing this. Reviewed or Audited financial statements are more expensive to prepare but have much more credibility with buyers and make Due Diligence go quicker and easier. It is not necessary to have Reviewed or Audited financial statements, but depending on the size and complexity of your company, it may be well worth it.
    • Clean up your A/R. Collect and clean up past due accounts, and review your A/R practices to ensure your invoicing practices follow the proper accounting practices (e.g. invoicing at proper dates and milestones).
  3. Select a Professional Lower Middle Market M&A Broker
    • Meet with your Middle Market Broker and discuss your business, the transaction process, their experience, and your other questions about the sale.
    • Market Value Analysis is the next step after the initial meeting. The M&A broker will review the company’s tax returns, P&Ls, and balance sheet to work up a Market Value Analysis and review it with you. The M&A Broker will discuss the expected market value and recommended asking price.
    • Representation Agreement is the next step. Once this is signed the M&A Broker will prepare the CIM (Confidential Memorandum) agreement. The CIM is sent to prospective buyers after they have signed a Confidentiality Agreement (NDA) and provided a buyer or firm profile indicating their financial and professional qualifications.
  4. Initial Buyer Meetings
    • Your M&A Broker will handle initial buyer meetings and then schedule meetings with you. There will be several meetings along the way to an LOI and purchase agreement.
    • After we have met with prospective buyers we arrange a meeting with you. The questions in the initial meetings are about your role in the business, operations, staff roles and experience, and the company’s products or services. We go into more detail as we progress with the prospective buyer.
  5. LOIs (Letter of Intent) & Negotiations
    • Middle-market transactions rarely start with a Purchase Agreement. Most start with an LOI (Letter of Intent) which will include the terms of the transaction (subject to completion of Due Diligence), timeline, an exclusivity or No Shop clause, and other general terms of the transaction. The LOI is usually much shorter than the purchase agreement which will have all of the legal language and terms of the agreement.
  6. Due Diligence & QofE (Quality of Earnings)
    • After an LOI has been accepted & signed Due Diligence starts. For Middle market businesses Due Diligence can run between 45 days to 90 days depending on the size and complexity of the company and financials.
    • Most middle market transactions will have a QofE (Quality of Earnings) report prepared by an independent accounting firm as part of the QofE. QofE reports typically take from 45 to 90 days, most are completed within 60 days.
    • Commercial & Legal reviews are often a part of Due Diligence.
      • A commercial review is an analysis of the company’s market forecast, competitive position, opportunities for growth, and risk.
      • Legal review is an examination of the company’s corporate books, past litigation, patents-trademarks (if any), and other legal concerns.
  7. Purchase Agreement & Closing
    • The purchase agreement is prepared by the buyer’s attorneys and reviewed by the sellers’ attorneys. There are often a few rounds of “redlines” (markups) before it is finalized and ready for closing.
    • When the purchase agreement is fully executed closing occurs on the specified day. At closing you receive a wire transfer for your net cash at closing from either escrow or the closing attorney.
    • Transition and training start the next day, as specified in the purchase agreement.

Get in touch with Pacific Business Sales to receive your complimentary copy of our ebook, “Developing an Exit Strategy,” or to explore the potential sale of your middle-market business with our experienced team.

Bill Grunau

About the Author

Bill Grunau

Bill has over 20 years of experience as a Business Broker specializing in industries ranging from manufacturing to construction/contractors, technology and software, B2B services, distribution-3PL, and healthcare. His transaction experience includes successfully closed transactions as both stock sales and asset sales including transactions with licensing such as contractors, healthcare, and companies with government contracts in Orange County and other Southern California locations. Bill works closely with a team of financial advisors specializing in tax strategies to minimize taxes on the sale of a business and are available to advise clients on how to minimize the tax liability on the sale of their business. Bill is the author of “Own Your Future, Straight Talk about How to Buy a Business and Build Your Future” Bill has a BS in Electrical & Electronic Engineering studying at Cal Poly Pomona and West Coast University and also studied at Claremont Graduate school EMBA program.