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Business Owners

Expect the Unexpected: How to Prepare for a Transaction


In most cases, middle market business owners and entrepreneurs only go through the mergers and acquisitions process once in a lifetime. They don’t know what to expect from a transaction, and they often, unknowingly, limit their chances at achieving an ideal outcome in what is likely the biggest deal of their lives.

Middle market M&A transactions are rife with uncertainty and unpredictability. Because deals are effectively multi-month negotiations, there will always be unexpected developments that occur during the process.

To help manage these uncertainties, and make sure they don’t derail the deal, here are three issues business owners should unquestionably address before entering into the deal process.

Defining Your Goals

The first and most important step to take is analyzing your motivation for pursuing a transaction. The specific motivation often informs the type of deal and what type of partner or buyer will help you reach that goal. This step is crucial because it will define how you prepare for the transaction and largely, how to best structure the company for a successful sale.

Generally, business owners in the middle market have one of two reasons for wanting to sell. The first is retirement. The second is that the ownership group has reached constraints in the company’s growth and needs a partner to help it remove those constraints in order to grow the company more quickly. Since many middle market companies grow from the heart, soul, and wallet of an individual entrepreneur, there is often a transition that takes place at some point in the growth of a successful middle market company to bridge the company from individual ownership to a more institutional company.

Depending on whether your goal is one of those reasons or a combination of the two, you’ll want to carefully think through what you are trying to accomplish with a transaction. This motivation should be your true north during the deal process, keeping you from straying too far your desired goal.

Addressing Tax and Estate Issues

Implementing appropriate structural changes can radically affect the ultimate value of a sale if they are put into place many years before a transaction takes place. For example, most middle market sellers will greatly benefit from converting their C corporations to S corporations, but only if the conversion is done many years in advance of a potential transaction. Since many companies retain outside accountants only for tax preparation, many middle market owners have never worked with anyone on transaction planning, and therefore do not realize these types of opportunities.

Like any other field, all accountants are not created equal. Consulting with an accountant that has significant M&A experience well in advance of a transaction will likely yield significant increases in post-tax value. Discussing your company with an M&A-specific accountant will reduce the number of unexpected financial developments in your most important negotiation.

In addition to evaluating the company’s tax status, business owners considering a sale should consult with an experienced deal accountant to evaluate their personal options for maximizing post-tax value. There are a variety of tools that can be used to defer or eliminate tax liability, but they need to be planned for well in advance.

Since mortality is a subject that many hard-driving entrepreneurs often don’t want to discuss, I regularly talk to business owners that have highly valuable businesses, but have neither taken steps to ensure that their families are protected in the event of catastrophe, nor taken advantage of estate planning tools available to increase the value realized in a transaction. Business owners thinking of a sale should consult with a financial planner and/or estate planning professional well ahead of a potential transaction.

Hiring an Intermediary

Middle market M&A deals are difficult to complete and numerous factors need to align to get a deal done. Ensuring that you have solid advice on marketing your company for sale and getting a transaction completed is crucial not just to maximizing value, but also to just getting a deal done at all.

Hiring a competent M&A advisor will be one of the most important parts in reducing the uncertainty in a transaction. In the deal business, I have found that many times, buyers and sellers simply don’t speak the same language. Entrepreneur owners of businesses often run valuable businesses without the sort of infrastructure or institutional experience that strategic and/or financial buyers are used to seeing. M&A advisors can help entrepreneurs see these misalignments and either advise for solutions or prepare the owner for the conversation.

Additionally, getting a transaction completed will take time. Selling a company can take anywhere from six to 12 months, or longer, and will require countless hours of work and discussions with potential acquirers. Most likely, your time is going to be much better spent running and growing your company rather than selling it. The process will be exhausting; and getting distracted from your company’s success is a dangerous risk to take.

Of equal significance, these intermediaries create leverage in marketing a company that a business owner likely couldn’t create for himself. There is a reason that private equity firms have large business development groups that work hard to generate proprietary leads. They would much prefer to acquire companies for which they are sole potential purchaser. If you want buyers to compete for your company, you’ll want to retain an advisor to make that happen.

Michael Schwerdtfeger’s eBook “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for download. Get your free copy here:

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