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In our most recent sell-side engagements, three of our clients sold their businesses to private equity (PE) buyers. While PE often gets a bad rap for cutting corners or gutting companies, our experience has been quite the opposite. We’ve found PE firms to be professional, ethical, and results-driven.

Many lower middle-market business owners are unfamiliar with private equity and how it creates value, so we want to demystify the process by walking through the PE playbook.

Private equity firms succeed because they follow a systematic, disciplined approach to investing that consistently delivers impressive returns. Their playbook focuses on three core pillars: Thesis Development, Deal Structuring, and Operational Execution.

1. Thesis Development: Finding the Right Opportunities

Every PE investment begins with a clear, strategic thesis. PE firms identify industries ripe for growth, typically focusing on markets that are large, fragmented, and underserved by dominant players. Here are some industries where PE is actively creating value:

• Software: Scalable models with recurring revenue.
• Residential Services (e.g., plumbing/HVAC): Stable, recession-resistant demand and price elasticity.
• IT & Professional Services: Growing reliance on outsourcing expertise.
• Financial Services (e.g., wealth management): High barriers to entry and dependable revenue streams.
• Niche Manufacturing: High-margin businesses with loyal customer bases.

By targeting these industries, PE firms position themselves to acquire and scale smaller companies effectively.

2. Deal Structuring: Aligning Interests

PE firms are masters of structuring deals to align incentives and maximize value. Here’s how they approach deal-making:

• Majority Ownership with Shared Risk: PE firms typically acquire 65–85% ownership while requiring sellers to retain 15–35% equity. This keeps sellers invested in the company’s growth and opens the door for a second “bite of the apple” in 3–7 years.
• Strategic Use of Leverage: PE firms employ debt thoughtfully to amplify returns, ensuring it doesn’t overburden the company while preserving cash for growth.
• Earnouts and Performance-Based Payments: These structures allow sellers to maximize their payout if certain financial milestones are met, reducing risk for the buyer.

This approach ensures sellers and PE firms remain aligned on the ultimate goal: driving growth and creating value.

3. Operational Execution: Unlocking Value Post-Acquisition

After closing, PE firms focus on professionalizing and scaling the business. Here are some of the strategies they use:

• Achieve Cost Savings at Scale: Consolidating smaller companies creates efficiencies in procurement, logistics, and operations.
• Modernize Systems and Processes: Replacing fragmented systems with centralized ERP platforms and integrating digital tools like AI and e-commerce solutions.
• Upgrade Leadership: PE firms often recruit seasoned executives who excel at scaling businesses and align their incentives with equity stakes.
• Shift to Recurring Revenue Models: For example, transitioning HVAC companies to subscription maintenance plans or adding SaaS features to traditional software products.
• Expand Products and Geography: Cross-selling, introducing complementary services, or expanding into new markets are common strategies.
  • A landscaping company might add snow removal services for year-round revenue.
  • A U.S.-based manufacturer might expand globally by leveraging PE expertise in navigating international markets.

These tactics enable PE firms to unlock potential and drive significant returns for all stakeholders.

Why This Matters for Business Owners

Understanding the private equity playbook helps business owners see the value PE firms bring to the table. By targeting the right industries, structuring deals effectively, and executing operational improvements, PE firms unlock immense value in the businesses they acquire.

If you’re considering selling your business, preparation is key. At Kinected Advisors, we’ve introduced a new service called ExitBoost® to help owners like you prepare for a successful transaction. ExitBoost® includes:

• A baseline valuation of your business.
• Benchmarking analysis to compare your performance to peers.
• A salability scorecard with actionable recommendations.

On average, our clients have seen valuation increases of 20–140% with our guidance.  With an 87% success rate in transactions, Kinected Advisors would love to help you unlock your next chapter. Let us guide you through the process and maximize the value of your business.

Your future starts with a conversation—let’s get started.

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Mistake #1 – Not Appreciating Valuation from a Buyer’s POV

Sellers often overestimate the value of their businesses due to emotional attachment or lack of market knowledge. Before going to market, it’s crucial to consult with an experienced M&A firm, who will normalize financials to reflect adjusted cash flow, provide data on comparable company sales, and offer guidance on probable deal terms. Buyers assess targets based on quantitative (financial) and qualitative (team, industry trends, etc.) factors.  Don’t waste your time pursuing a sale unless you’re comfortable accepting probable market value and terms. Before Kinected accepts a client, we ensure that all three “legs of the stool” are well-supported: the business is performing well, the owner is financially prepared (can afford to sell), and the owner has a personal post-retirement plan.

Lesson: Get an Opinion of Value from an M&A professional before going to market.

Mistake #2 – Underestimating the Complexity of Exit Planning

One common pitfall is assuming that selling a business is as straightforward as negotiating commercial agreements with suppliers or customers.  Exit planning is a complex process that requires specialized knowledge and experience from a few highly experienced resources. Just as your surgeon, pilot, or electrician would tell you — sometimes you need to trust professionals. Without proper planning, you risk leaving money on the table or, worse, throwing away a ton of time and money to ultimately not sell your business.

Lesson: Build your team of advisors 12-18 months before you intend to go to market.

Mistake #3 – Financial Repercussions for an Unprepared Seller

Rushing into a sale without adequate preparation often leads to catastrophic financial consequences. Deals frequently fall apart during due diligence as sellers are not prepared to have their books and records scrutinized.  For example, we once discovered that our client has overstated earnings by $2M by paying commissions directly from retained earnings.  If we hadn’t caught this prior to going to market, the seller would have faced two terrible outcomes – a busted process or the sellers being asked to accept a valuation 70% less than they expected.

Lesson: Engage a fractional CFO/CPA firm to ensure your financials are GAAP-compliant (Generally Accepted Accounting Principles) prior to going to market.

In today’s competitive M&A landscape, professional buyers seek businesses with solid financial performance and reporting, deep management teams and well-diversified customer and supplier bases.  Buyers often pay a 20-30% premium in competitive processes for well-prepared companies exhibiting these characteristics.

Selling your business is likely one of the most significant financial events of your life. Properly preparing your business for sale and engaging the right team of advisors can maximize your business’s value and ensure a seamless transition to your next chapter.  

Don’t let a lack of exit planning erode the value you’ve worked so hard to build. Start your exit planning now and engage with an experienced team to secure your financial future. Kinected Advisors has an 87% closing rate, significantly higher than the industry average of 20%-30%.  Our ExitBoost service helps you prepare by providing a baseline valuation, a salability assessment, and on-going consulting to ensure your business is positioned to sell for maximum value when you and the business are ready.

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This is an even greater challenge for family businesses, as the decision to sell is not just a financial one. It also balances legacy preservation and succession planning. Between Private Equity firms sitting on $2.5 Trillion in dry powder and increasing consumer and business confidence, we are experiencing a rare confluence of factors expected to power what should be a strong seller’s market in 2025.

There may not be a better time to sell over the next decade – here’s why:

Increased Business/Consumer Confidence

Family businesses can capitalize on the decreasing US interest rates, creating an advantageous environment for deal structuring and financing. This, coupled with the recent surge in the stock market, offers an enticing proposition for sellers, potentially translating into higher valuations. 

As buyers pulled back on large M&A deals in 2024 due to higher financing costs, they began to move down-market pursuing lower-middle market deals as “add-ons.” This buyer appetite towards lower-middle market deals is expected to carry through 2025.

Pent-Up Buyer Demand

Many deals were put on hold over the past couple of years due to COVID, relative uncertainty around the global economy, and an inflationary environment.  As we are seeing inflation decline, an increase in consumer and business confidence, and wider availability of credit, many stalled M&A processes are becoming active again. Private Equity and Strategic Buyers that were unable to fulfill their acquisition mandates and deploy capital are seeking to increase their M&A efforts in 2025.

Excess Buyer Capital

Financial buyers (Private Equity firms & family offices) have an abundance of capital ready to deploy. Many Private Equity firms have continued to raise capital over the past several years and are collectively sitting on $2.5 Trillion in dry powder.

As the economy bounces back, the need for buyers to invest this capital is more pressing, having not invested over the past few years. Many corporate buyers also have cash earmarked for growth through acquisition.  

Reduced Borrowing Costs

Just like the housing market, interest rates for debt are inversely correlated to purchase price. The lower the interest expense, the higher the borrowing capacity (assuming sufficient cash flow from the business to support debt coverage ratios, of course.) The bottom line is that decreasing interest rates enable buyers to pay more for businesses and have ample cash flow to service the debt.

As we guide family business owners through the process of selling their businesses, it’s essential that we balance financial and emotional considerations.  By leveraging the tailwinds enabled by interest rate declines, stock market surges, and global economic resilience, family businesses can embark on a journey that not only maximizes financial returns but also protects the family legacy built over decades.

As you consider selling your business, we encourage you to speak with an experienced M&A advisory firm that will help increase the odds of your transaction closing successfully while reducing your stress. Kinected has an 87% success rate in our transactions, well above the industry average of 30%.

If you aren’t ready to sell, Kinected has created an exit planning service called ExitBoost where we provide a baseline valuation, benchmarking analysis, salability scorecard and update periodically until you are ready to go to market. Based on successfully helping other clients increase their valuations by 20%-140%, we are confident we will add value and make your business more salable for when you and the business are ready.  Let’s have a confidential discussion today.

The post Why 2025 May Be the Perfect Time for Family-Owned Businesses to Exit appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

Mistake #1 – Misjudging Exit Alternatives and Timing

DIY sellers often lack a deep understanding of market conditions and the optimal timing for a sale, leading to missed opportunities or undervalued offers. When business owners think of exiting, they typically assume they will transition business to their kids (increasingly unlikely), sell to a competitor (low-ball offers) or wind down (fire sale). There are many other alternatives that many owners don’t consider, such as selling to employees through an Employee Stock Option Plan (ESOP) or selling partial equity (typically 60-80%.) This can be ideal for sellers who are interested in staying involved, as it creates liquidity, reduces the owner’s stress, risk, and responsibility, and allows the owner to benefit from the investor’s capital and professional management capabilities. If the new investor succeeds, the seller’s equity could be more valuable than proceeds from the initial transaction (‘second bite of the apple.’)  

Lesson: Explore all exit options before going to market.

Mistake #2 – Overestimating Business Value and Terms

Sellers’ valuation expectations are often disconnected from reality as they tend to overestimate the value of their business due to emotional attachment or lack of market knowledge. Before going to market, sellers must consult with an experienced M&A firm who will normalize financials to properly reflect adjusted cash flow, provide data on comparable company sales, and provide guidance on probable deal terms. Sellers must appreciate that buyers assess value across quantitative (financial) and qualitative (team, industry trends, etc.) dimensions. Don’t waste your time pursuing a sale unless you’re comfortable accepting probable market value and terms. Before Kinected accepts a client, we ensure that all three “legs of the stool” are well-supported: the business is performing well, the owner is financially prepared (can afford to sell), and the owner has a personal post-retirement plan.

Lesson: Get an Opinion of Value from an M&A professional as part of your initial Exit Plan

Mistake #3 – Targeting the Wrong Buyers

You know your business better than anyone, so you may assume you know your perfect buyer, usually a competitor. You may not realize that there could be several potential buyers willing to compete to buy your business. Fixating on one buyer/type limits your options. Having an M&A advisor target an expanded buyer pool including strategic and financial buyers increases your probability of a successful sale and creates leverage. When you have only one buyer in play, that buyer feels no pressure to keep the process moving or pay a premium. This is why we commonly say, “When you have one buyer, you have no buyers.”     

Lesson: Run a process targeting both strategic and financial buyers

Mistake #4 – Lack of preparation, specifically around financials

Most entrepreneurs with revenues under $25M don’t see a benefit in strong financial reporting. They run their businesses by gut feel. If there’s sufficient cash in the bank, all is fine. Most engage low-cost bookkeepers who perform basic tasks—entering transactions in QuickBooks (sometimes correctly), doing monthly bank reconciliations, and providing just enough detail to file the tax return. Sure, business owners can “get by” with unsophisticated bookkeeping but trust me on this—low-caliber recordkeeping will prevent you from selling your business for anything approaching fair market value. If you want a premium valuation, you must present your books so the “real” earnings can be validated by buyers. Because buyers of $5M–$50M companies usually value businesses on a multiple of earnings, earnings are the most scrutinized element of any deal.  Before we take a company to market, we insist the seller engage a third-party CFO/CPA for an independent review. This financial pro will come in on a part-time basis and bring invaluable industry and M&A expertise to the review process. 

Lesson: Ensure your financials are ‘bulletproof’ before going to market – preferred to a busted deal due to misleading/incorrect financials.

Mistake #5 – Poor Negotiation Skills and Emotional Attachment

As an entrepreneur, you feel confident in your ability to negotiate favorably with suppliers, customers, and employees. However, selling your business is very different, requiring specific skills and experience that DIY sellers often lack. On the other side of the table will likely be a professional buyer who has completed several dozen transactions and negotiates deals for a living. Without the support of an experienced M&A team, who will ensure the deal is negotiated properly, the cost of making a mistake or the value left on the table can be substantial. While you would prefer to not pay the fees to retain a deal team (M&A advisor, transactional attorney, and CPA/CFO), I can assure that these professionals will pay for themselves many times over in terms of the additional value they bring. 

Lesson: Just as your surgeon, pilot, or electrician would tell you, sometimes you need to trust professionals.

Selling a business is a complex and emotionally charged process that requires specialized knowledge and skills. While the DIY approach might seem appealing to save on costs, the potential risks and pitfalls almost always outweigh the benefits. By engaging professionals and taking a well-planned approach, you can maximize the value of your business and ensure a smoother transition.

As you consider selling your business, we encourage you to speak with an experienced M&A advisory firm that will help increase the odds of your transaction closing successfully. Kinected Advisors has an 87% success rate in our transactions, well above the industry average of 30%.
If you aren’t ready to sell, Kinected has created an exit planning service called ExitBoost where we provide a baseline valuation, benchmarking analysis, salability scorecard and periodically update until you are ready to go to market. Based on successfully helping other clients increase their valuations by 20-140%, we are confident we will add value along the way and make your business more salable for when you and the business is ready.  We would love to speak with you about getting you the best possible deal for your business.

The post The Top Five Mistakes Entrepreneurs Make Trying to DIY the Sale of Their Business appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

Without a predefined exit or succession plan, the company struggled to navigate a leadership transition.The company faced significant disruptions, and its ability to maintain customer and investor confidence and operational continuity was severely hampered. The absence of a clear contingency strategy meant that the company had to make rapid, reactionary decisions, misaligned with the company’s long-term strategic goals.

We had spoken with this prospect several times over the past few years and each time, the owner mentioned he was too busy. Clearly, no exit planning occurred before the owner’s unexpected passing. Unfortunately, this is a far too common story, as supported by recent findings from the Exit Planning Institute:

• 79% of business owners have no written transition plan
• 49% have done no planning at all
• 80% business owner net worth tied up in the business
• 70%+ of businesses put on market do not sell
• 30% of family businesses transition to 2^nd generation and only 12% the 3^rd generation

Baby Boomers own two-thirds of U.S. businesses. These owners will be transitioning out of their businesses over the next decade, whether they are prepared or not. As statistics show that only 20%-30% of businesses that go to market actually sell, this leaves 70-80% of businesses without solid options for owners to transition wealth and secure their legacies. Business owners actually spend more time planning vacations than preparing to sell their businesses! 

Thoughtful business owners, who take the time to prepare their businesses AND themselves for sale significantly increase the odds of a successful transition. 

Kinected has developed a proprietary exit planning methodology called ExitBoost designed to prepare the business and the owners for an optimal sale process. With ExitBoost, we work with business owners to break down the exit planning process into bite size steps. We provide a comprehensive view of financial, operational, legal and personal readiness and establish checkpoints to monitor the readiness of the owner and the business to transition. Additional ExitBoost benefits include:

1. Increase Transaction Value: Businesses that have gone through our process are properly positioned to attract premium buyers and have successfully increased valuation by 20-140%
2. Maximize cash at closing: Exit planning helps to maximize the after-tax proceeds owners receive at closing, ensuring optimal deal structure and tax efficiency.
3. Increase probability of closing: Exit planning helps increase the probability of successfully closing the sale of the business. ​
4. Reduced Time to Close: Ensures owner and business are fully prepared for sale, reducing friction and facilitating a quicker close.

5. Expert Guidance: Receive advice from seasoned professionals and introductions to other vetted deal team members, which helps sellers address potential buyers concerns increasing the probability of a smooth and successful sale.
6. Reduced Stress on Owner– M&A Advisor prepares business and runs M&A process while you continue to run business.

By learning from this tragic story and proactively developing an exit plan, business owners can better prepare for the future, securing their legacies, while simultaneously increasing the value of their business.

As you consider preparing your business for sale, we encourage you to speak with an experienced M&A Advisory firm that will increase the odds of your successful transaction. Based on successfully helping other clients increase their valuations by 20-140% we are confident we will add value along the way and make your business more sellable for when you and the business is ready. Kinected Advisors has an 87% success rate for our transactions and we would love to assist you on your journey towards unlocking your next chapter.

The post A Cautionary Tale – Why Exit Planning is Essential appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

In this article, we explore the reasons behind this surge and offer insights on how business owners can effectively prepare their companies for a successful sale.

3 Reasons Why More Business Owners are Seeking to Sell Now

Changing Macro-Environmental Factors

The rapidly evolving business environment, characterized by rapid technological advancements, market disruptions, COVID-19, geopolitical conflicts, and economic uncertainties, has made it challenging for business owners to navigate complexities and maintain profitability. As a result, many entrepreneurs are considering selling their businesses or reducing their risk exposure.

Demographic Changes and Retirement

The changing demographics of business ownership play a significant role in the increasing number of business owners seeking to sell. With many baby boomers reaching retirement age, they are looking to secure their legacies and unlock wealth through selling their businesses.

Lifestyle Changes and Personal Priorities

The increasing desire for work-life balance and personal fulfillment has led business owners to explore selling their companies. As individuals reevaluate their priorities, selling a business can offer them more time for new ventures, hobbies, or spending quality time with family.

Preparing Your Business for Sale

Once the decision to sell has been made, engaging an experienced M&A Advisor is essential for preparing the business for sale and attracting premium buyers. Key activities in this process include:

1. Business Valuation

An experienced M&A Advisor will review your financials and provide a market-based opinion of value and probable terms by analyzing comparable company sales. This analysis allows you to understand your business’s probable value, how it compares to industry peers, and identify improvement opportunities if needed.

2. Operational Optimization

Documenting stable, repeatable, and scalable business processes with clearly defined employee roles is crucial to attract buyers and achieve higher valuation multiples.

3. Market Positioning and Differentiation

Highlighting unique selling points and a credible long-term growth strategy enhances the attractiveness of the business to potential buyers.

4. Organizational Structure with Empowered Middle Management

Having a well-structured organization with a competent and empowered management team ensures a smooth transition plan for new owners.

5. Legal Considerations

Engaging an experienced corporate transactional attorney to address any outstanding legal issues, contracts, permits, and potential changes of control is vital.

The significant increase in business owners seeking to sell their businesses reflects the dynamic economic landscape and evolving personal priorities. Proactively preparing your business for sale, optimizing financials, and documenting key processes and competitive advantages can increase the value of your business and attract premium buyers.

As you consider preparing your business for sale, we encourage you to speak with an experienced M&A Advisory firm that will increase the odds of your successful transaction. Kinected Advisors has an 85% success rate in our transactions and we would love to assist you on your journey toward unlocking your next chapter.

The post Why More Business Owners Are Seeking to Sell (and How to Prepare for an Optimal Sale Process) appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

Statistics show that only 20%-30% of businesses that go to market actually sell. This leaves 70%-80% of enterprises stranded without solid options for owners to transition their wealth and secure their legacies. In fact, studies show that business owners spend more time planning vacations than preparing to sell their businesses!

Thoughtful business owners who have taken the time to prepare their businesses and themselves for sale significantly increase their odds of a successful transition.

What Is Exit Planning?

Exit planning refers to a broad series of activities that prepare businesses for an optimal sales process. It also ensures that business owners are psychologically and financially prepared to exit.

Why Is Exit Planning Important?

The goal of exit planning is to increase the probability of your success. Additionally, sellers who go through exit planning gain benefits like:

• Attracting higher-quality buyers
• Increasing the probability of closing
• Expediating the closing process
• Maximizing cash at closing
• Optimizing tax position
• Reducing escrow amounts and hold-backs
• Pre-empting common buyer and lender questions and concerns

What Does the Exit Planning Process Look Like?

The exit planning process occurs in three steps:

• Exit planning prep (9-12 months)
• M&A process (9-12 months)
• Post-closing transition (3-6 months)

When Should Sellers Start to Prepare?

Sellers should start the process at least two years before they’d like to exit. Given that most sales processes take 6-9 months (and sellers typically stay involved a few months post-closing), two years allows ample time to plan, sell, close, and transition after closing.

Who Is Involved in Exit Planning?

Exit planning involves five key players:

• The business owner
• A corporate attorney
• A CPA or wealth manager
• The CFO or COO
• An M&A advisor

What Are the Key Exit Planning Workstreams?

There are three critical workstreams in exit planning.

Finance and Accounting

The finance and accounting workstream includes preparing GAAP financials. This workstream also involves preparing audited or reviewed financial statements and conducting a quality of earnings assessment. Further, the finance and accounting workstream substantiates personal and nonrecurring expenses. Lastly, it ensures that monthly or quarterly processes are in place.

Legal, Operations, and HR

Within the legal, operations, and HR workstream, responsibilities include:

• Locating and cataloging company agreements
• Addressing major deficiencies (like. staffing, IT, and insurance)
• Creating employee retention and incentive plans

Legal, operations, and HR also updates job descriptions, training materials, and the org chart.

Marketing

Some responsibilities in the marketing workstream include creating a marketing plan, building a virtual data room, and pre-screening deals with potential lenders. The marketing team also prepares the CIM, Teaser, and buyer lists.

Working with a trusted M&A Advisory firm will increase your odds of a successful transition. If you or a client is interested in learning more about exit planning, business valuation, or the M&A process, our team at Kinected Advisors would love to have a confidential conversation.

The post What is Exit Planning and Why Is It Important? appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

Discrepancies in Earnings

One factor that can cause an M&A deal to fail is discrepancies in earnings. If the parties cannot agree on the adjusted earnings of the target company, the deal is likely to fall apart.

To avoid such a situation, sellers should obtain a sell-side Quality of Earnings (QofE) report from a third-party accounting firm for deals valued over $10 million. This report evaluates the target’s financial and operating information with a focus on the EBITDA. It ensures that the seller’s financials are prepared, increasing the probability of closing and allowing deals to close more quickly.

Financing

Financing is another common issue that can cause deals to fail. If financing required to complete the deal is not available or becomes too expensive, the deal may fall apart.

In such cases, parties will need to get creative to get the deal closed. For example, in a recent deal, a seller acted as the buyer’s bank, receiving an above-market interest rate collateralized by a lien on the buyer’s assets and a personal guarantee from the buyer individually.

Diligence Findings

Diligence findings are another factor that can cause deals to fail. If the diligence process reveals issues with the target company that were not previously known or not properly disclosed, the buyer may lose trust and back out of the deal.

To avoid such a situation, sellers should disclose everything—good,
bad, and ugly—early, and often, as professional buyers employ specialized diligence teams trained to uncover potential issues. When sellers disclose issues in a truthful manner, guided by the advice of their corporate attorney, there is usually a path forward for buyers to mitigate risks (e.g., escrow holdbacks). However, deals can die when trust is diminished through one principal’s action that the other side perceives as a character issue.

Greed

Greed is another factor that can cause deals to fail. Emotions run high in M&A transactions, and a seller may seek a higher price when on market, or a buyer may reduce their offer or impose punitive terms when they discover an issue during diligence. A good M&A advisor plays a critical role in serving as a therapist to their client, grounding them and keeping egos in check. The deal network Axial recently analyzed this subject and provided several recent examples of why deals failed.

In summary, trust and clear communication are essential for closing M&A deals successfully. Most issues can be dealt with in creative ways if the underlying trust has been established. As such, it is essential to work with an experienced M&A advisory firm to increase the odds of your successful transaction.

Kinected Advisors has an 85% success rate in our transactions, well above the 20-30% industry average. If you are considering selling your business, we would love to speak with you about getting you the best possible deal for your business.

The post Why Do Some M&A Deals Die? appeared first on Kinected Advisors - Helping Entrepreneurs Sell their Businesses for Maximum Value.

1. Lure Sellers with a Large Headline Number

Buyers ingratiate themselves to sellers by offering a significant valuation or a high EBITDA multiple along with the promise of a “quick and painless” close. This is classic misdirection. The seller should focus only on the amount of after-tax cash they’ll receive at closing, as nothing else is guaranteed.

In these cases, all three buyers offered most of the consideration in earn-outs and shares of the acquiring company rather than cash. Sellers are advised to be comfortable with the amount of cash they receive at closing, as all other types of consideration carry far more risk.

2. Offer Significant Consideration in an Earn-Out

What’s the downside of taking the consideration in earn-outs? Earn-outs, when structured fairly, bridge the gap between buyer and seller expectations. To receive earn-out payments, sellers need to meet certain predefined goals (revenue, gross profit, or EBITDA) over several years before becoming eligible to receive the additional consideration.

However, earn-outs can be challenging and contentious, because once the seller no longer owns the business, they lack control. Buyers may add costs or allocations, making earn-outs far more difficult for the seller to achieve than expected.

3. Sprinkle in Shares of the Acquirer’s Stock

Stock can be tremendously valuable if the buyer’s company performs well and has a liquidity event. However, sellers offered shares of buyer stock should realize these shares can be illiquid, difficult to value, carry limited voting rights, and may be subject to lock-out periods and tax implications.

4. Include Excess Net Working Capital (NWC) in the Valuation

Net Working Capital (NWC) is one of the most misunderstood aspects of M&A transactions. A business should be sold with sufficient NWC or “gas in the tank” for the buyer to operate post-closing. However, many business owners are not used to measuring NWC and can fall prey to a buyer’s request to include excess NWC, effectively transferring value to the buyer.

5. Tie Up Seller in Extended Exclusivity

All three offers lacked a timeline to complete diligence. This is a trap for the seller. When buyers know they’re not competing against other buyers, they lack the incentive to move quickly. In fact, extended time benefits the buyer, as prolonged diligence likely provides them with opportunities to discover reasons to reduce their offer. The buyer also hopes the seller will agree to concessions to avoid starting the process over with new buyers.

How Do Sellers Avoid These Traps?

The surefire way to maximize value is to have an experienced M&A advisor run a process to confidentially market the business to a broad buyer pool, creating competition and keeping the process moving. The advisor’s network of proven deal professionals can help optimize the outcome for the seller.

Before accepting an unsolicited offer, think about how many companies you’ve successfully sold. Most business owners get one chance to sell their business. Yet most buyers are experienced professionals who acquire companies for a living. Who has the upper hand — you, or the buyer who’s built a career purchasing companies on the cheap?

As you consider selling your business, we encourage you to speak with an experienced M&A advisory firm that can increase the odds of your transaction closing successfully. Kinected Advisors has an 85% success rate in our transactions, well above the 20–30% industry average. We would love to speak with you about getting you the best possible deal for your business.

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