Buying and Selling Business in the Middle Market - VR Business Sales Blog

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Thursday, April 30, 2009

Buying and Selling Business in the Middle Market

Peter King
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VR defines the middle market as a realm of businesses that have grown beyond single management entities to significant regional or national stature with revenues between $10 million and $200 million.  
However, the majority of the middle market is made up of businesses that are built around a single product area and its natural extensions. Normally, they are not comprised of multi-market corporations with a group of divisions. Therefore, the enterprise is an integral unit that does not lend it to being sold in pieces.  
Various Types of Owners
Mid-market business owners can come in a variety of different types. The businesses are generally categorized as family managed, a small-sized entity or an independent subsidiary or division of a larger enterprise.  
Usually, owners of closely-held mid-market businesses have invested so much both financially and emotionally that the sale is a very significant event in their lives. This contrasts from the situation that a corporate development officer from a Fortune 500 company dispassionately executes a strategic shift by a redeployment of global resources. Both of these types are participants in these kinds of transactions where the sensitivities required vary dramatically from transaction to transaction.  
Right Price on Both Sides of the Table
Everyone wants to obtain the right price. You will rarely find dedicated corporate sellers that are determined to complete a transaction within a predetermined time frame at whatever cost that the market will pay to sell the business.  
More often than not, the given seller has never experienced the processes and complexities that are involved. Many owners will soon retire and view the prospect of receiving top dollar for the sale of their interest in the business as vitally important. Receiving the highest price is a natural function when coming up with an offer that will carefully cultivate competition among buyers, which will give an accurate picture about the size of the market for the transaction.  
A prospective buyer will see a business as valuable if it’s highly profitable, has attractive prospects and is the missing piece for their strategic jigsaw puzzle. They have to see the business as an opportunity for maximum profit with an organized and realistic description of their benefits and value.  
The seller will receive the best deal through a combination of a clear and convincing presentation that shows that the business is an attractive fit for the buyer. The company’s value is what an informed and motivated potential owner is willing to pay for it.  
If you are selling, you want to be sure to review all agreements between your company and other parties. You should focus on strengthening the business’ position on existing and new arrangements that are flexible and identify problematic areas that can be resolved with measures that can be implemented quickly. Also, you must be aware with the buyer’s approach to measuring return on investment, discounted cash flow and potential strategies to their overall plan.  
Show Diligence with Add-Backs
To maximize price, you have to have clear and reliable information. Pro forma adjustments to financial statements (called add-backs) are the norm for illustrating how the target company performed in the configuration that the seller anticipates for the new owner.  
Expenses are usually reduced to eliminate obviously unnecessary items. Good historical financial data represents the best starting point, particularly audited financial statements.  
Buyers will feel more comfortable discussing add-backs when they know that the results have been determined with audit scrutiny. The investment in having assessed financial statements reduces clutter later in the negotiation and preparation of the definitive agreements.  
Remember that add-backs and adjustments should be reasonable and consistent with the overall expectations of the seller. For example, buyers do not appreciate being asked to value a business for which the seller has added back $500,000 of the compensation that CEO expects to continue to receive at the unadjusted level. Therefore, make sure that if you have to have add-backs that they are few in number, logical and easily identifiable.


Response to: Buying and Selling Business in the Middle Market
Ally Conrad says
A buyer is going to want to know the condition, the history, and if the business has the potential to become as more successful. Similarly, a middle market company needs a complete "book" that describes all aspects of the company. There has to be opportunity there to strike the interest of the potential buyer.

Response to: Buying and Selling Business in the Middle Market
Sandy Lamar says
In my experience when I am either buying or selling a business, it always comes down to getting the terms right where both sides will agree. That can be sticky, and not necessarily because of the size of the establishment. You really have to understand the other parties needs, not just your own. There has to be a level of trust.

Response to: Buying and Selling Business in the Middle Market
Ron Bushland says
I was looking to buy this one manufacturing business a couple of years ago. However, the whole process was delayed so much because the seller dragged his feet revealing all of their add backs. It turned out, he hadn't kept good books and I decided to invest in another business near by.

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