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What to Expect from the M&A Advisory Process

For many business owners, selling or transitioning a company is among the most consequential decisions they will face. The M&A advisory process can feel unfamiliar at first, but understanding how it works, and what each phase involves, helps owners engage more effectively and make better-informed decisions along the way.

The process typically begins with an initial consultation, during which the advisor works to understand the business, the owner's objectives, and the relevant financial and operational context. This phase is as much about fit as it is about information gathering. A good advisory relationship requires candor on both sides.

Once engaged, the advisor will work with the owner to prepare marketing materials, most commonly a Confidential Information Memorandum (CIM), that presents the business to prospective buyers in a clear, accurate, and compelling way. This document covers the company's history, operations, financial performance, and growth prospects. The quality of this preparation often has a meaningful impact on how buyers initially perceive the opportunity.

With materials in hand, the advisor identifies and contacts prospective buyers. Depending on the situation, this may include strategic acquirers, companies in the same or adjacent industries, as well as financial buyers such as private equity firms. The advisor manages this outreach confidentially, ensuring that sensitive information is only shared with parties who have signed a non-disclosure agreement.

This phase requires judgment. Casting too wide a net can compromise confidentiality and distract management. A targeted, well-curated approach is generally more effective.

Interested buyers will submit indications of interest, and after further conversations, a smaller group will be invited to submit formal letters of intent (LOIs). The LOI outlines the proposed purchase price, deal structure, and key terms. Selecting the right LOI to proceed with involves more than comparing headline numbers, deal structure, contingencies, and the buyer's credibility all matter.

Following the LOI, the buyer conducts due diligence, a thorough review of the business's financial, legal, operational, and commercial standing. The advisor helps the owner prepare for this process and navigate the questions that arise.

The final phase involves negotiating the definitive purchase agreement and working toward closing. This requires close coordination between the advisor, legal counsel, and accounting professionals. Experienced advisors anticipate points of friction and help keep the process on track.

Throughout each phase, the role of the advisor is to represent the owner's interests, manage the complexity of the process, and help the owner stay focused on what matters most.

How Business Valuation Works: A Practical Guide for Business Owners

A business valuation is a structured analysis that estimates the economic value of a company at a specific point in time. Valuations are used for a range of purposes, from preparing for a potential sale to satisfying IRS or financial reporting requirements, and the methodology used often depends on the purpose of the engagement.

There is no single universally accepted way to value a business. Different methods yield different results, and a well-supported valuation typically draws on more than one approach. The three primary frameworks are the income approach, the market approach, and the asset approach.

The income approach focuses on the economic benefits the business is expected to generate in the future, discounted back to present value. This is particularly relevant for businesses with stable, recurring cash flows.

The market approach looks at how comparable companies have been valued, either through publicly traded stock prices or through actual transaction data. This approach requires judgment about which comparables are truly relevant and how to adjust for differences.

The asset approach focuses on the underlying value of the company's assets, net of liabilities. It is most commonly used for holding companies or businesses where asset values are the primary driver of worth.

A thorough valuation involves a review of the company's historical financial statements, an understanding of the business model and competitive position, an assessment of industry and market conditions, and consideration of company-specific risk factors. Normalizing adjustments are often necessary to reflect the true earning power of the business, for example, removing one-time expenses or adjusting owner compensation to a market rate.

The purpose of the engagement shapes the standard of value applied. For IRS purposes, such as estate and gift tax planning or the donation of a business interest, the applicable standard is typically fair market value, defined as the price a hypothetical willing buyer and seller would agree upon, with neither under compulsion to transact. For financial reporting under GAAP, different standards may apply, such as fair value as defined under ASC 820.

Owners sometimes assume a valuation conducted for one purpose can be repurposed for another. In practice, this is not always appropriate, and using a valuation outside its intended context can create risk.

A credentialed valuation professional brings analytical rigor, professional judgment, and familiarity with accepted standards. They can also serve as a useful sounding board, helping owners understand not just what their business is worth today, but what factors are driving that value and how they might be influenced over time.

Sell-Side vs. Buy-Side Advisory: Understanding the Difference

In any M&A transaction, the advisor's role is shaped by whom they represent. Sell-side advisors work on behalf of the business owner or seller; buy-side advisors work on behalf of the acquirer. While both sides share an interest in reaching a successful closing, their objectives, and the work they do, differ meaningfully.

A sell-side advisor's primary responsibility is to represent the interests of the selling party throughout the transaction process. This includes preparing the business for market, identifying and approaching prospective buyers, managing the flow of information and negotiations, and helping the owner evaluate and respond to offers.

For a business owner, retaining a sell-side advisor provides several practical benefits. The advisor brings experience managing a process the owner may be going through for the first time. They create competitive tension among buyers, which tends to improve pricing and terms. And they allow the owner to remain focused on running the business during what is often an extended and demanding process.

Sell-side engagements typically involve a retainer and a success fee, a percentage of the transaction value paid at closing. The success fee structure aligns the advisor's incentives with the owner's goal of achieving the best possible outcome.

A buy-side advisor assists an acquirer in identifying acquisition targets, evaluating opportunities, and negotiating on their behalf. This type of engagement is common among companies pursuing a growth-through-acquisition strategy, as well as private equity firms seeking to deploy capital in a particular sector.

Buy-side work often requires a deep understanding of the acquirer's strategic objectives and the industries or market segments they are targeting. The advisor may conduct proprietary outreach to business owners who are not actively marketing their companies, a more relationship-driven process than a typical sell-side engagement.

Advisors generally represent one side of a transaction. Dual representation, acting as advisor to both buyer and seller, raises significant conflict-of-interest concerns and is uncommon in professional advisory practice. Owners should clarify the advisor's role and any potential conflicts early in the engagement.

Understanding which side an advisor represents is fundamental to understanding whose interests they are serving and how they are being compensated.

Understanding EBITDA and Valuation Multiples in M&A

When business owners begin exploring a potential sale, they often encounter references to EBITDA and valuation multiples. These are standard tools in M&A analysis, but they are frequently misunderstood, or applied without the nuance the context requires.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's operating profitability that removes the effects of financing decisions, tax environments, and non-cash accounting charges. In M&A, it serves as a commonly used proxy for cash flow, the economic benefit a buyer is effectively acquiring.

EBITDA is not a GAAP measure, and it has limitations. It does not account for capital expenditures required to maintain or grow the business, changes in working capital, or the actual cash taxes a buyer will owe. For capital-intensive businesses, EBITDA can meaningfully overstate true cash generation. Buyers and their advisors are aware of this, and the analysis typically goes deeper than the headline number.

Before applying a multiple, buyers and advisors typically adjust reported EBITDA to reflect the true, ongoing earning power of the business. Common adjustments include removing one-time or non-recurring expenses, adjusting owner compensation to a market rate, and adding back personal expenses run through the business. The result is often referred to as "adjusted EBITDA" or "normalized EBITDA."

The size and defensibility of these adjustments can have a meaningful effect on valuation. Buyers will scrutinize them during due diligence, so it is important that they are well-documented and reasonable.

A valuation multiple expresses the relationship between a company's value and a financial metric, most commonly EBITDA. If a business is valued at $10 million and generates $2 million in EBITDA, it is said to have traded at a 5x EBITDA multiple.

Multiples vary significantly by industry, company size, growth rate, and market conditions. A business in a high-growth sector with recurring revenue and a strong management team will generally command a higher multiple than a business with declining revenue and significant customer concentration. Understanding where your business sits within its industry's multiple range, and why, is an important part of preparing for a transaction.

A high multiple on a poorly defined EBITDA base may result in a lower actual transaction value than a moderate multiple applied to a well-supported, cleanly presented earnings figure. Deal structure also matters, the mix of cash at closing, seller notes, earnouts, and equity rollovers can significantly affect what an owner ultimately receives.

Multiples are a useful starting point for valuation conversations, but they are not a substitute for a thorough, deal-specific analysis.

Preparing Your Business for a Sale: Practical Steps for Owners

A well-prepared business tends to command better terms, attract more credible buyers, and move through the transaction process more efficiently. Preparation is not a one-time event; it is a process that ideally begins at least one to two years before a planned sale. The following areas are among the most important to address.

Buyers and their advisors will scrutinize the company's financial statements. Ideally, a business entering a sale process has three to five years of clean, internally consistent financial records. If the company has not worked with an outside accounting firm, engaging one to compile or review the financials, or ideally to audit them, can increase buyer confidence and reduce friction during due diligence.

Normalizing adjustments should be identified and documented before the process begins, not surfaced reactively during buyer questions.

Buyers pay close attention to the composition of revenue. Recurring or contracted revenue is viewed more favorably than project-based or transactional revenue. Customer concentration, where a significant portion of revenue is attributable to one or a small number of customers, is a common concern. If any single customer represents more than 15–20% of revenue, buyers will factor that risk into their pricing and terms.

Diversifying the customer base before a sale, where possible, can meaningfully affect how buyers assess risk.

A business that is heavily dependent on the owner for day-to-day operations, customer relationships, key vendor contacts, technical knowledge, presents transition risk that buyers will discount for. Building a capable management team and documenting key processes reduces this dependency and makes the business more transferable.

This does not mean the owner needs to be uninvolved. It means that the business should be able to function and retain its customers if the owner steps back after a transition period.

Common legal issues that slow or derail transactions include unclear ownership structures, missing or poorly drafted customer contracts, unresolved disputes, intellectual property that is not properly assigned to the company, and gaps in employment agreements. A pre-sale legal review can surface these issues early, when there is still time to address them.

Perhaps the most important element of preparation is developing a clear, well-informed sense of what the business is worth and what a reasonable transaction might look like. Owners who enter a process with unrealistic expectations are more likely to walk away from viable opportunities or make decisions that are not in their long-term interest.

Working with an experienced advisor early, even before formally going to market, can help calibrate expectations and identify the steps that will have the greatest impact on value.

Business Valuation in Estate and Gift Tax Planning

For business owners with a significant portion of their net worth tied up in a privately held company, estate and gift tax planning often requires a formal business valuation. Understanding the purpose of these valuations, and the standards that govern them, helps owners engage more productively with their advisors.

For federal estate and gift tax purposes, the IRS requires that business interests be valued using the fair market value standard. Fair market value is defined as the price at which property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

This is a specific, legally defined standard, not simply an owner's opinion of what the business is worth, nor what a specific buyer might be willing to pay in a strategic transaction. The distinction matters, because fair market value often differs from what a business might achieve in an actual sale to a motivated strategic buyer.

When valuing a minority interest in a privately held business, such as a partial ownership stake being transferred as a gift, appraisers often apply discounts to reflect the economic reality of holding that interest. A minority owner typically cannot control distributions, force a sale, or direct management decisions. This lack of control has value implications that the market recognizes.

Similarly, interests in privately held companies are less liquid than publicly traded securities. A discount for lack of marketability reflects the time, cost, and uncertainty associated with converting a private business interest into cash.

These discounts are well-established in valuation practice and IRS guidance, but they are also frequently scrutinized by the IRS. A well-supported, thoroughly documented appraisal is essential.

The IRS requires that valuations used for estate and gift tax purposes meet specific standards. The appraisal must be conducted by a qualified appraiser, defined in part by professional credentials, experience, and independence, and the report must meet requirements for a qualified appraisal under Treasury regulations.

Using a valuation that does not meet these standards can expose the estate or the donor to penalties, in addition to the underlying tax liability. Engaging a credentialed professional with specific experience in estate and gift tax valuations is important.

Valuation is not only relevant at the time of death. Gift tax planning, including family limited partnerships, grantor retained annuity trusts (GRATs), and similar structures, often involves the transfer of business interests during the owner's lifetime. In these cases, the valuation date and the current state of the business can have significant tax implications.

Working with an estate planning attorney and a qualified valuation professional in a coordinated way helps ensure that the valuation supports the broader planning strategy.

What Buyers Look for in a Lower Middle Market Acquisition

The lower middle market, generally defined as businesses with enterprise values between approximately $5 million and $50 million, is one of the most active segments of the M&A market, and also one of the most nuanced. Buyers in this space range from private equity firms and their portfolio companies to individual operators and family offices. Understanding what each type of buyer prioritizes helps owners position their business more effectively.

The starting point for most buyers is the financial track record. Buyers want to see consistent or growing revenue and earnings, with margins that are explainable and defensible. A business with strong recent performance but significant historical volatility will prompt questions about sustainability. Conversely, a business with a clear upward trend, even if it started from a modest base, can be a compelling opportunity.

Buyers will look beyond the headline numbers. They will want to understand the drivers of profitability, the cost structure, and the quality of the accounting. Businesses with well-maintained books and a clean financial history move through due diligence more smoothly.

Recurring or contractually committed revenue is among the most valued characteristics in a lower middle market business. It reduces the buyer's perception of risk and increases confidence in the earnings they are effectively acquiring. Even where fully recurring revenue is not possible given the business model, buyers look for evidence of customer loyalty, repeat business, and long-standing relationships.

For financial buyers in particular, the strength of the management team is a critical factor. Private equity firms are generally acquiring a business they expect to operate and grow, often with the existing team in place. A business that relies heavily on the owner for relationships, technical expertise, or day-to-day decision-making presents transition risk.

Strategic acquirers may be less concerned about management depth if they plan to integrate the business and bring their own operational resources. But even strategic buyers want assurance that the business will not lose key customers or employees immediately following a change in ownership.

Buyers are not only acquiring what a business is today. They are acquiring what they believe it can become. Evidence of a clear path to growth, whether through geographic expansion, new product lines, or an underserved customer segment, tends to be viewed favorably. Sellers who have thought through the growth thesis and can articulate it credibly are better positioned than those who cannot.

Buyers in the lower middle market, particularly experienced private equity groups, encounter owners with a wide range of expectations. Owners who have a realistic sense of value, understand the mechanics of a deal, and are prepared for the process tend to generate more competitive outcomes. Those who approach a sale with inflated expectations or insufficient preparation often find the process more difficult and the results less satisfying.

Valuation for GAAP Financial Reporting: What Companies Need to Know

When a company completes an acquisition, issues equity-based compensation, or holds certain financial instruments, its financial statements may require valuations that comply with generally accepted accounting principles (GAAP). These are not the same as the valuations used for sale or tax planning purposes, and the distinctions matter.

Following the completion of an acquisition, GAAP requires that the purchase price be allocated to the assets acquired and liabilities assumed, with any excess assigned to goodwill. This process, known as a purchase price allocation (PPA) or ASC 805 analysis, requires identifying and valuing intangible assets that may not have appeared on the seller's balance sheet.

Common intangible assets identified in a PPA include customer relationships, trade names, developed technology, non-compete agreements, and backlog. Each of these must be valued using methods appropriate to its nature, and the resulting values affect the acquiring company's balance sheet and the amortization charges that will flow through its income statement in subsequent periods.

A PPA is typically required to be completed within one year of the acquisition close date. Engaging a qualified valuation firm early in the process, ideally before the transaction closes, can help ensure a smoother and more defensible analysis.

Once goodwill is recorded on the balance sheet, it is subject to annual impairment testing under ASC 350. If a company's reporting unit has declined in value below the carrying amount of its net assets (including goodwill), the company may be required to recognize an impairment charge.

Impairment testing involves estimating the fair value of the reporting unit and comparing it to its carrying value. This is a valuation exercise that requires professional judgment and familiarity with the applicable accounting standards.

ASC 820 establishes the framework for fair value measurement under GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, a market participant perspective, as opposed to an entity-specific one.

ASC 820 applies to a range of contexts, including the valuation of financial instruments, contingent consideration in M&A transactions, and assets measured at fair value on a recurring basis. Companies subject to audit will find that their auditors scrutinize fair value measurements carefully, particularly for complex or illiquid instruments.

Companies facing GAAP valuation requirements benefit from working with a firm that understands both the accounting standards and the underlying valuation methodology. A valuation that is technically sound but not aligned with the auditor's interpretation of the applicable standard can require significant rework.

Clear communication between the company, its auditors, and the valuation firm, ideally established before the work begins, reduces the risk of surprises and helps ensure the financial statements reflect an accurate and defensible picture of value.

Earnouts in M&A Transactions: How They Work and When They Make Sense

An earnout is a contractual provision in an M&A transaction that ties a portion of the purchase price to the future performance of the business. Earnouts are relatively common in the lower middle market, and while they can bridge valuation gaps, they also introduce complexity and risk that owners should understand before agreeing to one.

The most common reason for an earnout is a disconnect between what a seller believes the business is worth and what a buyer is willing to pay based on historical performance. A seller may point to recent growth momentum, a significant new customer, or an anticipated product launch as reasons the business deserves a higher valuation. A buyer, unwilling to pay for outcomes that have not yet materialized, may propose an earnout that allows the seller to capture additional value if those expectations are met.

Earnouts can also arise from genuine uncertainty, in cyclical industries, during periods of market disruption, or when a business is undergoing a meaningful transition.

An earnout typically specifies a performance metric, a measurement period, and a payout schedule. Common metrics include revenue, EBITDA, or gross profit. The measurement period is often one to three years following the closing date.

The structure of the earnout matters considerably. An earnout tied to revenue is generally simpler to measure and less susceptible to manipulation through accounting decisions. An earnout tied to EBITDA or net income gives the buyer more flexibility in managing expenses, which can create tension if the seller remains with the business post-close.

Earnouts are widely recognized as a source of post-closing disputes. Sellers who remain with the business after closing may find that the buyer's management decisions, cost allocations, capital expenditure timing, investment in sales and marketing, affect the earnout metrics in ways the seller did not anticipate. Even with well-drafted provisions, disputes over earnout calculations are common.

Key protections sellers should seek include clearly defined accounting methodologies, restrictions on the buyer's ability to take actions that would impair the earnout, and in some cases, acceleration provisions if the business is sold again during the earnout period.

An earnout may make sense when the seller has high conviction in near-term performance that the business has not yet demonstrated, when the seller plans to remain actively involved post-close, and when the earnout is structured around a metric that is objective and largely within the seller's influence.

In general, sellers are better served by negotiating for as much cash at closing as possible, with earnout provisions reserved for circumstances where the potential upside justifies the added complexity and risk.

The Value of Knowing What Your Business Is Worth Before You Need to Sell

Most business owners think about valuation in connection with a specific event, a planned sale, a buyout of a partner, or an estate planning need. In practice, understanding the value of a business on an ongoing basis, rather than only when a transaction is imminent, tends to support better decisions and better outcomes.

A valuation provides a clear, independent view of where the business stands financially. It surfaces the factors that are driving value, and, equally importantly, those that are constraining it. For an owner who plans to transition the business in five to ten years, this information is actionable. There is time to address customer concentration, strengthen the management team, invest in recurring revenue streams, or make other operational improvements that will have a tangible impact on the eventual sale price.

Owners who obtain a valuation only when they are ready to sell have less flexibility. They learn about value drivers and detractors at a point when there is limited time, and sometimes limited appetite, to address them.

For many business owners, the company represents the largest component of their net worth. Planning for retirement, charitable giving, or the transfer of wealth to the next generation is difficult to do with confidence when the value of that asset is unknown or estimated informally.

A credible, up-to-date valuation allows owners and their financial advisors to plan with more precision. It informs decisions about how much to retain in the business versus distribute, when to begin transitioning ownership, and how to structure gifts or trusts to minimize tax exposure.

Businesses with multiple owners often benefit from a formal valuation independent of any transaction. Buy-sell agreements, which govern what happens to a partner's interest in the event of death, disability, retirement, or voluntary departure, typically require an agreed-upon method for determining value. Having a current, professionally prepared valuation helps ensure that these provisions operate fairly and do not become a source of conflict at an already difficult moment.

Business valuations do not exist in isolation. They reflect conditions in the broader M&A market, including buyer appetite, available financing, and comparable transaction activity. An owner who understands the current market context is better positioned to decide whether now is a favorable time to explore a transaction or whether waiting for different conditions makes more sense.

A valuation conversation with an experienced advisor is rarely just about a number. It tends to open a broader discussion about strategy, timing, and the factors that will shape what a transaction ultimately looks like, a conversation that is almost always worth having sooner rather than later.