Selling a Lower Middle Market Business

What every business owner should know before selling

If you've built a business that generates millions of dollars a year, with a team that operates without you having to be behind every counter, you're no longer playing in the same league as the corner store. When it comes time to sell, you're not going to sell like a corner store. main street business: you're going to enter the realm of the Mergers and Acquisitions (M&A)And the rules there are different.

After more than two decades assisting Hispanic and Latin American business owners in selling their companies in Florida, I can tell you that the most expensive mistake isn't accepting a low price. It's arriving at the table without understanding how the game really works. This article is to help you be prepared.

El lower middle market

El lower middle market The lower-middle market broadly comprises companies with annual revenues between $5 million and $50 million, or with an EBITDA of approximately $1 million to $5 million. They are not large corporations, but neither are they small owner-operator businesses.

The difference with a main street business It's not just about size. It's about nature:

• Your business has middle management and processes that don't depend exclusively on you.
• You have audited or at least reviewed financial statements, not just tax returns.
• Your buyers are not individuals looking to "buy a job": they are professional investors and companies.
• The assessment is based on EBITDA multiplesnot in the Seller's Discretionary Earnings (SDE) which is used for smaller businesses.

Understanding what league you're playing in is the first step. Because the same business, sold as main street or sold as M&A, it can have a price difference of hundreds of thousands —sometimes millions— of dollars.

An institutional market

On main street market The typical buyer is a person. In the lower middle marketYour buyers are in a different category, and each type values ​​your company differently:

• Strategic buyers. Competitors, suppliers, or companies in adjacent sectors that want to grow by acquiring you. They pay for synergiesThey eliminate duplicate costs, absorb your customer base, and enter your market. They tend to pay the highest multiples because, for them, your business is worth more integrated than on its own.
• Financial buyers (private equity). Funds that buy companies to grow them and sell them in 3 to 7 years at a profit. Many operate under the strategy of Roll-upThey buy a "platform" company and then add smaller acquisitions to it (add-onsIf your company is solid but medium-sized, you could be just that. add-on that a fund seeks.
• Family offices. Capital from wealthy families who invest with longer horizons and, sometimes, with less pressure to exit quickly. They can be excellent buyers for owners who want their legacy to continue.
• Search funds and independent sponsors. Entrepreneurs —often executives with MBAs— who raise capital from investors to buy and operate one They bring energy and capital, although sometimes less immediate liquidity.

In Florida, and especially in South Florida, there is an additional factor that is almost nonexistent in other states: the foreign buyerLatin American investors seeking an established company as a vehicle for an E-2 or L-1 visa, or for an EB-5 investment. These buyers have motivations beyond price alone, and knowing how to position your business in relation to them is a real competitive advantage in this market.

The value of your company: the multiple isn't everything

The basic formula sounds simple: value = EBITDA × multipleBut every word hides real work.

First, the Adjusted EBITDA or recastYour financial statements are almost always designed to pay less tax, not to sell at a high price. The process of recast It normalizes those figures: it returns to the profit the owner's discretionary expenses, personal expenses channeled through the company, one-off events, and above-market salaries. recast When done well, it can significantly increase reported EBITDA—and as it multiplies, each well-documented dollar is worth several times its size in the final price.

Second, the multipleIt's not a fixed number. It depends on size (the larger the EBITDA, the higher the multiple—it's the "size premium"), the sector, the growth rate, customer concentration, how dependent the business is on you as the owner, and the quality of your recurring revenue. Two companies with the same EBITDA can be sold at very different multiples for these reasons.

Third, and increasingly important: the Quality of Earnings (QoE)It's an independent financial analysis that verifies your profits are real and sustainable. Previously, only the buyer did this during the due diligenceToday, more and more vendors are commissioning their own QoE. before before going to market. Why? Because a seller's QoE detects and corrects surprises before the buyer encounters them, and deprives the buyer of the leverage to renegotiate the price downwards.

The structure and the price

This is the point that first-time owners ignore the most, and the most costly: The price you see in the headline is almost never the money you take home.

Pay attention to the deal structure:

• Selling assets vs. selling shares. The buyer almost always prefers to buy assets (avoiding hidden liabilities and obtaining tax benefits). The seller often prefers to sell shares. This decision has enormous tax consequences for both parties.
• Earnouts. Part of the price is contingent upon the business achieving certain milestones after closing. This can increase your total price, but it can also remain just a promise if it's not properly structured.
• Rollover equity. In transactions with private equityIt's common to retain a percentage of the business in the new structure. It's the famous "second bite of the apple": if the fund grows the company and resells it, your share profits again. For many owners, that second sale ends up being worth more than the first.
• Seller financing (seller's note). You finance part of the price yourself. It's common practice and, when done well, it expands the pool of potential buyers.
• Working capital peg. The agreement on how much working capital you must leave in the business at closing. It sounds technical, but a miscalculation here can cost you hundreds of thousands of dollars in the final settlement.

A high price with a poor structure can yield less, both in real money and certainty, than a well-structured, moderate price. Learn to look at the whole deal, not just the big number.

The M&A process, step by step

Unlike selling a small business, an M&A transaction is an orderly process that usually takes 6 to 12 months:

1. Preparation and evaluation. Recast, seller QoE, organize contracts, correct visible weaknesses. This is where the sale is won or lost.
2. Marketing materials. Un official teaser or blind profile (without revealing the name) and a CIM (Confidential Information Memorandum), the professional document that tells your company's story to qualified buyers.
3. Market entry. Discreet contact with selected strategic and financial buyers, always under confidentiality agreements (NDA).
4. Letters of Intent (LOI). Interested parties submit a Letter of Intent (LOI), which is generally non-binding except for clauses such as exclusivity and confidentiality. Here, you choose who to work with.
5. Due diligence. The buyer examines everything: finances, contracts, employees, litigation, taxes. It's intense. If you're well prepared, it's a formality; if not, that's where the deal falls apart—or gets cheapened.
6. Closing. Definitive purchase and sale agreement, reps and warranties, escrow, and the signature.

Watch out for mistakes

After so many years in this, I see the same mistakes repeating themselves:

• Selling without preparing. The buyer senses improvisation and uses it to lower the price.
• Confusing billing with value. Sustainable profitability is purchased, not gross sales.
• To depend too much on the owner. If the business doesn't work without you, the buyer will either discount it or demand that you stay tied to it for years.
• Customer concentration. If a customer represents 40% of your revenue, that's a risk that's paid for with a lower multiple.
• Breaking confidentiality. Letting employees, customers, or competitors find out ahead of time can damage the business you're trying to sell.
• Negotiate only the price. As we said: the structure and taxes define how much you actually take home.
• Improvise the tax section. The difference in taxes between a well-planned and a poorly planned sale can be hundreds of thousands of dollars.

Prevention is better than cure.

The best sale isn't planned on the day you decide to sell. It's planned two or three years in advance: documenting processes, reducing the owner's dependence, diversifying clients, cleaning up financial statements, and building a team that inspires confidence in the buyer. Each of these decisions translates, on closing day, into a higher multiple and a smoother negotiation.

Selling your company is probably the most important financial transaction of your life. It's not the time to learn on the fly or to do it alone.

As Benjamin Franklin said: "An ounce of prevention is worth a pound of cure."An M&A advisor who knows the lower middle market From Florida —and who speaks the language of your buyers, here and in Latin America— is not an expense: it is, many times, the difference between a sale and the sale you really deserved.

This article is for informational purposes only and does not constitute individual legal, tax, or accounting advice. Every transaction is different; consult your attorney and accountant before making any decisions.

Alfredo González es Certified Business Broker (CBB) and founder of International Business Group (IBG) in Coral Gables, Florida, with over 25 years of experience advising Hispanic and Latin American entrepreneurs on buying and selling businesses in Florida. (786) 486-3615 Alfred@negociosenflorida.com  I  BusinessInFlorida.com