What is the purpose of a letter of intent (LOI) in a business sale?

/in , /by Al Statz

A Letter of Intent (LOI) in a business acquisition serves as a blueprint for the deal by establishing key terms, as well as process and timeline, before moving into due diligence and final agreements. It signals serious intent, based on what is known today, without final commitment. It helps both parties align their expectations and minimize wasted time and costs.

Key Purposes of an LOI in Business Acquisitions

1. Establishes Key Deal Terms

  • Defines the purchase price and deal structure (e.g., asset vs. stock sale, earnouts, seller financing).
  • Clarifies terms around payment, contingencies, and liabilities.
  • Helps both parties determine if they are aligned before investing in full due diligence and legal work.

2. Creates a Framework for Due Diligence

  • Allows the buyer to dig deeper into financials, operations, and risks before committing.
  • Gives the seller an idea of what information will be required and what potential hurdles may arise.

3. Includes Exclusivity to Prevent Shopping the Deal

  • Most LOIs include a “no-shop” clause, preventing the seller from negotiating with other buyers for a set period.
  • This protects the buyer from wasting time and money only for the seller to accept a better offer elsewhere.

4. Signals Serious Intent Without Full Commitment

  • While mostly non-binding, an LOI shows that both parties are serious about making a deal.
  • Some provisions, such as confidentiality, exclusivity, and break-up fees, may be binding.

5. Reduces the Risk of Late-Stage Surprises

  • A well-structured LOI helps avoid major renegotiations when drafting the final purchase agreement.
  • The clearer the LOI, the less room for misunderstandings later.

Why LOIs Matter

The LOI may be the most important document in a business sale process. A well written LOI reduces misunderstandings and renegotiations, and increases the probability of a successful closing. A weak or vague LOI often leads to delays, disputes, cost overruns, and failed deals.

Are you working on an LOI right now or planning to sell a lower middle market business? Contact Al Statz with any questions, or for information on our highly successful structured sale process.

Beyond price: What matters most when selling your company

/in , /by Al Statz

Most of our seller clients go into a sale thinking their highest priority is getting top dollar. And sure, price matters—it’s your financial reward for years of hard work. But many clients learn along the way, that other factors often carry just as much weight—sometimes more. If you want a successful and satisfying sale, look beyond the headline sale price.

Strategic Fit: Will the Buyer Honor Your Legacy?

The right buyer isn’t just the one offering the most money—it’s the one who sees value in what you’ve built. Many owners care deeply about their company’s culture, employees, and future direction. A buyer who shares your vision and wants to grow what you started may be worth more than a higher offer from someone looking to wring maximum profit out of your business.

Deal Structure: Terms Matter More Than Price

A higher price isn’t always the best deal. The structure—earn-outs, seller financing, holdbacks, rep and warranty insurance—can make a big difference. A slightly lower offer with favorable terms can often put more money in your pocket in the long run than a big number with strings attached.

Taxes: It’s Not What You Make, It’s What You Keep

How a deal is structured—stock sale vs. asset sale, purchase price allocation, installment payments vs. lump sum—can dramatically impact your tax bill. A “higher” price can shrink fast after taxes if the deal isn’t structured wisely. Smart sellers work with advisors to maximize after-tax proceeds, not just the headline number.

Legacy and Employees: What Happens After You Leave?

Many owners care deeply about their employees and the legacy they’re leaving behind. If keeping your team or family employed, maintaining company values, or ensuring community involvement matters to you, it may be better to select a buyer who aligns with that vision. It’s not just about money—it’s also about what happens when you’re gone.

Your Role Post-Sale: Are You In or Out?

Do you want a clean break, or are you open to staying involved? Some buyers need sellers to stick around for a transition—or retain partial ownership. Others can offer a full and quick exit. Know what you want and make sure the deal matches your expectations.

Speed and Certainty: A Fast Close Can Be Worth More

A higher offer isn’t worth much if it drags out for months or falls apart at the last minute. Buyers with secure financing and a smooth path to closing can be more attractive than those offering more money but bringing uncertainty. Time kills deals—certainty has value.

The Bottom Line

Yes, price matters, and we’re all about helping our seller clients maximize value. But a successful and satisfying sale is about more than that. Strategic and cultural fit, deal terms, taxes, legacy, and closing certainty all play a role in selecting a buyer and optimizing sale outcomes. Sellers learn that the best deal isn’t always the highest price—it’s the one that checks the most boxes for achieving their financial and personal goals.

For further information on this topic or to discuss a potential M&A advisory or exit planning need, please contact Al Statz.

U.S. Private Equity M&A Activity and 2025 Outlook

/in , /by Al Statz

Exit Strategies Group sees 2024 as a turning point for U.S. acquisitions by private equity groups, for both new platform and strategic add-on acquisitions, and we’re optimistic that market conditions will continue to improve in 2025.

U.S. M&A activity, particularly in private equity (PE), rebounded strongly in 2024, with deal value rising 19.3% and deal count up 12.8%; fueled by stabilizing inflation, improved credit access, and a more favorable interest rate environment.

The hottest sectors were IT—especially software, where deal value surged 32.4%—and healthcare, which saw renewed interest despite ongoing regulatory hurdles. Software M&A thrived as PE firms chased high-margin, cash-flow-rich assets, while healthcare rebounded after years of regulatory stagnation.

Leveraged buyout (LBO) financing improved as banks re-entered the market, though loan volumes remain below pre-pandemic levels. PE dealmaking remains highly financing-driven, as it always has been!

For further information on M&A market conditions or to discuss a current need, contact Al Statz.

 

How important is the management team when selling a business?

/in , /by Al Statz

Selling a lower middle-market business involves various factors that can impact the price buyers are willing to pay, the cash amount they offer, and the likelihood of a successful sale. One of the most crucial elements is the strength and stability of the management team and key contributors within the organization.

Continuity and Stability

A strong management team is essential for ensuring continuity and stability, which are highly attractive to buyers. Investors are more inclined to purchase a business when they see a competent team in place, capable of maintaining smooth operations after the sale. This continuity mitigates instills confidence that the business will remain stable and profitable.

Operational Expertise

Experienced managers contribute invaluable operational expertise that is vital for the business’s success. Their in-depth understanding of company processes, customer relationships, and market dynamics equips them to maintain and continue to enhance performance during and after the sale. This institutional knowledge reassures buyers that the business can sustain its success independently of the current owner(s).

Strategic Vision

Buyers are drawn to companies with leadership that not only manages operations effectively but also has a plan for the future. Strong teams have a clear strategic vision. They can articulate growth opportunities and strategic initiatives that will propel the business forward. The strongest teams have a written strategic plan and are in the process of implanting that plan.

Enhanced Valuation

The presence of a skilled and dedicated management team can significantly increase a company’s market value. Buyers are often willing to pay a premium price for businesses backed by a proven and committed leadership team and offer more favorable terms to the seller.

Lower Risk

A seasoned management team helps mitigate various risks associated with a sale. Their ability to navigate operational challenges, market changes and internal dynamics reduces business risk and makes your company more appealing to risk-averse buyers, increasing the chances of a successful sale.

Smoother Transition

No one would argue that continuity of leadership results in more seamless ownership transitions. Changes of ownership without capable and committed leadership are often challenging. The management team plays a crucial role in minimizing disruptions and maintaining employee morale and customer satisfaction at a vulnerable time.

Better Quality Buyers

Quality buyers usually have many investment alternatives. They want assurance that an acquired company will thrive without the seller’s involvement. A seasoned and committed management team signals that the business is well-managed and positioned for continued success, making it more attractive to higher-quality buyers.

Companies with proven and committed management teams usually attract better quality buyers and result in more successful acquisitions. Exit Strategies Group helps sellers highlight their team’s strengths, ensuring that prospective buyers appreciate that value and make offers that are more favorable to our clients. During the Assessment phase we help clients understand the strength of their team from an investor perspective and recommend adjustments that are likely to enhance its attractiveness and value.

For information about Exit Strategies Group’s M&A advisory or business valuation services, please contact Al Statz at alstatz@exitstrategiesgroup.com.

M&A Glossary: No-Shop Clause

/in , /by Al Statz

Many M&A negotiations include a no-shop clause. This is a period of exclusivity when the seller cannot solicit offers from other parties. The due diligence process is expensive for buyers, so sellers sign these agreements as an act of good faith.

Typically, a no-shop clause has a near-term expiration date and is only in effect for a couple of months (45—90 days). Buyers with a lot of leverage, and those working with inexperienced sellers trying to represent themselves, will work hard to tie you up in exclusivity for as long as possible.

 

If they can get away with it, the no-shop clause won’t have any expiration date at all, allowing the buyer to drag their feet indefinitely. Don’t get caught in that kind of dirty play. 

Scaling for Sale: Growth Strategies that Double as Exit Plans

/in , , /by Al Statz

As a business owner, you’re likely consumed with the daily challenges of building and growing your business. The question of selling might seem like a distant concern—something to worry about years down the road. But the reality is that planning your exit and growing your business are two sides of the same coin.

We’ve been conditioned to think about entrepreneurship in distinct phases: First, you build; then, you grow; finally, you sell or pass it on. It seems logical, doesn’t it? But this linear thinking misses a crucial point: Building scalable value and preparing for an exit are not separate processes—they’re intrinsically linked.

By viewing them as separate endeavors, we put ourselves at a disadvantage. We might inadvertently grow a business that provides a decent income in the here and now but has little value to future buyers. Instead, adopting a seller’s mindset from the outset can transform how you approach your business, driving growth and creating lasting value.

Most Entrepreneurs Exit Empty Handed
Estimates suggest only about 25% of businesses on the M&A market will successfully transition to new owners. Even certified and well-networked M&A advisors report that 50% of their engagements terminate without closing, according to the IBBA and M&A Source Market Pulse Report.

The reasons are myriad from valuation discrepancies, conflicting expectations, and due diligence challenges, to underlying operational issues such as customer concentration, overreliance on key personnel, and static business models.

So while starting a business is challenging, successfully exiting one can be just as difficult. This is where the wisdom of maintaining a “seller’s mindset” comes into play. Business owners who adopt a seller’s mindset aren’t just building for today or tomorrow; they’re crafting a legacy designed for eventual transition.

This approach doesn’t mean these leaders are any less passionate or committed to their ventures. On the contrary, it adds a layer of strategy and foresight that can significantly enhance a business’s long-term value and success.

The Entrepreneur’s Paradox: Less Doing, More Growing
One of the key principles of building a business with a seller’s mindset is focusing on working “on” the business rather than “in” it. This shift in perspective is part of creating a company that can operate independently of its owner.

When you work “in” the business, you’re caught up in day-to-day operations, fighting fires, and personally handling key client relationships. While this hands-on approach is often necessary in the early stages, it can create a business that’s overly dependent on you as the owner.

Working “on” the business, however, involves:

  1. Developing systems and processes that can run without your constant oversight
  2. Building a strong management team that can operate the business in your absence
  3. Creating a strategic plan for long-term growth and sustainability
  4. Investing in technology and infrastructure to improve efficiency and scalability
  5. Focusing on strategic partnerships and market positioning

By adopting this approach, you’re not only creating a more valuable business in the eyes of potential buyers, but you’re also giving yourself more freedom to focus on high-level strategy and personal goals.

From Owner’s Pride to Buyer’s Prize
As you shift from working in your business to working on it, your perspective naturally begins to align more closely to that of a potential buyer. And ultimately, your business is only worth what someone else is willing to pay for it.

So, what exactly makes a business valuable to buyers? The answer might surprise you. While profitability matters, it’s not always the primary driver of value in M&A transactions. Buyers are looking for businesses that offer more than just a healthy bottom line—they want potential for growth, strategic advantages, and operations that can thrive under new ownership.

For example, we sometimes see businesses with 40% or more customer concentration, particularly in the manufacturing space. It happens easily enough—the business has a great relationship with its biggest customer, and the work is steady and profitable. It’s great income now, but it makes this business a risky proposition for a future buyer.

As mentioned above, over-reliance on an owner can also diminish business value. A business that depends heavily on the owner’s personal relationships, expertise, or daily involvement may struggle to maintain performance under new leadership.

Other factors that can negatively impact value include:

  • Failure to innovate or keep up with industry trends
  • Delayed investments in technology or equipment
  • An unstable workforce or high turnover rates
  • Lack of documented processes and procedures
  • Inconsistent financial performance or unclear financial records

Building your business with a seller’s mindset means identifying and developing value drivers while simultaneously driving out risk factors that could reduce buyer confidence or limit their ability to succeed.

The Valuation Report Card
Now that you know a little bit about what buyers value, it’s time to take an honest look at your own business. But how can you objectively assess your company’s worth and identify areas for improvement? Consider getting a regular estimate of value.

Imagine sending your child through 12 years of school, only to discover in their senior year that they’re woefully unprepared for graduation. It would be a shocking and potentially devastating revelation, wouldn’t it? Yet, many business owners unknowingly put themselves in a similar position.

Just like a report card provides feedback on a student’s progress, a business valuation can offer vital insights into your company’s health and market position. A valuation can serve as a comprehensive scorecard, highlighting your business’s strengths and pinpointing areas that need improvement. It provides a clear picture of how the market perceives your company and what factors are driving or diminishing its value.

Without this periodic assessment, you might be operating under false assumptions about your business’s worth. Perhaps you’re overestimating its value, setting yourself up for disappointment when it comes time to sell. Or maybe you’re undervaluing your company, putting your financial security and legacy at risk.

Calculating Your Exit Equation
But knowing your business’s value is only half the equation. The other half? Understanding what that value means for your personal goals. After all, the ultimate purpose of building a valuable business isn’t just to create an attractive asset—it’s to create the financial foundation for the life you want to lead.

Many business owners fall into the trap of waiting for a predetermined age or milestone to sell their company. However, this approach can lead to missed opportunities or, worse, financial shortfalls. Instead, consider aligning your exit strategy with your personal financial goals by understanding your “lifestyle number.”

Your lifestyle number is the amount of capital you need to receive from your business exit to achieve financial freedom and realize your goals or live your ideal lifestyle. When you get clear about your goals—and have an objective opinion on how much your business is worth—you can make better informed decisions about growing (and exiting) your business.

The Exit Roadmap
Finally, it’s time to think about the actual nuts and bolts of preparing for a sale. Many business owners make the mistake of treating their exit as an event rather than a process. For some owners, this means they’re leaving significant money on the table when it’s time to sell.

Depending on the nature of your business, a comprehensive exit plan might address areas like these:

  1. Transferrable contracts: Ensure key contracts can be transferred to a new owner without dispute or disruption.
  2. Management team retention: Consider tying up your management team with stay bonuses or equity to ensure continuity.
  3. Clean financials: Maintain clear, organized accounting records. Consider audits to boost buyer confidence or a sell-side quality of earnings report prior to going to market.
  4. Working capital optimization: Understand how working capital impacts your take-home money after a sale and optimize it in the years leading up to a sale.
  5. Tax planning: Understand the tax implications of different deal scenarios to maximize your after-tax proceeds.
  6. Buyer options: Explore different exit options and the pros and cons of each. Understand how each option might impact your key managers, family members, or real estate strategy.

Some of these strategies can take two or three years to put in place. Plus, some sellers can’t walk away immediately after a transaction. Depending on deal terms, you may need to provide a certain amount of seller financing or stay involved in a consulting role.

Don’t wait to find out you have to trade value for time. Plus, the sooner you plan, the more options you will have and the better prepared you’ll be to exit with leverage, on your own terms.

Seller Strategy = Growth Strategy
At the end of the day, growing your business with a seller’s mindset isn’t about looking for a quick cash-out; it’s about creating something of lasting value that can thrive even as ownership changes hands. By adopting a seller’s mindset, you’re committing to:

  1. Creating systems and processes that allow your business to thrive without your constant involvement
  2. Building a strong, capable team that can drive the business forward
  3. Focusing on sustainable growth and diversification
  4. Maintaining clean, transparent financials
  5. Continually assessing and improving your business’s value

This approach not only prepares you for a successful exit but also creates a stronger, more resilient business in the present. It pushes you to think strategically, to focus on what truly adds value, and to build something that can stand the test of time.

Whether you plan to sell your business next year, pass it on to the next generation, or continue growing it for decades to come, building your business with a seller’s mindset will serve you well. It’s not about whether you’re ready to sell right now; it’s about maximizing the value of what you’ve been building and creating options for your future.

From the M&A Glossary: Add-backs

/in , /by Al Statz
Add-backs are adjustments made to a company’s financial statements to more accurately reflect its true earning potential and “normalize” its financial performance. These adjustments are typically made to the target company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) to create a metric known as “Adjusted” or “Normalized” EBITDA.

Add-backs to EBITDA are expenses or income items that are considered definitional, discretionary, non-recurring, one-time, or not essential to the company’s core operations.

Common examples of add-backs include:

  1. Non-recurring:  These could include costs related to a lawsuit, restructuring, a natural disaster, or significant one-time investments.
  2. Owner’s compensation:  If the owner’s salary or benefits are higher than market rates, the excess may be added back to reflect the company’s true profitability.
  3. Discretionary expenses:  These are expenses that are not essential to the company’s operations, such as donations or excessive travel and entertainment.
  4. Non-arm’s length transactions:  These are business deals between related parties, such as family members, where the terms may not reflect fair market rates (e.g., real estate leases).
  5. Definitional: Interest, income taxes, depreciation and amortization are expenses that must be added back to net income to arrive at EBITDA

Properly normalizing financial statements is a learned skill that takes years of real-world M&A transaction experience. This is one of the many roles of an M&A advisor.

From the M&A Glossary: Search Fund 

/in , /by Exit Strategies

A search fund is an investment vehicle through which an entrepreneur raises capital from investors to fund the search for and eventually the acquisition of a privately-held company. 

The search fund model allows the entrepreneur to collect a salary while they search for a suitable target company and negotiate a letter of intent and perform due diligence. Once a target company is acquired, the entrepreneur usually takes an active role in managing and growing the business, with the goal of creating value for all stakeholders involved.  Investors provide the necessary capital and often offer guidance and expertise.  Another term for search fund is “independent sponsor”.

Search funds aren’t our favorite type of buyer, but occasionally they are the right type of buyer for one of our seller clients. Search funders are most likely to prevail in a sale process when all of the following are true:

  1. the seller manages the business and doesn’t have an internal successor,
  2. the business is smaller, say less than $2M EBITDA, and
  3. there are no strategic buyers present, or the seller wants to retain some equity and the strategic buyers can’t accommodate that, or the seller doesn’t like what the strategic buyers plan to do with the company (e.g. relocate, rebrand, or dismantle it).

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Equity Rollover Benefits

/in , /by Exit Strategies

An equity rollover occurs when a business owner sells their company but chooses to reinvest, or “roll over,” a portion of the proceeds into the newly acquired business. An equity rollover allows a shareholder to benefit from any future growth and value creation. In a bolt-on acquisition or consolidation, the owner would likely receive equity in a larger, more diverse and less risky business enterprise. 

The benefits of an equity rollover for the shareholder include: 

  1. Continued participation in the company’s growth and potential upside. 
  2. Opportunity to partner with experienced investors or strategic buyers who can help scale the business.
  3. Potential referral of capital gains taxes that would otherwise be due upon a full cash-out.

For the new owners or investors, an equity rollover helps to: 

  1. Retain and incentivize valuable expertise and knowledge within the company.
  2. Align the interests of key stakeholders.
  3. Reduce the upfront cash requirements for the transaction. 

Learn more about the advantages and risks of an equity rollover in these articles on our website:

What is a Recapitalization Exit Strategy

Recapitalization Pros and Cons

What is an equity rollover when selling your business

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Timing the Sale of Your Founder-Owned Enterprise

/in , /by Exit Strategies

For founder- and family-owned businesses, deciding to sell is much more than a financial decision. Its a pivotal moment that marks the culmination of years, often decades, of dedication and hard work. The timing decision involves personal and market factors that can significantly influence the outcome of a sale. Understanding the right moment to sell requires an appreciation of the market environment, the business’s lifecycle, and the personal readiness of the owners. 

Market Conditions

The broader economic and specific industry conditions play a vital role in determining the optimal time to sell. A robust market with strong buyer demand and healthy valuations offers a favorable backdrop for selling a business. Sellers should look for periods of economic growth, low interest rates, and a competitive M&A landscape, where strategic buyers and private equity firms are actively seeking acquisitions. Timing the sale when your sector is experiencing an upswing in valuations or when there is a surge in demand for businesses like yours can significantly enhance the financial returns from the sale. 

Business Readiness

The ideal time to sell is also closely linked to the business’s operational and financial health. A track record of steady growth, strong profit margins, a diversified customer base, and a solid management team in place all make a business more attractive to potential buyers. Preparing for a sale often involves several years of planning to streamline operations, professionalize management, and resolve any outstanding legal or financial issues. Selling when the business is on an upward trajectory, rather than in decline or during a plateau, can positively impact the valuation. 

Personal Readiness

For many founders and family-owned businesses, personal readiness to sell is just as critical as market and business readiness. The decision to sell often involves emotional, lifestyle, and legacy considerations. Owners must assess their personal goals, retirement plans, and what they envision for their life post-sale. Additionally, the desire to ensure the continued success of the business and care for employees can influence the timing and terms of the sale. Waiting until the owners are mentally and emotionally prepared can lead to a more satisfactory outcome. 

Succession Plans

The absence of a clear succession plan within the family or the business can be a strong indicator that it’s time to consider selling. If the next generation is not interested or ready to take over, or if there is no internal candidate who can lead the company forward, selling to an external buyer who can provide the necessary leadership and investment might be the best option for ensuring the business’s continued growth and success. 

Strategic Fit

Sometimes, the right time to sell is determined by strategic considerations. This could be a shift in industry dynamics, the emergence of new technologies, or changes in consumer behavior that make it advantageous to sell to a larger entity with the resources and capabilities to navigate these changes more effectively. 

Conclusion

Timing the sale of a founder-owned or family-owned business hinges on a range of factors. Sellers must balance market opportunities with personal readiness and the business’s operational health. With careful planning, owners can identify a strategic window that maximizes financial returns and protects their life’s work. 

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.