If your business is over $10 million in revenue and under $100 million it is considered a Lower Middle Market (LMM) business. These types of businesses and transactions involve a complexity that needs to be handled with experience, knowledge, and expertise, and are too small for large M&A firms.
Lower Middle Market (LMM M&A) Business Brokers specialize in lower middle market businesses that are well above Main Street businesses and below the threshold for M&A firms. Pacific Business Sales specializes in LMM M&A transactions for Lower Middle Market businesses with over $10 million in revenue. Our team is experienced in transactions in a wide variety of industries ranging from Aerospace-Military manufacturers to construction, technology businesses, and distribution-3PL businesses in addition to many other industry sectors.
What is Different in a Lower Middle Market – M&A Business Sales-Transaction
Lower Middle Market – M&A business sales transactions are much more complex from start to finish.
Step 1 LOI (Letter of Intent)
Lower Middle market transactions usually start with an LOI (Letter of Intent) from the buyer’s attorney or legal department and are never on a standard purchase agreement. The term Letter of Intent sounds harmless enough, but the LOI is a very critical first step in the transaction and lays out the foundation of the transaction and deal terms. LOIs can be considered non-binding or binding.
Lower Middle Market transactions often have complex deal terms that must be negotiated before signing the LOI. It is important to ensure the deal terms are clear and most importantly agreeable to you, the seller, before signing an LOI. Likewise, if the LOI terms are vague, they must be clarified prior to signing the LOI. This is where an experienced Lower Middle Market M&A Business Broker is a critical part of your team. Your M&A-LMM Business Broker will negotiate the LOI terms to ensure they are acceptable, and you get what you are expecting. Pacific Business Sales will work with your attorney to ensure the LOI language is acceptable.
Step 2 Due Diligence
With the LOI settled and signed, the next step is Due Diligence. Due Diligence in a Lower Middle Market transaction will include 3 major components, 1) Operational and Financial Due Diligence, 2) QofE (Quality of Earnings), and 3) Legal Due Diligence which we explain further below.
- Commercial Due Diligence
Commercial Due Diligence is a review of the company’s overall business model, market share, customer concentration, competitors, products/services, opportunities for growth and risks. This is conducted by analysts within the Private Equity Group or acquiring company. - Quality of Earnings (QofE)
QofE is performed by an independent accounting firm on behalf of the buyer. QofE is a comprehensive review of the company’s tax returns, P&Ls, bank statements, invoices, sales by customer, etc. and is much like an audit. QofE often takes from 60 to 90 days to complete, depending on the availability and condition of the company’s financials. QofE usually runs in parallel with Commercial Due Diligence. - Legal Due Diligence
Legal Due Diligence is performed by the buyer’s in-house counsel or their attorney and is a review of the company’s corporate documents (bylaws, articles of incorporation, minutes) and includes searches for outstanding liens, past litigation, or claims, pending litigation, trademarks & copyright, and potential liabilities. - Committee, Investors or Corp Review-Approval
After Due Diligence is complete the deal package will be presented to a committee, Investment group or for corporate review and approval. The committee, investors or Corporate Officers has already seen the LOI and has had updates along the way, so this generally is a final review and approval.
Step 3 Purchase Agreement and Closing
With a well prepared LOI the Purchase Agreement should reflect the same deal terms. The Purchase Agreement will have the legal terms and conditions required for a formal purchase agreement such as indemnifications, Representations and Warranties, additional disclosures (if required), equipment list, etc.
As with the LOI, your Lower Middle Market M&A Business Broker will review the purchase agreement, then work with your attorney during the attorney review. Once the final redline purchase agreement is approved by your attorney the next step is closing.
The critical steps in an M&A- Lower Middle Market business sale are the LOI. Purchase Agreement, Due Diligence and keeping all parties including attorneys, accountants, and business advisors on track for closing. An experienced Lower Middle Market M&A business broker will guide you and all parties involved in the transaction, from initial contact with buyers and buyer meetings, through the LOI, Due Diligence, Purchase Agreement and most importantly closing.
It is our job to ensure the transaction goes smoothly through timely communication keeping all parties on track, and most importantly achieving a successful closing.
Pacific Business Sales is an experienced Lower-Middle Market M&A-Business Broker midsize-middle market business merger and acquisition venture with confidence, knowing you are guided by strategic expertise and foresight at every step. Trust Pacific Business Sales to be your reliable partner in navigating the complexities of M&A transactions.
