Get beyond just “price.” These considerations will protect your downside, unlock hidden value, and keep deals from falling apart.
Introduction
In middle market M&A transactions — typically involving companies between $10M and $250M in enterprise value — the difference between a good deal and a great one lies in the terms, not just the price. At VALCOR Advisors, we’ve seen countless deals derailed (or de risked) based on how negotiations were handled at the term sheet and purchase agreement stages.
Below are six key considerations that can make or break your next deal. Whether you’re a seller trying to optimize exit value or a buyer seeking clarity and protection, these strategies will ensure you’re negotiating from a position of strength.
1. Price Is Not Everything — Total Deal Value Matters More
Too often, sellers become overly focused on the headline purchase price, without recognizing the true economic reality of the deal. The structure — cash at close, deferred payments, seller financing, earnouts, equity rollovers — substantially impact what they walk away with.
It is critical to assess total deal value after tax and with an understanding of timing, risks, and contingencies. A deal with 80% cash at close and realistic metrics for an earnout (more on this later) may be more favorable than a higher purchase price riddled with conditional payouts or aggressive clawbacks.
Therefore, you need to consider not just the nominal value, but the net present value of scheduled and contingent payments. $2M deferred over 4 years at 8% discount rate could be worth less than $1.7M today — and that’s assuming no performance hurdles or risk factors that could affect collectability. Additionally, tax implications need to be factored in: equity rollovers may defer capital gains, while seller notes generate interest income taxed at ordinary rates.
🔎Case Example: One client was offered a $30M price, including $10M cash, $10M seller note, and $10M in equity in the newly combined company. The competing offer was $26M all cash. After modeling tax, risk-adjusted future payouts, and dilution assumptions on the rollover equity, the client chose the lower nominal bid — which delivered higher real value and eliminated exposure to the buyer’s post-close decisions.
2. Define ‘Working Capital’ Early — and Carefully
Working capital adjustments are among the most misunderstood and disputed elements of a sale. Buyers typically want to ensure that the business has sufficient short-term net assets to operate post-close — but if sellers don’t negotiate these terms tightly, they can lose value unknowingly.
Negotiate a target working capital based on trailing 12-month averages, and clarify which line items are included or excluded. Define whether the adjustment is a dollar-for-dollar true-up and specify the mechanism for dispute resolution.
Watch out for non-operating or seasonal distortions. If Q4 is your busiest season, the average working capital may overstate what’s needed in a normalized environment. Similarly, clarify how cash, prepaid expenses, deferred revenue, or inventory reserves are treated. Many buyers exclude cash and include all liabilities, skewing the net working capital downward and creating post-close deductions.
🔎Common Pitfalls: To avoid significant disagreement and potentially material post closing adjustments to transaction price, it is important to identify exactly what line items will be included in net working capital, over what period of time it is to be measured and how much is truly needed to sustain operations post-close. To often these factors are not clearly defined causing delays and significant adjustments to realized proceeds.
3. Use Data to Support Your Value — and Counter the Buyer’s
Middle market buyers will often attempt to “chip away” at value using concerns revealed in diligence. Without strong preparation, sellers lose leverage.
Often, a buyer, particularly professional investors, will prepare a comprehensive quality of earnings (QoE) report, including normalized EBITDA, adjusted for one-time, non-operating, or excess items, and will benchmark your company against market comps. Be proactive: present a data-driven story that anticipates pushback and explains why your valuation is justified.
Benchmarking not only helps justify your price — it puts pressure on the buyer to justify any discount. Use transaction multiples from PitchBook, GF Data, or other private databases. If you’re outperforming your peers in gross margin or retention, highlight that explicitly.
📈Additional Insight: When being proactive, the seller should prepare their own analysis to highlight their perception of normalized EBITDA, which should include a detailed, line item delineation of various add-backs like excess owners compensation and extra-ordinary expenses. With the right data and analysis, sellers can dismantle weak negotiating arguments from the buyer in in real time and effectively negotiate better price and terms.
4. Know Where to Give — and Where to Stand Firm
No deal gets signed without compromise. But smart negotiators know which issues are cosmetic and which can dramatically alter the economics or risk profile of the transaction.
Be willing to concede on lower-impact issues like minor representations or transition assistance, but draw a hard line on indemnity caps, escrow amounts, non-compete lengths, and working capital definitions. Use these redlines strategically to extract value elsewhere.
📌Additional Strategies: Before negotiations begin, consider creating a three-column matrix:
- Must Have – deal breakers (e.g., indemnity cap not to exceed 10% of purchase price)
- Nice to Have – flexible but valuable terms (e.g., a consulting agreement for the founder)
- Trading Chips – concessions you can give to win points elsewhere (e.g., extending training support)
And, consider offering non-economic concessions early to build goodwill — such as making yourself available post-close for 6 months versus 90 days. Then hold firm on indemnification survival periods or claw-back provisions, which can materially affect overall value.
🔄Example Trade-Off: In one transaction, a seller agreed to a 6-month transition assistance clause but insisted on reducing the post-closing escrow holdback from 10% to 7.5% — with half to be released at 6 months and the remainder to be released at one year — which protected more of the proceeds from time value diminution and post-close management risk.
5. Earnouts: Incentive or Trap?
Earnouts are often pitched as win-wins — giving sellers the chance to share in future success and buyers a way to de-risk overpaying. But unless they’re carefully constructed, they become a breeding ground for post-close conflict.
Earnouts should be based on objective, auditable financial metrics (not subjective KPIs). Tie them to topline revenue or gross margin rather than EBITDA (which can be manipulated post-close), limit the duration to 12–24 months, and secure seller oversight on key operational decisions during that period.
🚩Red Flags to Watch:
- Buyer controls all decisions affecting the earnout but isn’t obligated to pursue growth
- Earnout tied to net income or adjusted EBITDA, which can be changed via accounting decisions
- Lack of access to monthly reports or internal data to verify milestones
📜Smart Structuring:
- Audit rights for seller or third-party verification
- Change of control clauses (earnout accelerates if buyer is sold)
- Performance covenants (e.g., maintain marketing spend, key staff, or pricing policies)
As a final thought, if an earnout is included as a bridge to competing values, it is essential to structure it in a way that that has the highest probability of realization. Ensure that potential pitfalls are adequately addressed and if there’s push-back when doing so, consider it a red flag!
6. Don’t Skip the Diligence on the Buyer
As a final, but often overlooked consideration, don’t fail to conduct sufficient diligence on the buyer — a critical oversight in the middle market, where private equity sponsors or first-time acquirers may lack the capital or operational skill they claim.
At a minimum, ask to review the buyer’s acquisition history, capital stack, sources of financing, and integration plans. Don’t be afraid to request references or case studies from prior sellers. The right buyer will welcome transparency — the wrong one will bristle.
🔒Protective Measures: Consider a “reverse breakup fee” if buyer fails to close due to financing issues. Or require proof of funds (including equity commitments) as a closing condition.
Conclusion
Deal success in the middle market hinges on far more than getting the highest price. The terms — how value is delivered, how risk is shared, and how disputes are resolved — often matter more than the number at the top of the page.
At VALCOR Advisors, we work with business owners, family offices, institutional buyers and private company sellers to structure and negotiate M&A deals that maximize value AND realized proceeds, reduce risk, and close efficiently. If you’re thinking about a sale or acquisition, we invite you to schedule a confidential call with us!
📞Ready to Talk?
Contact us today at https://www.valcoradvisors.com to explore how we can help structure your next deal from a position of strength. Or, call us at: (949) 644-8022.