Key Principle
The sale of a lower-middle-market company is a staged disclosure process that runs from a one-page teaser to a closed deal, and at every gate the seller is trading information for a costlier signal of buyer seriousness. The single irreversible move is the LOI: signing grants the buyer a 60–120-day exclusivity window that collapses the seller's leverage onto one party. Everything before it — honest financials, defensible add-backs, choosing how to create a market, qualifying the buyer — exists to make that one bet correctly. Honest presentation survives diligence; cosmetic numbers and inflated headline prices do not.
Why This Matters
Present reality with context, not cosmetics: "Present reality with contextual detail, but do not try to remove reality to improve the numbers." Better-looking financials raise the price, so the temptation to distort is maximal exactly where it is most fatal — diligence ties statements back to bank records, and a number inflated by removed reality becomes a deal-killer. The sobering base rate is that fewer than 1 in 4 (<25%) sub-$15M-EBITDA deals close after the LOI is signed. A seller who treats exclusivity as a shot clock, over-reaches on add-backs, or runs a broad auction systematically repels the disciplined buyers most likely to actually close.
Good Examples
- Defensible add-backs ("beer money" framing). Restate reported earnings toward true owner earnings, but only with adjustments that pass two tests: (1) personal-expense ("an expense related to me personally that a new owner won't assume") — personal cars, family phone plans, family members not staying post-close; charitable contributions are the most commonly accepted add-back; (2) extraordinary/one-time (unlikely to recur, and operations/culture wouldn't have suffered if never paid). Lead with distributable free cash flow — "beer money," "whether you can actually buy beer with generated profits" — not just income-statement profit.
- The marketing document stack as a graduated valve. Teaser/blind profile (non-confidential 30-second elevator pitch → induces NDA or self-selection) → NDA/CA (licenses candor) → CIM (full viability document, post-NDA only) → operating documents (appendices). Put material skeletons (pending lawsuit, etc.) in the CIM: buyers find them in diligence anyway, where the same fact is a priced, manageable risk if disclosed early but a deal-killer if discovered late.
- The Likely Market (the realistic default). Remove unwanted buyer types, prioritize desired attributes, research candidates (Google, LinkedIn, ACG, Private Equity Info, Axial), assemble a list, then prioritize a second time, contact the 2–3 clear favorites first, and ask those who pass for feedback and referrals — "continuing the research in-process." Funnel: ~50–75 teasers → 20–30 CIMs → 3–9 IOIs → 1–3 LOIs → exactly one due-diligence party.
- Qualify the buyer before signing the LOI. Verify (1) is this the buyer you actually want (exclusivity forecloses the market), and (2) can they fund the close — internal funds (PE/family office/corporate) verify easily; independent sponsors/search funds need written proof of investor interest; individuals/SBA need a statement from their financial institution.
Counterpoints
- An auction is endorsed only in the narrow case. "If money is your only motivation, an auction can be a viable path." Otherwise breadth is harmful: "An offering meant for 'everyone' attracts no one particularly well." Base-rate math — with 100 buyers each has ~1% chance of winning and less than a quarter of a percent chance of closing, so disciplined, well-capitalized buyers self-select out first; breadth subtracts strong buyers, not just adds weak ones.
- Hyper-target is Permanent Equity's preference but carries single-point-of-failure risk — no price competition, and "you might get within a foot of the finish line and lose the deal, only to start over again."
- Abandon the process for the right match. "You are trying to put together one great transaction, not create a repeatable process." Advisors push the process that worked for their prior deals.
- Re-trading vs. legitimate re-pricing. Some buyers post a "suspiciously attractive 'headline' number, then slowly lower the valuation after you agree to exclusivity." But not all re-pricing is bad faith — genuinely surprising facts can justify a real change.
Key Quotes
"Accuracy is the objective. And if you adjust away from accuracy too much, you will lose investors' interest." — Brent Beshore, (Telling Your Financial Story)
"Particularly for Permanent Equity, cash flow is king... what we call 'beer money,' as in whether you can actually buy beer with generated profits." — Brent Beshore, (Telling Your Financial Story)
"Think of a teaser as your 30-second elevator pitch. It should outline the opportunity and be shareable (not confidential)." — Brent Beshore, (The Process)
"An offering meant for 'everyone' attracts no one particularly well." — Brent Beshore, (Creating a Market)
"The more casually an offer is made, the less seriously you should take it." — Brent Beshore, (The Process)
"On average there's greater than a 75% chance that the transaction won't close once it goes under a letter of intent." — Brent Beshore, (LOI & Due Diligence)
"That period should not be looked at as a shot clock, or a deadline, unless the buyer is clearly stalling. It can serve as a forcing function, but is almost always extended if everyone is working in good faith." — Brent Beshore, (A New Normal)
Rules of Thumb
- Provide financial history back to 2019 (post-pandemic volatility); break out monthly/quarterly and by revenue stream; split capex into maintenance (no change in capacity) vs. growth.
- A business needing an asset base worth 20–30X profits may not be sellable as a business.
- Read the IOI for what's missing, not the top number — IOIs are non-binding; omissions are the tell.
- A real offer follows a 4–8 hour site visit; a frictionless offer means the buyer hasn't paid the cost a genuine bid demands.
- Sign the LOI only when a close is genuinely plausible — it flips a cheap multi-buyer negotiation into an expensive, exclusive (60–120-day) process.
- Vet the buyer's close rate before signing: "Of your last ten LOIs, how many closed?" Evasiveness on close rates or references is the re-trade red flag.
- Treat a "no" as free research, not a verdict — high teaser volume means a desirable buyer may pass on odds, not merit.
- Tell meaningful contenders within the week when you go under LOI — given the >75% failure rate, you may need them back.
- A typical funding stack: most proceeds are cash to the seller, with a seller note and rolled equity — the seller helps finance their own sale. [UNCLEAR: the Sources & Uses figure for the $21M example had conflicting OCR values for Mezz Debt / Buyer Equity; the balancing figure-table reads Mezz Debt $0, Seller Note $5M, Buyer Equity $7M.]
Related References
- Due Diligence — "A Professional Colonoscopy" - what happens after LOI
- Types of Buyers & Closing Certainty - who you're marketing to
- Advisors, Intermediaries & Fees - who runs the process
Diagram
