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Middle-Market M&A Insights: Q2 2023

June 22, 2023


The second quarter, fueled by rising interest rates, limited access to debt, and persistent high inflation indicators, offered much uncertainty for mergers and acquisitions (M&A) buyers and investors. With sellers remaining focused on peak valuations from 2021 and 2022 and buyers becoming increasingly conscious of macroeconomic trends, more creative dealmaking strategies could be required to get deals done. One approach buyers and investors are using is shifting a portion of risk to sellers through earnout structures, seller notes, and equity rollover options.


Earnouts can be structured in many ways, but most are based on revenue, gross profit, or earnings before interest, tax, depreciation, and amortization (EBITDA). Earnouts allow sellers the opportunity to realize a higher valuation based upon future performance, and buyers benefit from the ability to shift risk to the sellers. When considering an earnout structure, it is imperative to develop a mutual understanding between all parties and to precisely document in the purchase agreement how the earnout will be calculated. Successor accounting treatment can have a significant impact on post-closing earnout calculations, and establishing the proper documentation is critical to avoid disputes.

Seller Notes

A seller note is a type of debt financing where the seller of the business pays some portion of the purchase price in the form of a promissory note. Like earnouts, seller notes can give buyers confidence that the sellers will remain motivated post-transaction because a piece of their value is dependent upon future performance of the business. Buyers also find seller notes attractive because it may reduce the risk for other lenders and can serve as a financing bridge when lending options are tight. Additionally, seller notes can offer tax benefits, which add to the attractiveness for sellers.

Equity Rollover

When an equity rollover is agreed to, the seller is investing in the business and the buyer’s success by retaining an equity interest in the company post-transaction. The primary benefit of an equity rollover for a buyer is less cash invested upfront, which means less capital to raise and less risk. Sellers can monetize a portion of their equity interest initially and can also participate in a potentially higher valuation upon a future sale of the company.

Effective Dealmaking in Uncertain Economic Times

While larger deals have slowed, the middle and lower-middle M&A market has remained resilient in the first half of the year. Private equity firms are sitting on large sums of dry powder, driven by record fundraising over the last several years. Strategic acquirers have also built healthy balance sheets and are sitting on excess cash driven by the pandemic-induced economies of 2021 and 2022.

Being proactive in evaluating potential strategies to bridge valuation gaps can speed up deals, improve certainty of closing, and increase value for all parties. EBITDA adjustments are becoming more heavily scrutinized in today’s market compared to recent years. Whether your deal is buy-side or sell-side, KSM’s dedicated transaction advisory services professionals are well versed in every aspect of the deal process and can help identify the best strategies to get your deal to closing.

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