Cross-Border M&A

The world is getting smaller, at least from an M&A perspective! Increased competition and globalization in almost all industries have fostered an era of friendly M&A deals without borders. Strategic buyers have been the primary source of M&A transactions in recent years as many firms look to remain competitive in an increasingly global landscape. Most of the time, M&A deals are completed for either offensive or defensive reasons. And, post-recession, the companies with cash have wanted to deploy it quickly and efficiently. Most of the time, the best way for a company to invest is by buying another company. In the “old” days, a company would create a strategy and business plan to expand its business. This would include acquiring or building new plants and equipment. In today’s environment, that takes too long and is too risky for most companies. Therefore, buying another business is a faster, more direct, and less risky approach to expanding a business.

As technology continues to make communication throughout the world easier, companies have not hesitated to do transactions in other countries and continents. These cross-border deals have further fueled M&A in recent years. Acquisitions provide the buying company with an opportunity to expand its global reach in order to generate new sources of revenue, acquire new technology or products, etc.

It is important to note that, unlike the M&A deals of the 1980’s, the transactions taking place today are much more friendly in nature as strategic buyers look for target firms that can complement their core competencies.

The role of investment banks in M&A transactions has also evolved with the motivation of buyers and sellers. Today, more than ever, investment banks are required to be global in their reach. Investment banks that fail to offer cross-border services are proving to be less valuable to strategic buyers who are looking to expand their businesses across the globe. It’s imperative to work with a firm with many years of cross-border M&A experience, as there are many nuances and cultural factors that play into closing a successful transaction. This is true whether it’s hiring an investment bank on the buy side or the sell side.

Mortgage-Backed Securities

A mortgage-backed security, or MBS, is an asset-backed investment that is secured by one or more mortgages. This type of financing is rarely used to complete M&A deals; however, it’s an interesting investment. Occasionally, we like to inform our readers of interesting financial instruments or other matters of interest.

Investing in an MBS is similar to lending money to a homebuyer taking on a mortgage. However, instead of receiving a mortgage that is financed solely by the bank, the mortgage is funded by an open market of investors. Investors reap a return on their investment via the interest rate associated with monthly payments on the mortgage. Because of this functionality, it is clear why an MBS can also be referred to as a “mortgage pass-through.” Mortgage-backed securities generally achieve a rate of return that is slightly better than government treasury bills or high-grade corporate debt.

The greatest risk to investing in an MBS is known as “prepayment risk,” or the chance that the mortgage is repaid ahead of time. Prepayments of mortgages are most likely to happen in a low-interest-rate environment or when interest rates are declining, as homeowners refinance their mortgages at a lower interest rate. The acceleration of prepayments creates a “reinvestment risk” for the investor who must reinvest the principal that has been prepaid in a now lower interest rate environment. Due to the reduction of interest rates, it is difficult for the investor to reinvest the principal at a rate comparable to the original rate of the original MBS investment.

The opposite of prepayment risk is “extension risk.” This is the risk that the mortgage repayment takes longer than expected. This scenario is most common in a rising interest rate environment as homeowners are less likely to make the required principal payments on their mortgages. This, in effect, extends the life of a low-yielding investment in an environment where interest rates are increasing.

Founded in 1987, Versailles Group is a boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies in the middle and lower-middle market. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

M&A transactions sometimes require financing, and buyers must carefully weigh their financing options to ensure a successful acquisition, i.e., one that will not jeopardize their financial condition. It’s also helpful for sellers to understand why buyers offer equity versus cash or sometimes ask the seller to finance part of the purchase.

Two of the most common forms of financing for acquisitions are the use of debt or the issuance of equity to fund the acquisition. Given that there are advantages and disadvantages to each form, many buyers use a combination of the two.

Financing an M&A transaction through the use of debt can be appealing since it is typically cheaper for the company to issue debt compared to equity, which usually carries a much higher rate of return expectation from investors. Issuing debt has tax benefits because the interest payments are tax deductible, and the increased leverage can also boost a company’s return on equity. Another benefit of issuing debt is that no additional shares are issued, and so there is no dilution of ownership. On the other hand, there are many notable downfalls to financing through debt. The issuance of too much debt will hurt the company’s credit rating, which would hinder its ability to borrow money in the future and would lead to an increase in the company’s cost of debt. Debt issuance may also be limited by existing lender covenants that set a restriction on the amount of debt the firm can assume. This might make it impossible for some companies to borrow enough money to make a large acquisition.

When equity financing is utilized, a buyer can either offer its stock to the target firm’s shareholders or offer cash, which would be generated by the proceeds from an equity offering. Despite the higher cost of equity, it is still very common in M&A transactions because of the flexibility it provides the issuers. Some of the benefits of equity include (i) no mandatory interest payments, (ii) no principal that must be repaid, and (iii) no restrictive covenants related to its issuance. Financing an M&A transaction with equity has no impact on a company’s credit rating, therefore allowing them to issue debt in the future if needed. Equity offerings can however have negative side effects. Issuing stock can hurt a firm’s earnings per share and return on equity as it becomes less leveraged. Furthermore, the volatility of a company’s share price can cause uncertainty about the exact acquisition valuation, which in turn can increase the amount of time needed to reach a closing or even destroy the planned transaction.

Frequently, public companies use equity financing as their preferred form of payment in M&A transactions. Nevertheless, debt still plays an important role because of its cost-effectiveness and the advantages of leverage.

An experienced M&A advisor can help buyers and sellers figure out the best combination of debt and equity for any particular transaction.

Versailles Group, Ltd.

Versailles Group is a Boston-based boutique investment bank that specializes in international mergers, acquisitions, and divestitures.

Since 1987, Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions.

Speak Confidentially with Versailles Group

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

If you are considering selling or acquiring a company, we welcome the opportunity to discuss your objectives and offer a clear perspective on your options.

Request a Session >>

In M&A transactions, an escrow or a holdback is used to ensure that certain conditions are met by the seller before an agreed amount of funds is released. These structures help allocate risk between buyer and seller and are common in middle-market business sales.

If an escrow is used, a third party known as the escrow agent holds the funds until receiving instructions that certain obligations have been satisfied and the funds can be released. Most of the time, the escrow agent is a large, reputable bank or trust company that provides this service.

In middle-market transactions, escrow and holdback structures are often heavily negotiated and can materially impact a seller’s net proceeds, timing of payment, and overall risk exposure.

How Escrow Accounts Work

The escrow agent holds the funds pursuant to an escrow agreement executed at closing. That agreement governs how claims are submitted, the required notice procedures and timelines, dispute resolution mechanisms, the conditions for release of funds, and the investment of escrowed funds along with the allocation of interest.

In most transactions, escrow funds are invested in low-risk instruments. The interest earned is typically paid to the seller upon release, although this is negotiable.

Despite the fact that escrow accounts are very common in M&A transactions, the specific terms can vary greatly. The average escrow amount typically ranges between 10 percent and 20 percent of the purchase price. The holding period generally ranges from 12 to 24 months following closing. In certain situations, however, both the percentage and the duration may be increased depending on the perceived risk of the transaction.

Why Escrows Are Used

Escrows are designed to protect buyers against unforeseen financial losses after closing. Buyers are often concerned that undisclosed liabilities may surface once the transaction is complete.

Funds are typically released to the seller at pre-agreed times. Sometimes, partial releases occur as early as six months after closing. It would be unusual for the entire escrow to be released that early, but buyers and sellers frequently agree to release portions after six or twelve months if no claims have been made.

The funds are released only if all agreed obligations have been fulfilled. If unknown liabilities arise, or if the seller fails to meet certain pre-agreed conditions outlined in the Purchase and Sale Agreement, the buyer may have the right to recover amounts from the escrow.

Provided the agreed conditions are met, escrow funds ultimately belong to the seller. Buyers do not expect escrow funds to be returned to them. Rather, the escrow serves as a protection mechanism in the event issues arise.

Because the funds are held by a neutral third party and can only be released in accordance with the escrow agreement, escrows can reduce a seller’s risk of not being paid.

The Alternative: Holdbacks

The alternative to an escrow is a holdback. In this structure, the buyer simply retains a certain percentage of the transaction consideration instead of depositing it with a third-party escrow agent.

In some transactions, a holdback is used to secure a specific known risk such as a pending tax matter, while general indemnification risk is covered through a separate escrow.

The primary risk of a holdback is that the funds remain in the buyer’s possession. If the buyer were to go bankrupt or otherwise become unable to pay, the seller could face increased credit risk. While such situations are uncommon, this risk is one reason many sellers prefer the added protection of a formal escrow arrangement.

Representation and Warranty Insurance (RWI)

In recent years, representation and warranty insurance, often referred to as RWI, has become more prevalent in middle-market transactions. RWI allows an insurance policy to cover certain breaches of representations and warranties, which can reduce the need for larger escrow amounts.

For sellers, this can increase cash received at closing, reduce post-closing exposure, and improve overall deal competitiveness. However, RWI does not eliminate escrow entirely and often excludes known risks. It is typically used as a complement to traditional escrow structures.

Escrow accounts and holdbacks are important tools for allocating risk in M&A transactions. While they are standard components of many deals, their structure, size, and duration can significantly affect a seller’s ultimate proceeds and risk profile.

Written by Donald Grava

Versailles Group, Ltd.

Founded in 1987, Versailles Group is a boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies in the middle and lower-middle market. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

Speak Confidentially with Versailles Group

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

If you are considering selling or acquiring a company, we welcome the opportunity to discuss your objectives and offer a clear perspective on your options.

Request a Session >>

In many middle-market M&A transactions, buyer and seller do not initially agree on the purchase price. One way to bridge this difference is to structure an earnout.

An earnout is a purchase price mechanism in which the buyer makes additional payments to the seller based upon the post-closing performance of the newly acquired business. Earnouts can be essential to completing M&A transactions when the buyer and seller have different views of value, particularly when part of that value depends on future performance.

For private company owners, especially in the lower middle market and middle market, earnouts are often used when a buyer recognizes the strength and potential of a business but wants part of the purchase price tied to results that have not yet occurred. This may arise when a business has strong growth prospects, new customer opportunities, recent investments, or projections that have not yet been fully reflected in historical financial results.

Earnouts are often designed to help both parties move forward. The seller may receive additional consideration if the business achieves agreed-upon goals after closing, while the buyer reduces the risk of paying the full value upfront for performance that remains uncertain.

Advantages of Structuring an Earnout

There are several advantages to structuring an earnout. Earnouts can reduce negotiation time in cases where neither buyer nor seller can agree on a valuation. An earnout can help the selling party receive additional value for their business by having the buyer make specific payments, over time, based on the business achieving defined performance criteria.

Through the use of an earnout, the selling company may receive more money, or in some transactions additional shares or equity value, than it would have if the acquisition were structured as a one-time payment at closing. Buyers like the use of earnouts because it reduces the risk of overpaying for an investment that does not achieve its financial projections.

For this reason, earnouts are often used to move a transaction forward when the parties agree on the quality of the business but disagree on how much future performance should be paid for at closing.

For example, a founder-owned business services company may have $4 million of EBITDA and recently signed several new customer contracts expected to increase earnings over the next two years. The seller may believe those contracts justify a higher valuation today. The buyer, however, may prefer to pay for that growth only after the revenue is realized. In that case, the parties may structure part of the purchase price as an earnout tied to revenue or EBITDA targets.

Why Earnouts Are Relevant to Private Business Owners

Earnouts are particularly relevant in private company transactions because many lower-middle-market and middle-market businesses are founder-led, relationship-driven, and dependent on future growth assumptions. A seller may believe strongly in the company’s future, while a buyer may focus more heavily on historical EBITDA, customer concentration, margin trends, or other risks.

In these situations, an earnout can allow both parties to proceed with a transaction. The buyer pays a meaningful amount at closing, while the seller has the opportunity to receive additional value if the business performs as expected.

Earnouts may be based on revenue, EBITDA, gross profit, customer retention, new contract wins, or other agreed-upon milestones. The appropriate structure depends on the nature of the business, the buyer’s concerns, the seller’s role after closing, and the degree to which the seller can influence future performance.

For example, a middle-market manufacturing company may have recently invested in new equipment that increases production capacity, but the financial impact may not yet appear in trailing twelve-month EBITDA. A buyer may be unwilling to pay full value for the expected margin improvement at closing. An earnout tied to gross profit or EBITDA may allow the seller to participate in the upside if the investment produces the expected results.

Similarly, a healthcare services company with a strong pipeline of new client relationships may be attractive to strategic and financial buyers, but the buyer may want protection if those relationships do not convert into revenue. An earnout tied to client retention, new contract wins, or revenue growth may help align both parties.

Key Considerations When Negotiating an Earnout

Experienced M&A advisers can help structure and negotiate an earnout that will be acceptable to both buyer and seller. A well-structured earnout can be beneficial to all parties involved. The buyer feels confident it is not overpaying for the company because the seller has to achieve certain performance thresholds in order to receive additional payments. The seller is satisfied because additional consideration will be paid if the business achieves its forecasts.

However, private business owners should understand that the details of an earnout are very important. The parties should clearly define the performance targets, measurement period, accounting methodology, payment timing, reporting process, and dispute resolution procedures.

For example, a revenue-based earnout may be easier to measure, but it may not fully reflect profitability. An EBITDA-based earnout may better reflect business performance, but it can be affected by expenses, accounting treatment, integration decisions, or corporate overhead allocations.

The seller should also consider how much control or influence they will have after closing. Once the transaction is completed, the buyer may control staffing, pricing, sales strategy, marketing spend, capital investment, accounting policies, and other operational decisions. These decisions can affect whether the earnout is achieved.

For this reason, sellers should not focus only on the headline purchase price. They should evaluate how likely it is that the earnout will actually be paid and whether the structure gives them a fair opportunity to achieve the agreed-upon targets.

A $30 million purchase price with $8 million tied to an uncertain earnout may not be as attractive as a $27 million purchase price with more cash paid at closing. The true value of an offer depends not only on the total potential consideration, but also on the certainty, timing, and terms of payment.

The Seller’s Post-Closing Role

The earnout has the added benefit of demonstrating to the buyer that the seller believes in the forecasts and that the seller is willing to support the business after closing. In many transactions, the founder or seller of a company stays with the company during the earnout period to help ensure that the company will achieve the desired results.

This can be valuable for both parties. The buyer benefits from the seller’s knowledge, customer relationships, and operational experience. The seller benefits from having an opportunity to influence the company’s post-closing performance and potentially receive additional consideration.

At the same time, the seller’s post-closing role should be carefully documented. The parties should understand the seller’s responsibilities, authority, compensation, reporting relationship, and ability to influence the business during the earnout period.

For example, if a founder-owned distribution company depends heavily on long-standing customer relationships, the buyer may want the founder to remain involved for one or two years after closing. In that case, the earnout may be tied to customer retention or revenue from key accounts. The seller should understand what authority they will have to manage those relationships and what support the buyer will provide during the earnout period.

Conclusion

Earnouts can be an effective way to address purchase price differences in lower-middle-market and middle-market M&A transactions. They can help sellers receive additional value for future performance while helping buyers reduce the risk of overpaying at closing.

When properly structured, an earnout can help both parties reach a fair compromise on purchase price and move a transaction forward. However, earnouts should be negotiated carefully, with close attention to performance metrics, payment terms, operating control, reporting rights, and the seller’s post-closing role.

For private company owners considering a sale, an earnout should be evaluated not only by the potential dollar amount, but also by the certainty of payment and the practical ability to achieve the required targets.

Versailles Group helps private business owners evaluate transaction structures, negotiate key deal terms, and understand how buyers may view value, risk, and post-closing performance. If you are considering a sale or evaluating an acquisition proposal, a confidential conversation can help clarify your options before entering negotiations.

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What is Due Diligence?

A question sellers often have is what is due diligence? Due diligence is the process that takes place after a letter of intent (LOI) is signed, but before the closing of the deal. It is a detailed investigation into the potential investment in order to verify the assets and liabilities and to make sure that the buyer understands what it is acquiring. Normally, it entails a complete review of the business, products, customers, facilities, background checks on the management, technological reviews, etc.

If the due diligence process is not comprehensive, then the buyer runs the risk of serious financial losses. It is imperative for the buyer to understand how the business operates and the potential risks before closing the deal no matter how big or small that acquisition may be. Due diligence is a way to ensure that neither party involved in the transaction was misled so the deal can be closed successfully.

Three major areas of financial due diligence

Most often the three most important areas of the financial diligence are; (i) the quality and accuracy of the financial statements and related information, (ii) the sustainability of the cash flows, and (iii) a thorough understanding of the tax issues that may arise due to a possible change of ownership. Prior to a sale, owners can significantly improve the value of their business by focusing on these three areas to make sure there are no issues.

Most buyers prefer audited financial statements; however, in the middle-market, a majority of the companies do not have audited statements, primarily due to the high cost. If a seller does not have audited financial statements, the most important thing is to have accurate financial data that is prepared in accordance with GAAP. Sloppy or inaccurate accounting data always makes buyers nervous about the value of the assets and the possibility that liabilities are under-reported.

The sustainability of the seller’s cash flows is very important to potential buyers as this information provides excellent visibility into the possible future performance of the target company. Buyers also like to know which products and services generate the highest margins and have the greatest growth potential in order to better recognize how they can integrate these products and services into their strategic plans and current product offerings. Buyers tend to pay higher multiples when there is a strong, diversified customer base from which they can grow the company.

It’s important that a seller understand that if the diligence doesn’t go well, the buyer may elect not to close the transaction or may ask for a price reduction. For that reason, sellers should make sure that their accounting records are up to date and accurate. Furthermore, to the extent possible, sellers should think about the most important parts of their business and make sure that they are ready to withstand the scrutiny of someone else’s due diligence.

There are many misconceptions about international mergers, acquisitions, and divestitures. The five biggest myths are:

That cross-border transactions are not worth the effort.

Cross-border transactions can be very productive and profitable whether you’re on the buy or sell side – depending on the opportunity. Many companies like to expand into new markets and do well; for example, Illinois Tool Works, the multi-billion dollar US company, has made over 30 acquisitions in Brazil alone. Obviously, they have the vision and resources to complete these deals and would have stopped long ago if they were unprofitable.

That foreign buyers always pay more when acquiring a company.

Foreign buyers sometimes pay more for an acquisition in a different country to buy their way into a market. But that’s not always the case. Many foreign buyers are careful buyers and only pay for value.

That cross-border transactions will take an impossibly long time.

Cross-border transactions can take extra time, as sometimes due diligence will be slowed down by the need to translate documents, to obtain the necessary approvals, understand local customs, etc. However, for an organized buyer, these extra steps only add a modest amount of time, not the unreasonably long time that many envision.

That foreign buyers or sellers are impossible to work with.

Many people believe that foreign buyers or sellers are difficult to work with. There is absolutely no truth to that. People are people, and that’s the same around the world. The percentage of people who are difficult to work with is probably the same in every country. That’s a simple fact of life. And, many foreigners doing international mergers and acquisitions are actually a pleasure to work with.

That foreign sellers always try to cheat the buyers.

Foreign sellers, despite some beliefs to the contrary, are not out to cheat the buyers of their companies. Many countries use different accounting conventions, which do not mean the accounting data has been “cooked.” Frequently, buyers think that whatever is happening in the transaction is directed towards them. Most of the time, it’s just that the buyer doesn’t understand the local customs.

As with any transaction, foreign or domestic, the key to success is thorough due diligence.

If you’re considering hiring a middle market investment bank to either buy or sell a business, it’s important to check the firm out carefully. Successful transactions don’t just happen. To obtain the best result, transactions have to be managed carefully by seasoned professionals.

Middle market investment banks should have both domestic and international reach. That’s important for both buy and sell side transactions in M&A. On the buy side, one shouldn’t miss the chance to view every possible target in the defined geography. On the seller's side, it’s important that the seller not miss another possible buyer, who might have offered better terms and more consideration, just because they’re outside of the territory that is most familiar to a particular firm. In other words, one should hire a firm that can truly cover the world. There are always opportunities if one knows how to find them.

It’s also important for middle-market investment banks to have the ability to create excellent documentation. Those documents will be the first thing that the potential target or buyer will see about your company. As they say, “first impressions count.” If you take a moment to examine the documents that the prospective investment bank sent you, it’s a giant clue as to how they present their clients.

Another important element to check is the firm’s ability to structure and negotiate difficult transactions. The best way to ferret out this information is to ask about a complex transaction. Another way is to look at the firm’s “tombstones.” Are they all transactions between well-known buyers and sellers or are some of them cross-border and between companies that aren’t so obvious?

Staffing on any advisory engagement is important. How long have the principals of the firm been employed by that particular middle-market investment bank? What is their experience level? What are the chances that they will leave the firm mid-transaction? There have been many cases of clients being impressed with the individual handling their project, only to find that they took a better position across town. And, understandably, the transaction stays with the firm, not the individual. As we say, buyer beware.

To summarize, check out your middle market investment bank's experience level, years in business, credentials of the staff and ability to present well.

A little due diligence goes a long way to ensuring a successful transaction.

Speak Confidentially with Versailles Group

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

If you are considering selling or acquiring a company, we welcome the opportunity to discuss your objectives and offer a clear perspective on your options.

Request a Session >>

Selecting a middle-market investment bank can influence buyer reach, valuation strategy, confidentiality, negotiating leverage, and the likelihood of closing. For many owners, especially founders and first-time sellers, the challenge is knowing how to evaluate an advisor before the engagement begins. Reputation and relationships matter, but execution matters more. A capable M&A advisor brings senior-level judgment, transaction experience, project management, and the ability to identify and engage parties most likely to create value.

Before hiring a middle-market investment bank, business owners should consider the following five questions.

Question 1: Who will actually work on my transaction?

In M&A advisory, the team that wins the engagement is sometimes different from the team that manages the assignment day to day. Owners need clarity on who will lead the mandate, prepare the materials, contact buyers or targets, manage negotiations, and communicate with the client throughout the engagement.

That clarity matters because middle-market transactions require judgment at every stage. A sale or acquisition involves positioning the company, anticipating buyer concerns, preparing management for difficult questions, and deciding when to press, pause, or adjust the strategy. Those decisions are shaped by experience, not by process alone.

For sellers, senior-level attention is especially important during buyer outreach, management presentations, letter of intent negotiations, due diligence, and closing. For buyers, it is critical during target identification, owner outreach, valuation analysis, and transaction structuring.

The answer should be specific. A business owner should understand the senior banker’s role, the responsibilities of each team member, and the firm’s expected communication rhythm from launch through closing. Vague assurances about “team support” provide little comfort when a transaction becomes complex.

Question 2: How much M&A experience does the firm have?

Experience in M&A should be measured by more than familiarity with a single industry. Business owners should ask how long the firm has advised on M&A. They should also understand the range of transaction types the firm has handled.

This depth matters because middle-market transactions often involve issues that reach beyond industry knowledge. A successful advisor must know how to prepare a company for market, identify credible counterparties, protect confidentiality, manage buyer or target outreach, negotiate letters of intent, respond to diligence pressure, and help move a transaction toward closing.

A firm with broad M&A experience can draw on patterns seen across many assignments. It may recognize how buyers evaluate risk, where negotiations tend to become difficult, how valuation expectations shift, and which deal terms can materially affect the outcome. That judgment is developed through repeated transaction experience, not through research alone.

The most useful answer will be specific. A qualified middle-market investment bank should be able to describe its history, transaction breadth, senior-level involvement, and ability to manage the practical demands of an M&A process from preparation through closing.

Question 3: How will you identify and approach buyers or targets?

The quality of the buyer or target universe often shapes the quality of the outcome. For a seller, the investment bank should explain how it will identify strategic acquirers, private equity firms, family offices, international buyers, and other qualified parties. The market map should include obvious candidates as well as less visible parties with strategic reasons to pursue the company. These may include industry adjacencies, consolidators, suppliers, customers, foreign acquirers, or companies seeking access to a new geography, product line, customer base, or technical capability.

For a buyer, the advisor’s role shifts toward target identification and discreet owner outreach. Many attractive middle-market companies are privately held and are not actively for sale. Effective outreach requires research, credibility, persistence, and judgment. 

In both cases, the firm’s outreach strategy deserves close review. The client should understand who will be contacted, how sensitive information will be protected, how interest will be tracked, and how the advisor will distinguish serious parties from casual inquiries.

A strong M&A effort balances coverage with discretion. Contacting a large number of parties without a thoughtful strategy can create noise and increase confidentiality risk. The objective is targeted coverage: reaching the most relevant parties while maintaining control of the engagement.

Question 4: How do you protect confidentiality during the process?

Confidentiality is one of the most important issues in middle-market M&A, particularly for sellers. Employees, customers, suppliers, competitors, and lenders may react poorly if they learn too early that a company is exploring a sale or strategic alternative. A leak can disrupt operations, weaken negotiating leverage, and create avoidable concern inside and outside the business.

A qualified investment bank needs a clear system for protecting sensitive information. That system may include blind teasers, staged disclosure, non-disclosure agreements, controlled access to confidential materials, buyer screening, and careful sequencing of outreach.

The advisor’s approach to direct competitors, strategic buyers, and other sensitive parties is important. In some cases, certain buyers may need to be excluded from the outreach universe or approached only after additional protections are in place. The advisor must generate market interest while limiting unnecessary disclosure.

Important questions include:

1. What information will be included in the initial teaser?

2. When will the company’s name be disclosed?

3. Who approves the buyer list before outreach begins?

4. How are competitors handled?

5. How is confidential information controlled during diligence?

An advisor who treats confidentiality casually may expose the company to unnecessary risk.

Question 5: How do you manage valuation, negotiation, and closing risk?

A transaction succeeds when the process produces credible offers, preserves leverage, survives diligence, and closes on acceptable terms.

Business owners should examine how the investment bank manages valuation, negotiation, due diligence, and closing risk. The advisor’s answer should address how the firm will position the company’s financial performance, growth opportunities, customer relationships, management team, and strategic value. It should also show a working knowledge of how buyers evaluate EBITDA, working capital, addbacks, capital expenditures, customer concentration, and future growth assumptions.

In a sell-side process, the advisor’s role is to create a competitive environment and maintain leverage through each stage of the transaction. That requires careful timing, disciplined communication, and a clear understanding of buyer behavior. A good advisor knows how to compare offers beyond headline price, including structure, escrow, earnout terms, financing risk, closing certainty, indemnification, and post-closing obligations.

In a buy-side assignment, the advisor helps the client assess value, understand risk, and structure a transaction that supports the buyer’s strategic and financial objectives.

Business owners should also ask about regulatory structure where securities activities are involved. The advisor should be able to explain whether securities are offered through a FINRA-registered broker-dealer and whether the relevant professionals are properly licensed for the work being performed.

No reputable advisor can guarantee a specific valuation or closing outcome. The stronger answer is a clear explanation of positioning, negotiation strategy, diligence preparation, and closing discipline.

Choosing the Right Middle-Market Investment Bank

When considering hiring a middle-market investment bank, business owners must conduct a thorough evaluation. Key factors to assess include the qualifications and experience of the lead advisor, the strategy for developing the buyer or target universe, the measures in place to safeguard confidentiality, and the firm’s approach to managing valuation, negotiation, and execution risks.

A capable M&A advisor can answer those questions directly and explain the reasoning behind its approach. The conversation should give the owner confidence that the firm can manage both the strategic and practical demands of the transaction.

Speak Confidentially with Versailles Group

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.

If you are considering selling or acquiring a company, we welcome the opportunity to discuss your objectives and offer a clear perspective on your options.

Request a Session >>

Merger and acquisition transactions present an opportunity for a seller and buyer to complete a transaction that will benefit both parties. That being said, the objectives of the buyer and seller need to be in alignment for a transaction to close. Finding a proper deal structure is a critical component in promoting the feasibility of a merger or acquisition. Generally, there are two primary structures for M&A transactions: an asset purchase or a stock purchase.

In an asset purchase, the purchaser will provide consideration in exchange for the assets (both tangible and intangible, e.g., goodwill, intellectual property rights, etc.) of the target company. Somtimes, the acquirer will assume selected liabilities of the company.

The assets purchased are at the buyer’s discretion and what buyer and seller agree upon. Most often, all of the assets are acquired and the selling company is left with the consideration, usually cash, and any remaining liabilities. The seller then either changes the name of the company and uses that entity for another purpose or liquidates the entity.

Most of the time, an asset purchase is favored by the buyer as it mitigates the possibility that prior, and perhaps unknown, liabilities from the selling company will be their responsibility. In particular cases, the avoidance of liabilities is not clear cut. For example, in certain jurisdictions, certain liabilities, e.g., environmental issues may penetrate any structure of an M&A transaction.

A stock purchase is much simpler than an asset purchase. The buyer simply purchases the stock of the selling company directly from shareholders in exchange for cash, the acquiring company’s stock, other consideration, or a combination of the three. The corporate status of the target company remains unchanged except that the stock is now owned by the buyer. In this case, the acquirer acquires all of the assets and all of the liabilities of the target company, unless agreed otherwise by the buyer and seller. And, in some cases, if the seller has valuable tax attributes, e.g., tax loss carryforwards, the purchaser may be able to utilize them.

Each structure contains advantages and disadvantages for both companies. The major concerns include tax considerations, liabilities, and the ease of completing the transaction. Other concerns will arise depending on the nature of the industries and companies involved. Typically, both parties will seek the advice of their tax accountants, lawyers, and investment bankers to determine the best and most efficient structure for a particular transaction.