Exit Prep – Understanding how Buyers affect Bids, Valuations, and Deal Structures

Chris Skubic

November 17, 2022

Welcome to Alkali Insights: M&A Musings and Advice

In the capital markets, preparation is paramount. If you’re preparing to sell or considering a sale in the future, you need to engage an M&A advisor now. A skilled advisor helps you see your business through the lens of a buyer today, so you can make strategic operating decisions tomorrow. With planning and foresight, you’ll be ready when opportunity calls.

Understanding Buyer Types

It is often an emotional decision when founders or shareholders decide to exit a business. There are myriad of items to consider when prepping a business for an exit. One of the more poignant crossroads is coming to terms with how your business might change based on who buys it.

Where there are many types of buyers, most fall into three categories:

  • Corporate strategic buyers
  • Financial buyers
  • Financially backed strategic buyers

It is important for sellers to understand what to expect from these buyers in terms of valuation expectations, deal structure, and post-deal life.

Corporate Strategic Buyers

These buyers are typically publicly traded companies who view their targets as an addition to an existing product line or platform. Corporate strategic buyers usually approach prospective businesses by contacting product leadership instead of the dealmakers of the organization. Deal structures from these buyers are often all cash or a cash/stock mix.

Financial Buyers

These buyers are typically private equity, buyout, or growth equity firms looking for attractive financial investments. Financial buyers are highly focused on investment financials, addressable market, synergies with an existing public company, and optionality to resell in 3-5 years. Additionally, some firms focus on specific verticals, company size, revenue growth trajectory, and future profitability.

Most financial buyers who acquire a controlling stake are looking for companies with a minimum of $4-5M in revenue. A sub-set of private equity companies, called pledge or search funds, will invest in smaller companies. In these cases, it’s common for a fund manager to lead the acquired company post-purchase.

Financial buyers characteristically have more complex deal structures and offer lower valuations. Financial buyers have minimum ROIs for their acquisitions and thus have a cap on what they can pay for a business.

Financially Backed Strategic Buyers

These buyers are typically privately owned companies, backed by private equity or venture capital. Therefore, financially backed strategic buyers look at target acquisitions through the lens of both a strategic and financial buyer. Like corporate strategic buyers, there must be a tactical fit with the company’s product or platform. However, because these buyers are backed by a PE or VC, there is an intense focus on financials – similar to a financial buyer. Financially backed strategic buyers usually approach their prospective targets from the CEO level.

Deal structures from financially backed strategic buyers still tend to be complex, although valuations can be higher than a strictly financial buyer.


To understand where you will get the highest valuation, you need to understand how each buyer values businesses.

Corporate strategics buyers look at an acquisition target as buy-and-hold. Therefore, they look at more long-term growth opportunities and can often justify higher valuations.

Financial buyers, and to a certain extent, financially backed strategic buyers, value business with the idea that they will be selling the investment within 3-5 years. Because these buyers need minimum returns, their ability to stretch on what they can pay for their acquisitions is limited.

If a financial buyer sees the target company as a platform, they will oftentimes pay more for the business. Financial buyers see a platform as an initial investment in a market vertical, where a financial buyer can bolt-on additional acquisitions and increase the size of the core business. From there, the buyer realizes the synergies between the core and bolted businesses and sell the investment within five years.

Most financially backed strategic acquisitions are considered bolt-on investments that are added to financial buyer platforms. Their valuations are similar to financial buyer platforms, with a focus on exiting the business in less than five years.

Deal Structure

Corporate strategic buyers typically have the simplest deal structures. They usually purchase their acquisitions with cash on the balance sheet, through a corporate debt instrument, or a with mix of publicly traded stock and cash, depending on whether or not the company views their stock as properly valued by public markets.

As clean as these structures are, it is common to include an indemnification holdback, to cover any potential claims against the acquired company or a breach of fundamental reps and warranties. A holdback is a mechanism used by the acquirer to hold proceeds from specific individuals they view as key to the future business success. This holdback ranges from 5-20% of total purchase price and is placed in escrow for 1-2 years.

Financial and financially backed strategic buyers have far more complex deal structures. These deals usually include an equity roll and/or earnout. An equity roll involves asking the investors in the acquired company to take some individual proceeds and invest them back into the company. An earnout is a contingent payment that relies on the acquired company achieving a future business metric to earn part of the negotiated valuation. In addition to equity rolls and earnouts, these deals commonly include indemnification escrow, holdbacks, and retention bonuses.


There are many things to prepare for and consider when it is time to exit a business. Selecting an experienced advisor to assist in choosing a desired buyer is critical to post-closing personal and professional success.

Read next