The Mid-Market M&A Process Explained: From initial offer to closing the deal

Standfirst: Hilton Smythe demystifies the mid-market M&A process – from the Heads of Terms through to the Share & Purchase Agreement.

The Mid-Market Mergers and Acquisitions Process Explained

Most first-time dealmakers stepping into M&A are surprised by how much is involved. They’re ready to go but aren’t fully prepared for the finer details of the process, from Heads of Terms and due diligence to the Sale & Purchase Agreement.
That’s why we’ve created this guide, The Mid-Market M&A Process Explained, to shed light on each step so you can stay informed, prepared, and confident through every phase of the deal.

Heads of Terms / Letter of Intent

Interested buyers submit an initial non-binding oEer, often in the form of a Letter of Intent (LOI) or Heads of Terms. This document outlines the key terms of the proposed transaction, including:
• The purchase price and payment structure;
• Payment terms;
• Financing details and delivery schedules;
• Any other relevant commercial terms, such as intellectual property rights or licensing agreements, and exclusivity provisions (to protect the buyer).
Heads of Terms can be legally binding, non-binding, or somewhere in between, depending on what’s agreed upon. For instance, parties might choose to make specific clauses binding, like those covering confidentiality, exclusivity, or fee liability.
Katie Holt, one of Hilton Smythe’s experienced Deal Executives, says: “There are likely to be certain disagreements during the process so it’s essential to lock down the core terms of the deal in the Heads of Terms document. This helps everyone stay aligned as the process moves forward.”

Due Diligence

The due diligence phase is critical for the buyer to verify all material facts and financial information about the target company. It’ll cover areas such as:
• Financial records;
• Legal and regulatory compliance;
• Operational processes;
• Customer and vendor relationships;
• Human resources;
• Intellectual property.
At this point, the buyer should be ready to review full copies of property and equipment leases, supplier contracts, payroll and staffing documents, licenses and permits, bank statements, tax returns, and all relevant invoices and receipts.
“Due diligence can be a very lengthy process,” Katie says, “but connecting with us early can make it much smoother. We’re here to help you get prepared.”

Financial due diligence will take on extra importance when the deal relies on “locked box” accounts, as all financial risks and benefits transfer to the buyer starting from the locked box date. The buyer must be confident that there’s minimal risk of the business declining between the locked box date and the deal’s completion. This can be costly for the buyer and will increase reliance on warranties for protection.
For small to mid-sized businesses, due diligence usually spans 30–60 days, though timing can vary based on how quickly information is available, response times, and
overall communication flow.
There may be many “contingencies” that survive due diligence, such as bank financing, franchisor approval, lease assignment, or license transfer, which will need to be
resolved during closing.

Sale & Purchase Agreement
Once due diligence is substantially complete, the parties begin negotiating the definitive Sale and Purchase Agreement (SPA). This will involve the full involvement of both parties’ legal teams.
“Having the right legal team on your side makes all the difference,” Katie says.
“Choosing a solicitor recommended by an agent like ourselves can help keep things moving smoothly and speed up the whole process.”

Key elements of the SPA include:
Assets
The agreement should detail the assets being bought and sold, covering both tangible and intangible items like property, equipment, intellectual property, and contracts.
Purchase price and payment terms
The agreement specifies the total purchase price, currency, and any price adjustments based on factors like inventory value and working capital adjustment. It outlines the payment method, schedule, and any deposits, escrow arrangements, or financing conditions.
Representations and warranties
Both parties provide representations and warranties, assuring the accuracy of information, legality of the transaction, and absence of undisclosed liabilities or
encumbrances.
They’re there to provide the buyer with legal recourse if the seller fails to disclose material facts about the business that due diligence didn’t uncover, offering added protection if the seller isn’t fully transparent.
Indemnities
The SPA includes indemnity clauses, which are commitments to compensate the buyer for specific losses arising from issues like potential tax liabilities.
Covenants
These are promises made by the parties to perform or refrain from certain actions during the transaction, and may include non-compete, non-solicitation, and confidentiality provisions.
Conditions precedent
These are requirements that must be met (or waived) for the transaction to proceed, such as regulatory approvals, satisfactory due diligence, or third-party consents.
For instance, selling a company regulated by the Financial Conduct Authority (FCA) may require FCA approval; selling a gambling company will need an operating license from the Gambling Commission for the change of control; and selling a bar will require premises and personal licenses to sell alcohol.

Common stumbling blocks

Target working capital adjustments
Common stumbling blocks at this stage include purchase price adjustments, especially when it comes to agreeing on the target working capital to keep in the business. Seasonality can play a big role; for example, if you close the deal in December, much of the inventory might have been sold oE and accounts receivable collected—meaning a chunk of the value could already be out the door.
Buyers may ask their accountants to determine a “permanent level” of working capital, averaging it over the year if it’s seasonal. They’ll then make an adjustment based on the difference between this permanent level and the actual level at completion.
Net debt adjustments
A net debt adjustment helps balance the difference between the debt and cash levels of the target company at closing versus what was agreed on in negotiations. This means the purchase price will be adjusted to reflect any shifts in net debt—if net debt goes up, the purchase price goes down, and if it goes down, the price goes up. This really comes into play when using the completion accounts method, where you’ll need to “estimate” net debt at closing since final accounts can take about a month to prepare.
The scope and extent of representations and warranties
Representations and warranties are given by both parties to disclose material information to each other. However, their scope and extent is often negotiated—buyersusually push for broader coverage, while sellers aim to limit their risk. These terms play a key role in allocating risk between the parties and set the foundation for any legal claims if there’s a misrepresentation or breach down the line.

Closing

Closing is the big moment—when ownership of the business oEicially transfers to the buyer. This typically involves:
• Signing of final transaction documents;
• Transfer of funds;
• Handover of any physical assets or documentation;
• Regulatory filings and approvals, if required.
Preparing to step away from your business? Don’t do it alone. Contact us today.