What is a working capital adjustment and why does it affect what a seller nets?

A working capital target (peg) is set at the LOI stage, before formal diligence, based on the trailing average of normalized working capital. Any shortfall against that target reduces the purchase price dollar-for-dollar, so sellers who have not run their own analysis often accept a buyer-favorable peg by default.

When will a buyer propose an earnout, and how risky is it for the seller?

Buyers propose earnouts when part of the expected value depends on near-term contracts, new products, or growth not yet reflected in trailing financials. An earnout defers consideration and shifts performance risk to the seller, so the metric definition, duration, and measurement terms determine whether that consideration is realistic to recover.

What financial records do buyers expect for diligence and underwriting?

Buyers expect three to five years of clean, consistently prepared statements — ideally reviewed or audited — plus current management accounts and a documented add-back schedule. Weak or tax-basis records lead to discounts, higher escrow and holdback requirements, or extended diligence that creates closing risk.

Why do third-party consents and change-of-control provisions matter before a sale?

Key customer contracts, vendor agreements, leases, and licenses often contain anti-assignment or change-of-control clauses. Consent requirements discovered late create timeline risk, premature disclosure of the transaction, and leverage for buyers to seek price adjustments, so they should be identified and pre-positioned early.

Why does a seller need an experienced M&A advisory team?

Buyers such as private equity firms and strategic acquirers negotiate these deals regularly. A qualified M&A advisor, transaction counsel, and a sale-process-experienced CPA give the seller information parity; sellers without experienced representation consistently receive worse economics across every structural dimension of the deal.

Horizon M&A Advisors

Confidential

Prepared March 2026

Exit Readiness Assessment · Section 7 of 7

Deal Structure Readiness Scorecard

An assessment of the five factors that determine whether an owner is prepared to negotiate the deal structure terms that most directly affect what they receive at closing — and over time. The headline price is only one input.

Section 7 — Deal Structure Readiness

Scoring Key

Green — Buyer-ready (2 pts)

Yellow — Needs attention (1 pt)

Red — Significant gap (0 pts)

Click a column to record your rating.

Working Capital Awareness & Analysis

Green / 2 pts	Yellow / 1 pt	Red / 0 pts
The owner has run a detailed working capital analysis and knows the trailing 12-month average of normalized working capital — defined consistently with how buyers typically structure the adjustment. A defensible target number has been prepared and the owner is ready to negotiate the working capital peg from an informed position at the LOI stage, not in response to the buyer's proposal.	The owner has a general sense of the business's working capital profile — roughly what's in receivables, inventory, and payables — but has not calculated a trailing average or prepared a formal analysis. The peg is not yet a number the owner has stress-tested. Working capital will need to be analyzed before LOI negotiations begin to avoid accepting a buyer-favorable target by default.	The owner has not thought specifically about working capital as a deal term. The concept of a working capital adjustment — where a target is set at LOI, before formal diligence, and any shortfall reduces the purchase price dollar-for-dollar — is unfamiliar. Entering LOI negotiations without this analysis is one of the most structurally avoidable ways sellers give up value in a transaction.

Earnout Risk Profile

Green / 2 pts	Yellow / 1 pt	Red / 0 pts
The business's historical financials are clean, consistent, and fully documented. There is no valuation gap driven by near-term growth projections that buyers cannot verify from trailing results. The owner does not need to rely on an earnout to achieve their target valuation — the business's demonstrated earnings support the price. Buyers are unlikely to propose a significant earnout component.	Some portion of the business's expected value is tied to near-term contracts, new product lines, or growth initiatives not yet fully reflected in trailing financials. Buyers may propose an earnout to bridge this gap. The owner understands earnout mechanics at a conceptual level but has not analyzed specific structural terms — metric definition, duration, and measurement criteria — that determine whether earnout consideration is realistic to recover.	The owner's target valuation depends substantially on projections that the historical financials do not yet support, and they are unfamiliar with earnout mechanics. Buyers will propose earnout structures that defer significant consideration and shift performance risk to the seller. Without understanding how earnout metrics are defined and measured — and what the standard protections are — the owner is at a material disadvantage in this negotiation.

Financial Records for Diligence & Underwriting

Green / 2 pts	Yellow / 1 pt	Red / 0 pts
The business has three to five years of clean, consistently prepared financial statements — ideally reviewed or audited — along with management accounts for the current period and a documented add-back schedule. Buyers' financial diligence teams can underwrite the business from the records with minimal uncertainty. Strong financial records support the seller's negotiating position on price, escrow terms, and representations.	Financial statements exist for the required trailing period but are prepared on a tax basis, lack consistency in presentation, or require significant normalization to reflect the true operating performance. Buyers can underwrite the business but will apply a discount for documentation uncertainty. Escrow and holdback requirements may be higher to compensate for the additional verification burden during diligence.	Financial records are incomplete, inconsistent, or not readily available in the format buyers expect for formal diligence. The business may be operating profitably, but the documentation does not allow buyers to verify the earnings independently. This creates significant underwriting uncertainty — buyers will either decline to proceed, price in a substantial risk premium, or require an extended diligence period that creates closing risk.

Third-Party Consent & Change-of-Control Requirements

Green / 2 pts	Yellow / 1 pt	Red / 0 pts
Key customer contracts, vendor agreements, leases, and licenses have been reviewed for anti-assignment and change-of-control provisions. Any required consents have been identified and — where possible — obtained or pre-positioned. The owner has a clear view of which third-party approvals are required to close and has a timeline for obtaining them that does not create closing risk.	The owner has a general sense that some contracts may contain assignment provisions but has not completed a formal review. The specific agreements requiring consent, the consent process, and the timeline have not been mapped. This analysis will be required during diligence — but beginning it proactively is preferable to discovering consent requirements on a buyer's closing timeline.	Key contracts have not been reviewed for assignment provisions and the owner does not know which agreements require consent upon a change of ownership. Buyers' counsel will find these provisions in diligence. Consent requirements discovered late in the process introduce timeline risk, potential disclosure of the transaction to customers before the owner is ready, and leverage for buyers to seek price adjustments.

Professional Advisory Team Readiness

Green / 2 pts	Yellow / 1 pt	Red / 0 pts
The owner has engaged or identified a qualified M&A advisor with lower middle market transaction experience, transaction counsel (M&A attorney, not a generalist), and a CPA or financial advisor who has experience preparing businesses for sale-process diligence. The advisory team has been briefed on the owner's goals and timeline. The owner is not planning to negotiate directly with buyers without representation.	The owner has an existing CPA and business attorney but has not yet engaged an M&A-specific advisor or transaction counsel. The existing professional team has limited M&A transaction experience. The owner understands the need for deal-specific advisors but has not yet made those engagements — leaving them without experienced representation during the most consequential negotiations of the transaction.	The owner is planning to approach buyers directly or to rely on a business broker with limited transaction experience for a deal of this size and complexity. The owner does not have qualified M&A counsel identified. Buyers — particularly private equity firms and strategic acquirers — negotiate these transactions regularly. Sellers without experienced representation consistently receive worse economics across every structural dimension of the deal.

Deal Structure Readiness Score

— / 10

8 – 10

Well-prepared for deal structure negotiations. The owner understands the terms that affect seller economics and has the advisory team and analytical foundation to negotiate from a position of information parity with buyers.

5 – 7

Preparation gaps exist. Specific factors identified above should be addressed before entering an active process. Owners who close these gaps before receiving an LOI negotiate materially better structural outcomes.

0 – 4

Significant preparation required. Entering a sale process without addressing these gaps places the owner at a structural disadvantage across every dimension of the deal. A strategy call to discuss priorities is strongly recommended before engaging any buyer.

Understand what your deal structure would actually look like. A complimentary 30-minute strategy call with Dave Halvorson covers the structural terms most relevant to your transaction, where the gaps in your current preparation are, and what's worth addressing before you engage buyers or respond to an inbound inquiry.

Schedule a Call

This document is provided for informational purposes only and does not constitute legal advice, financial advice, or an engagement to provide advisory services. All assessments are self-reported by the business owner and are not verified by Horizon M&A Advisors. Business owners should consult qualified legal counsel and an experienced M&A advisor before responding to any offer or signing any transaction document. Results should not be shared with prospective buyers or used in connection with any transaction without the written consent of Horizon M&A Advisors.