The Sell Side: “Market” Isn’t Neutral
By Kevin Vela
In our first installment of this series, we talked about what it takes to be ready to sell – clean corporate records and a tight data room, as well as the advantage that comes from doing that work on your own timeline instead of a buyer’s. Now I’d like to turn our attention to one of the most common words thrown around by M&A professionals: “market.”
As a seller, it’s easy to get lured in by the headlines that buyers will throw at you – total consideration, a clean exit, freedom from the day-to-day of running the business. Frequently, the number gets agreed on, and then sellers receive an LOI with just a few basic stated terms like price and timeline, and then catch-all language that says the rest will be “market standard” terms. Market reps and warranties. Market indemnification. Market post-closing adjustments.
The problem is that “market” isn’t neutral. It’s been defined by buyers, the repeat actors in this ecosystem, and it reflects their interests, not yours.
Who Built the Framework
The problem with “market” is that it’s established by buyers.
Think about who’s at the table on the other side of your transaction. A PE firm or strategic acquirer that has closed dozens, sometimes hundreds, of deals. Their documents have been refined over years of transactions by the best lawyers in the country. Their counsel has carefully crafted a buyer-friendly purchase agreement that contains the headline numbers, but is loaded with bear traps.
The M&A ecosystem – the data providers, the rep and warranty insurance (“RWI”) carriers, the big law firms that trained a generation of practitioners on buy-side work – was built around repeat buyers. They transact constantly. Sellers show up once, sometimes twice in a lifetime. As a result, all of the data, the benchmarks, the form documents, the “market standard” language are a framework built by buyers, and it reflects their interests.
This isn’t an admonition; it’s simply the truth. We want to make sure that you fully understand the dynamic and are prepared for it.
For Example…The Earnout Problem
One of the clearest examples of how this plays out is the earnout.
An earnout is a structure where a portion of your purchase price is deferred and paid only if the business hits certain performance targets after closing. For example, the purchase price may be $20M paid as follows: $10M cash at close, and $10M paid over three years based on the business hitting certain metrics once it is sold. Buyers use earnouts to bridge valuation gaps – when you think your business is worth more than the buyer wants to pay at close, the earnout is presented as the solution that lets both sides get to yes.
It sounds reasonable. But the data tells a different story.
In the lower middle market – deals under $25M – more than a third of buyers insist on an earnout, and it often represents a substantial share of the total consideration. According to SRS Acquiom’s 2025 M&A Deal Terms Study, the median earnout is about about 31% of closing payments (or 31% of deal value) when it appears in a deal.
But here’s the number that matters: across all deals with earnouts, those same researchers found that sellers collect only about 21 cents on the dollar of the earnout they were promised.
Let’s put that in concrete terms. You’re selling a $10M business. The buyer wants to defer $3M as an earnout – about 30% of the price, right at the median. At a 21-cent payout rate, you can expect to collect around $630k of that $3M. Your $10M deal just became a $7.63M deal – a 24% haircut to the number you shook hands on.
And a lot of that shortfall has nothing to do with how your business performs after closing; it has to do with how the buyer shaped the purchase agreement.
“Market Standard” Indemnification – and Who Controls the Claims
Go back to that short LOI the buyer’s rep told you was “their standard term sheet – they don’t vary from it, and a shorter LOI keeps legal costs low for everyone” – probably over a steak dinner where they wined and dined you. It’s likely to include language like “customary indemnification and representations and warranties for transactions in this range” or something close to that. What it actually means is that key terms get proposed weeks after you’ve signed exclusivity, when your leverage has dropped considerably.
For example, here’s a provision that founders almost never focus on at the LOI stage: who controls indemnification claims.
In many deals, the buyer has the right to control any third-party claim that might give rise to an indemnification obligation. Let’s say that a lawsuit hits the acquired business post-closing. This will trigger indemnification rights defined in the transaction’s purchase agreement. Even if the claim is weak, the buyer is going to spring into action – with their attorneys and experts, no cost spared. Because they are doing so with your money.
In most M&A transactions, there is an indemnification escrow – typically 10% of the deal value – that is held back at closing. It sits either in the buyer’s bank account, or with a third party agent, and the buyer’s legal fees run against it. Put another way, your holdback is funding their lawyers. I want to be clear about this next point – indemnification holdbacks don’t just cover actual damages, those funds (your funds) are used to investigate claims. No matter how weak, or even baseless the claims are. By the time the dust settles, a meaningful portion of your escrow can be consumed by fees that have nothing to do with whether you actually owed anything. It’s kind of diabolical when you think about it. We had a deal once where buyer’s counsel racked up $700k in tax analysis on total tax exposure of $250k… Read that again…the buyer spend $750k in fees on a worst case scenario of $250k owed. Oh, and in the end, the buyer’s actual taxes and fees paid were much, much less. (Note that this particular client came to us after the LOI had been signed, and we could not negotiate out of the indemnification control language.)
Thus, it’s critical that, as a seller, you control the indemnification process.
A Note on AI-Assisted Review
One more thing worth understanding in 2026, when everyone on both sides of a deal is using AI tools to move faster. Document review technology – including AI-assisted review – generally works by flagging provisions that deviate from what the tool was trained to consider “market.” It’s faster than manual review and catches a lot of things.
What it tends to miss is how provisions interact across documents – the way a definition in one agreement connects to a payout mechanic in another. The most sophisticated buyer document sets are calibrated to survive ordinary review. Clause by clause, everything looks defensible. The risk only surfaces when someone reads the system as a whole. Default AI-assisted review doesn’t do that. In practice, it performs a faster version of the same provision-focused review that well-drafted buyer documents are built to survive.
AI is best used when it has good input. To do that, you need context. It’s why AI is so valuable for experienced lawyers when used correctly; we use it all the time. But do not let it be a substitute for experienced counsel.
So How Do Sellers Push Back?
The problem isn’t that buyers have leverage – it’s that sellers don’t use the leverage they have, at the moment they have it. That moment is before the LOI is signed.
Once you sign an LOI and enter exclusivity, the dynamic shifts. You’ve signaled that you’re serious. You’ve taken yourself off the market. Every week that passes makes walking away harder, financially and emotionally. The closer you get to close, the more real the cash becomes The buyer knows this, and they are very good at running out the clock.
Before you sign the LOI, walking away costs you nothing. That’s the only window where the leverage is approximately balanced – and in competitive processes, it can tilt toward you.
We’ll get into exactly what to negotiate at the LOI stage in the final post in this series. But the short version is: don’t let “market standard” pass without asking what it actually means. The buyer drafted it. Their counsel defined it. And you’re the one who has to live with the result.
This is Post 2 in The Sell Side, a blog series for founders and business owners navigating M&A. Start with Post 1: Preparing for an Exit.
Questions about your M&A process? Reach out to us at Vela Wood – this is what we do every day. And don’t forget to check out our M&A glossary.
About the Author(s)
Kevin Vela
Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.
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