Getting Top Dollar
- Published: September 30, 2005, By By George M. Spilka, George Spilka & Assoc.
Selling Substrates
Many changes in the acquisition market have had a negative impact on a US seller’s ability to obtain a premium price. These include the consolidation of most industries, which has led to a reduction of potential acquirers; the globalization of business; and the callousness and harshening of the US corporate culture.
There are many weapons available to a selling owner to overcome these obstacles. Knowing these techniques and how and when to use them will enable owners of middle-market companies to sell their companies despite the obstacles that confront them. In this way, selling owners will reap the benefits they deserve for their lifelong devotion to the operation of their companies.
As a frame of reference, the middle market includes companies with a transaction price between $2 million and $250 million.
Obstacles Faced by a Seller
1.The consolidation of many industries has reduced the number of prospective acquirers involved in a bidding contest. Usually with only a minimum number of strategic acquirers available, the few remaining prospects tend not to be as aggressive price-wise as they once were.
2. Usually a middle-market seller has a defined, somewhat limited, market niche that reduces the number of potentially interested acquirers.
3.The globalization of business has had many negative effects on middle-market acquisition pricing. The cost advantages often available to many non-US-based companies have heightened the acquisition interest in foreign markets and companies. This has minimized what was once buyers’ preeminent emphasis on the US market. Furthermore, in certain industries where a seller possesses a significant sales presence only in the US, many acquirers’ interests have been reduced due to the selling company’s inability to generate foreign sales.
4. In general, acquirers are used to taking advantage of middle-market sellers. Most are trying to steal your company. Many sellers retain advisors with only limited negotiating skills or strategic deal capabilities. These advisors too often are willing to accept substandard prices and deal term norms that are not conducive to the maximization of a seller’s economic interests. Other uninformed sellers try to handle a sale without an acquisition advisor. Instead, they rely only on their personal attorney to consummate the acquisition. This is absurd if one has any grasp of the complexity involved in getting a large acquirer to pay a premium price.
5. The inability of sellers and most advisors to access foreign markets for potential acquirers greatly reduces the number of strategic acquirers available.
6. Acquirers are used to getting unreasonable protective terms in representations and warranties. This shifts an unfair amount of the post-closing deal risk to a seller. Many advisors lack the strategic deal sense, perseverance, and determination necessary to obtain the protective deal terms a seller needs. Those advisors willing to accept a buyer’s demands in this area will put the seller in a precarious post-closing position.
7. For many companies, recent earnings have been depressed due to the recession, which lasted from 2001 through the first half of 2003. These depressed cyclical earnings have given acquirers the leverage to demand sub-standard deal pricing despite the future positive economic outlook, which should be the driver of current deal pricing.
8. Acquirers have become too used to either paying for companies with their overpriced stock, forcing sellers to accept a substantial amount of notes as part of the transaction price, or utilizing a partial contingency purchase price to shift post-closing earnings risk back to the seller.
Overcoming the Obstacles
The overriding point a middle-market owner must understand is that strategic acquirers who want their niche eventually will buy it at a premium price. However, the acquirer usually must be forced to pay this price, as they know most sellers settle for inferior deal pricing. The right strategic acquirer, if forced through the sophisticated execution of the acquisition process, eventually will pay a premium price.
Furthermore, the only acquirers that will be scared off in the long term by a seller’s aggressive deal positions are the ones that have only a lukewarm interest in buying the company. These acquirers never will buy the company unless they receive a bargain price.
Selling middle-market owners that utilize the following approaches and methodology in pursuing a potential sale eventually will be able to achieve a fully priced deal with strong terms that protect them from unreasonable post-closing exposure:
1. When your market niche is the best deployment of an acquirer’s capital, that acquirer will buy your company. If you are talking to the right type of strategic acquirer, this eventually will happen at a premium price. You do not have to give the right strategic acquirer a bargain price to make the acquisition of your company the best deployment of the acquirer’s capital. However, it is imperative that you sell at the optimal time. Correspondingly, do not put time pressure on yourself to consummate a sale quickly.
2. You must convey to acquirers that your pricing expectations are firm. If you do not get your price, you simply are not going to sell the company. You should emphasize that you don’t have to sell. It is but one of many options available to you. However, if forced, you must be prepared to pursue another option, even if only for a temporary period. You want to put the fear of losing the deal in an acquirer. To make it believable that you are comfortable pursuing alternatives other than selling, you might hire a reasonably youthful, yet experienced, general manager. With this individual in place, it will send the message loud and clear about the firmness of your position. It says that you are prepared to retire from the company and allow independent management to run it for you and eventually your heirs.
3. Some misguided executives believe a seller’s position is weakened if it takes a long time to sell a company. This is not the case. If market conditions force an abnormally long sale period, it can work to the seller’s advantage. For example, an acquirer that pursued the acquisition of your company two years ago and reapproaches you at a later time will understand that if your pricing expectations have not changed, you are determined not to sell until you get your price. 4. Emphasize to the acquirer that you are aware of the entry advantages to them of buying a company as opposed to entering a market through a “Greenfield approach,” in which buyers enter either a new geographic area or product market by developing their own operation and sales base from scratch. The advantages of entering a market through acquisition over a Greenfield approach have been documented by many studies. Acquirers should be aware that you understand this and are aware that if they really want a strong entry position into your market, it’s easier and less expensive to obtain it by buying your company rather than competing against you for market share.
5. Get a tough, knowledgeable negotiator for an advisor. This advisor must understand the corporate culture of large companies and must be aware of the differences that often are present between the personal objectives of the acquirer’s corporate development executive handling the deal and the goals and objectives of the operating personnel pushing the acquisition for the prospective purchaser. The advisor must know how and when to involve the operating personnel in the negotiating process and how to make their desires to obtain the operating and marketing benefits of the seller the driving force that will govern the acquirer’s final decision to pursue and price the deal.
6. You must have an advisor that has access to foreign strategic acquirers. This will increase the breadth of acquirers available to purchase your company. This is especially important in 2005 as the value of the dollar now provides foreign acquirers the capability of paying a premium price.
In the current business environment, it is not an easy task to transact premium-priced deals with strong terms that protect a seller against unreasonable post-closing exposure, but do not be daunted by the obstacles. Your eventual success will be realized if you handle the transaction expertly.
George M. Spilka is president of George Spilka & Assoc., Allison Park, PA, a national acquisition consulting firm based near Pittsburgh that specializes in middle-market, closely held corporations. The company has been advising clients on the sales of their firms for more than 25 years. Its client base has included a diverse group of converters, manufacturers, and distributors. Contact Spilka at 412/486-8189; This email address is being protected from spambots. You need JavaScript enabled to view it.; georgespilka.com.
