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Seller beware: Dos and don'ts

Getting the right price for your company can take a lot of resolve. But if you stick to your guns, you can get what the price you deserve.

In more than 25 years of advising middle-market owners who are selling their companies, I have seen many changes in the acquisition market. Many of these changes have negatively impacted a U.S. 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 U.S. corporate culture, among others. Knowing the techniques that enable owners to successfully surmount these obstacles is obviously in a seller''s best interest. I will first describe the obstacles, then how they may be overcome. Please note that by middle market, I mean companies with a transaction price of between $200 million and $250 million.

The obstacles

  • The vast consolidation of many, if not most, industries. This has reduced the number of prospective acquirers to involve in a bidding contest. Usually with only a minimum number of strategic acquirers available, the few remaining prospective acquirers tend to not be as aggressive as they once were.

  • Usually a middle-market seller has a defined, somewhat limited market niche. This also reduces the universe of potential acquirers.

  • Business globalization has had many negative effects on middle-market acquisition pricing. The cost advantages often available to many non-U.S.-based companies has heightened the acquisition interest in many foreign markets and companies. This has minimized what was once a buyers'' primary emphasis on the U.S. market for acquisitions. Furthermore, in certain industries and for certain companies, where a seller only possesses a significant ssales presence in the U.S., many acquirers'' interests have been reduced due to the selling company''s inability to generate foreign sales. The combination of these factors has had a tendency to suppress acquirers'' price aggressiveness in pursuing this type of deal.

  • In general, acquirers are used to taking advantage of middle-market sellers. It has been my general belief that most acquirers are trying to steal your company. Many sellers retain advisors with only limited negotiating skills or strategic deal capabilities, or ones who lack the toughness necessary to obtain a premium price. These advisors are too often willing to accept substandard prices and deal-term norms that are not conducive to the maximization of a seller''s economic interest. Other uninformed sellers try to handle a sale without an acquisition advisor. Instead, they rely only on themselves and 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, while providing reasonable protection to a seller in the deal terms. As the attainment of a premium-priced deal will only be obtained by a seller who executes the sale process with skill and expertise, it requires an advisor who has considerable sophistication to generate a premium price.

  • The inability of sellers and most advisors to access foreign markets for potential acquirers. This also reduces the number of strategic acquirers available.

  • Acquirers are used to getting unreasonably protective terms in the representations and warranties. This shifts an unfair amount of the post-closing deal risk to a seller. Most 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.

  • For many companies, recent earnings have been depressed due to the recession. Lasting from 2001 through the first half of 2003, the recession means depressed cyclical earnings have given acquirers the leverage to demand substandard deal pricing despite a positive future economic outlook, which should be the driver of current deal pricing.

  • Acquirers have become too used to paying for companies with overpriced stock (based on where stock values have been through early 2005). Likewise, some buyers force sellers to accept a substantial amount of notes as part of the transaction price, or they employ a partial contingency purchase price to shift post-closing earnings risk back to the seller. These trends have all had a negative impact on a seller''s ability to obtain a secure, premium-priced deal. However, it should not, and does not, have to be that way.

    The seller''s responses

    The major overriding point a selling middle-market owner must understand is that any strategic acquirer who really wants the niche will eventually buy it at a premium price. However, the acquirer usually must be forced to pay this price, as it knows that most sellers settle for inferior deal pricing. However, the right strategic acquirer, if forced through the sophisticated execution of the acquisition process, will eventually pay a premium price. Force the acquirer to pay that price; don''t leave money on the table. Furthermore, the only acquirers who will be scared off by a seller''s aggressive position are the ones who only have a lukewarm interest in buying your company. These acquirers will never buy your company unless they receive a bargain price.

    A selling middle-market owner who uses the following approaches and methodology in pursuing a potential sale will be able to eventually achieve a fully priced deal with strong terms that protect them from unreasonable post-closing exposure.

  • When your market niche is the best deployment of an acquirer''s capital, they will buy your company. If you are talking to the right type of strategic acquirer, this will eventually happen at a premium price. You don''t have to give the right acquirer a bargain price to make the acquisition of your company the best deployment of their capital. However, to be successful, it is imperative that you sell at the optimal time. Correspondingly, do not put time pressure on yourself to consummate a sale quickly.

  • You must convey to acquirers that your pricing expectations are firm. If you don''t get your price, you simply are not going to sell the company. To sustain this position, you need the strength, fortitude, and confidence to convey that it''s "your way or the highway." The acquirer must be convinced that you are not "wedded to a sale" at any cost. You should emphasize that you don''t have to sell. It is but one of many options available to you. However, you must be prepared to pursue another option, even if only for a temporary period, if forced.

    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, if you don''t already have one. It sends the message that you''re prepared to retire from the company and allow independent management to run it for you and, eventually, your heirs.

  • Some misguided executives believe a seller''s position is weakened if it takes a long time to sell the company. This is simply not the case. If market conditions force an abnormally long sale period on a seller, it can work to his or her advantage. For example, the acquirer who pursued your company two years ago and re-approaches 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. When your resolve is undiminished, in my opinion, a delay can fortify your ability to get your price.

  • Get a tough, knowledgeable negotiator for an advisor. This advisor must understand the culture of large companies. He must be aware of the differences that are often present between the personal objectives of the acquirer''s corporate-development executive handling the deal, and those of the operating personnel pushing the acquisition for the prospective purchaser.

    The advisor must know how and when to involve the operations personnel in the negotiating process and how to make their desires to obtain the operating and marketing assets of the target the guiding force that will govern the acquirer''s final decision to pursue and price the deal. This requires a knowledgeable advisor who possesses considerable strategic deal skills. Your advisor must be able to conceptualize the flow of the deal from its inception to its completion. He must perceive the problems that might be faced at various junctures in the deal, and know the appropriate responses.

  • You must have an advisor who has access to foreign strategic acquirers. This will tremendously increase the breadth of acquirers available to purchase your company. This is especially important now, as the value of the dollar provides foreign acquirers the capability to pay a premium price.

    Even though the transacting of premium-priced deals with strong terms that protect a seller against unreasonable post-closing exposure is not an easy task in the current business environment, it is a task that a seller can always accomplish if he or she uses the approaches and procdures I''ve outlined. A seller should not be intimidated by an acquirer''s sometimes arrogant attitude. He or she should understand that large acquirers are used to bullying middle-market sellers into accepting minimally priced deals. These prior successes of large acquirers, coming at the expense of poorly advised and malleable sellers, produces an attitude that I have found can always be overcome by the strong-willed approach of a seller with a good advisory team to guide him. Don''t be daunted. You can succeed.

    George Spilka ([email protected]; 412-486-8189) is president of George Spilka and Assoc. (Pittsburgh, PA), a national acquisition consulting firm specializing in middle-market, closely held corporations that include a diverse group of manufacturers, molders, and distributors. Spilka has been advising owners in the sale of their firms for more than 25 years.

    You can learn more online at www.georgespilka.com.

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