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March 1, 2013

Winning Ways

Oct. 1, 2005
How to remove hurdles to obtaining top price when selling your company.

Selling your company for the premium price it deserves is not a short race; instead, achieving premium price requires the commitment, pacing and strategy of a marathon runner. There will be many hurdles, but few are insurmountable.

Over the past 25 years as a consultant for middle-market owners looking to sell their companies, I have seen many changes that have negatively impacted a U.S. seller's ability to obtain a premium price. Most notably, consolidation has led to a reduction in potential acquirers, but there are other changes that have created an environment in which acquirers often take advantage of middle-market sellers.

This article identifies the many weapons available to a selling owner to overcome these obstacles. Knowing these techniques and how and when to use them will enable a selling owner to successfully sell his or her company. The article will first discuss the hurdles faced by middle-market sellers; the second part defines how those obstacles can be overcome.

Obstacles Facing a Selling Owner

  • Consolidation has reduced the number of prospective acquirers. With fewer strategic acquirers available, the remaining prospective acquirers tend not to be as aggressive price-wise as they once were.

  • Middle-market sellers usually have defined, somewhat limited, market niches that reduce the number of interested acquirers.

  • In general, acquirers are used to taking advantage of middle-market sellers. Many sellers retain advisors with only limited negotiating skills or strategic deal capabilities, or ones that lack the toughness necessary to obtain a premium price. Other sellers try to handle a sale without an acquisition advisor. Instead, they rely only on themselves and their personal attorney. This is absurd when one considers the complexity involved in getting a large acquirer to pay a premium price while providing reasonable protection to a seller in the deal terms.

  • The inability of sellers and most advisors to access foreign markets for potential acquirers greatly 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, which lasted from 2001 through the first half of 2003. These depressed cyclical earnings have given acquirers the leverage to demand substandard deal pricing despite the future positive economic outlook, which should be the driver of current deal pricing.

  • Acquirers have become too used to either paying for companies with their overpriced stock (based on where stock values have been through early 2005), or 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.

Overcome Price Obstacles

The major overriding point a selling middle-market owner must understand is that any strategic acquirer who really wants a niche will eventually buy it at a premium price. However, the seller usually must force the acquirer to pay this price.

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. The only acquirers that will be scared-off in the long-term by a seller's aggressive deal positions are the ones that 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 using the following approaches and methodology in pursuing a potential sale will always be able to eventually achieve a fully priced deal with strong deal terms that protect them from unreasonable post-closing exposure.

  • 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 will eventually happen at a premium price. Nonetheless, to be successful, it's imperative that you sell at the optimal time. Correspondingly, don't put time pressure on yourself to consummate a sale quickly.

  • You must convey to acquirers that your pricing expectations are firm. You simply aren't going to sell the company if you don't get your price. To sustain this position, you need strength, fortitude and confidence. You should emphasize that you don't have to sell. The acquirer must be convinced that you're not “wedded to a sale” at any cost — selling is only one of many options available to you. However, 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, if you do not already have one. With this individual in place, it will send a message about the firmness of your position. It says you are prepared to retire from the company and allow independent management to run it for you.

  • If market conditions force an abnormally long sale period, it can work to the seller's advantage. Some misguided executives believe a seller's position is weakened if it takes a long time to sell a company, but this is simply not true. For example, an acquirer that pursued the acquisition of your company two years ago and approaches you now will understand that if your pricing expectations have not changed; you are determined to sell only when you get your price. In my opinion, a delay fortifies your ability to sustain your pricing expectations.

  • If an acquirer wants a strong entry position into your market, it will be easier and less expensive to buy your company than compete against your company. Emphasize to the acquirer that you are aware of the market-entry advantages of buying a company as opposed to entering a market through a “Greenfields Approach,” where an acquirer enters either a new geographic area or product market by developing an operation and sales base from scratch.

  • Get a tough, knowledgeable negotiator for an advisor. This advisor must understand the corporate culture of large companies. He or she must be aware of the differences often 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.

    Your 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 and guiding force that will govern the acquirer's final decision to pursue and price the deal. This requires a knowledgeable and sophisticated advisor. Your advisor must be able to conceptualize the flow of the deal from its inception to its completion. He or she must perceive the potential problems at various junctions of the deal and the appropriate responses to those problems. Your advisor must employ the deal strategy that will assure your realization of a premium price.

  • You must have an advisor that has access to foreign strategic acquirers. This will tremendously increase the breadth of acquirers available to purchase your company.

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's a task a seller can always successfully accomplish when utilizing the approaches and procedures in this article. Sellers should not be intimidated by an acquirer's arrogant and demanding attitude. Instead, they should understand large acquirers are used to bullying middle-market sellers into accepting minimal-priced deals.

The strong-willed approach of a seller that employs the right advisory team for guidance will overcome the low-balling acquirer. Don't be daunted by the obstacles you'll face in this long race. With the right strategies, you'll win with a premium price for your company.

George Spilka is president of George Spilka and Associates, Allison Park, Pa. The firm specializes in mergers and acquisitions. The author's Web address is Reach him at (412) 486-8189 or by e-mail at [email protected].