George Spilka & Associates

Selling a privately-held middle market company is an art not a science. Middle market deals are defined as those with transaction prices in the range from $2 million - $250 million. Even experienced professionals realize that there are few sources of empirical data to use in pricing a middle market deal. The available information is usually sparse and superficial, therefore of limited utility in determining a transaction price. In addition, the procedures to sell or value a middle market company, the valuation multiple to apply, the appropriate transaction structure, and the likely events that will occur after a closing are usually substantially different for middle market deals than for the more publicized major public deals. Due to the uniqueness and complexity of middle market deals and the lack of meaningful information on the subject, it is essential for a seller to know these seven critical rules, if they are to be successful in the sale of their company:

1.	Obtain a principally all-cash deal.
2.	Retain a competent acquisition consulting/investment banking firm (advisory firm).
3.	Define your expected transaction price before going to market.
4.	Demand minimal exposure to post-closing issues and liabilities arising from the Definitive Purchase Agreement.
5.	Negotiations tend to be adversarial - accept that fact.
6.	Be patient.
7.	Divulge proprietary information only at the appropriate time.

Obtain A Principally All-Cash Deal
In an acquisition, as in business, you are trying to maximize price and minimize risk. There is no better way to accomplish the latter than by doing a principally all-cash deal. There are only two reasons why an acquirer wants a seller to accept notes:

It is my Firm's philosophy to only do principally all-cash deals.
Over 92% of the deals that I have closed during the past 15 years have been for all cash. No deal has been transacted where the cash component of consideration was less than 87% of total consideration. This track record is proof that it is not unreasonable to demand an all-cash deal from an acquirer

In a similar vein, I would almost never consider a deal with a contingent price factor, unless the contingency portion is in ex-cess of my expected transaction price. There is no way to protect the seller's ability to meet the contingency goals without unreasonably restricting the actions of the acquirer after the deal.

Retain A Competent Acquisition Consulting/Investment Banking Firm (Advisory Firm)
A seller requires an advisory firm to guide and direct them through the entire process. This includes planning the sale, the valuation, the development of an enticing Offering Circular, the search for a synergistic acquirer, and the conduct and control of all negotiations leading to a closing. The advisory firm should use a personalized, tailored approach that encompasses a review of all aspects of the seller's business foundation and niche. Such review far transcends a mere analysis of the financial statements, which only represents a small part of the review. The advisory firm should be committed to closing a sale only after an aggressive premium price has been obtained. They should have a reputation that the seller's best interest is the only factor that dictates an acceptable deal. The advisor must have a thorough understanding of the economic implications of the legal issues that are likely to arise in negotiating the Definitive Purchase Agreement, as they should control all negotiations with the attorneys working under their guidance. In a middle market deal, it is usually preferable to use an advisory firm with entrepreneurial flair, as they often will have a similar background and psychological make-up to the selling owner. They will understand the feelings that the seller will be dealing with during the acquisition process. Consequently, they can provide the emotional support that most sellers find beneficial at this time. As the negotiations leading to the closing are the most critical phase of an acquisition, the seller wants an advisor that is a strong-willed, articulate and persuasive negotiator. An advisor with these skills, approach, and characteristics is necessary for a seller to obtain a premium price.

Define Your Expected Transaction Price Before Going To Market
Acquirers are trying to steal your company, that is how the capitalist system works. Unfortunately, the acquirer is usually larger, has greater resources, and is more knowledgeable about acquisitions. However sophisticated, hard-working sellers can level the playing field. Prior to going to market, a seller should have their advisory firm comprehensively evaluate all facets of the company's business foundation. Its major future opportunities and risks should be determined, evaluated and quantified. When this process is completed, the seller and his advisory firm should feel that their knowledge of the company's future earnings potential is greater than an acquirer's. The determinant of a company's value will be its expected future earnings/EBITDA and the risk of achieving those earnings/EBITDA. This value will be impacted by both short-term future earnings potential and also long-term growth factors. The stability of the business foundation will have an impact on the multiple applied to the company's earnings/EBITDA. Depending on synergistic benefits, internal corporate needs, and differing perceptions of valuation factors, most prospective acquirers will see a company's value differently but within a price range of plus or minus 10-15% of an average market price. Be aggressive in your pricing expectations. Demand a realistic premium price. Remember you only sell your company to one buyer. You are not trying to get five acquirers to pay a normalized price; your objective is for one acquirer to pay a premium price. Once your pricing expectations are set, be confident and firm in your position; as most acquirers will try to convince you of the exorbitance of your pricing position.

Demand Minimal Exposure To Post-Closing Issues And Liabilities Arising From The Definitive Purchase Agreement
Large acquirers are used to shifting most deal risks to the seller. This is the norm, and it could be injurious to your economic health. After a company is sold, the owner has no upside. Correspondingly, they should have no downside risk for occurrences that become known after the deal closes. To assure a more equitable sharing of deal risk between seller and buyer, a seller should want the majority of their representations and warranties to be limited to "seller's knowledge". A few reps and warranties normally require a higher standard of seller guarantee. However for these reps and warranties the seller usually is aware if there is a problem prior to the deal closing, therefore they should have limited risk of the unknown. But the general rule is that the vast majority of reps and warranties should be limited to "seller's knowledge". An acquirer will strongly contest this position; however a seller should not relent, unless the deal price compensates them for the added risk. This is an area that is always of critical concern to my Firm. Negotiations Tend To Be Adversarial - Accept That Fact. Negotiations are a test of wills - a battle for control. By its very nature, negotiations are a confrontational process. A seller should accept that. In most corporate sales, the seller is usually much smaller and less knowledgeable about acquisitions than the buyer. Correspondingly, buyers are used to deals being priced the way they want. If an acquirer is forced to pay a price in excess of their target price, it will usually require difficult and adversarial negotiations before an acquirer acquiesces. If negotiations go smoothly and amicably, the acquirer is usually obtaining their price. Rarely would this represent a premium price to the seller. Therefore accept the confrontational nature of negotiations, as this is normally essential if a seller is to get a good deal.

Be Patient
If a seller is to be successful, usually patience must be demonstrated throughout the acquisition process. Patience should not be confused with lethargy. Instead, it represents the seasoned market response when a slow pace works to a seller's advantage. If a seller has thoroughly evaluated all factors surrounding the sale, being patient should be easy. I have found that patience is a by-product of the confidence in the validity of one's position. A patient seller usually produces anxiety in an acquirer. As an acquirer should never be aware of the full dynamics of the overall sale process, a patient seller usually is interpreted as one that has many attractive alternatives. This should tend to make the acquirer more flexible in negotiations.

Divulge Proprietary Information Only At The Appropriate Time
As a general rule it is advisable not to consider customers, competitors, or suppliers as a potential acquirer. If there are unique or compelling circumstances that mandate such prospects be pursued, they must be approached much more cautiously than would a typical acquirer. When this type of prospect is solicited, it is often advisable to significantly strengthen the Confidentiality Agreement in certain of the following ways:

A.	Limit the acquirer's right to solicit the employees and/or customers of the selling company in the future.
B.	Limit the detailed information provided the acquirer at the initial stage of the process.
C.	Require much more detailed financial and business information about the acquirer at the initial stage than is normally obtained.

Regardless of the acquirer, it is always prudent to restrict the divulging of proprietary information to the latter stages of negotiations. This information usually includes the following:

A.	Information pertinent to sales levels or pricing specifics for individual customers or products.
B.	Purchase or production costs for specific products or customers.
C.	Specific pricing strategy by product, volume or other pertinent factor.
D.	Specific future operating courses of action.

This information should not be divulged until the seller has signed a Letter Of Intent with a prospective acquirer. At that time, the parties would begin to negotiate a Definitive Purchase Agreement and the acquirer would commence their due diligence process. At this point, sensitive information will have to be divulged to the acquirer, especially if a seller is to obtain only minimal exposure in the rep, warranty and indemnification areas. However in certain high risk situations, when the Letter of Intent is signed a seller might expand the Confidentiality Agreement to prohibit the acquirer from hiring any of its key employees or soliciting key customers for a 12-18 month period, if the deal does not close.

If the aforementioned seven rules are followed, it is likely that a seller will obtain a premium price with favorable terms in the Definitive Purchase Agreement. To achieve this ultimate success, there is no substitution for hard work, knowledge, determination and patience. The sale of a company is usually the culmination of an owner's career or, in many cases, the end result of the efforts of many generations of a family at the company. It usually will be the legacy of decades of effort. The seller that follows these rules is likely to put a crowning touch on a successful career. Make sure you do it right and allow the legacy to speak for itself.