George Spilka & Associates

In over 25 years of advising selling middle market owners, I have seen many changes in the acquisition market. Many of these changes have negatively impacted 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, amongst others. This article defines the many weapons available to a selling owner to overcome these and other obstacles. They are all tried and tested techniques, which I have used to force arrogant and obstinate acquirers to pay the premium prices and provide the protective deal terms my clients were entitled (to). Knowing these techniques and how and when to use them will enable a selling owner to successfully sell their company despite the many obstacles that will confront them. In this way, a selling owner will reap the benefits they so justly deserve for their life-long devotion to the operation of their company.
The first part of the article discusses the major obstacles faced by middle market sellers in trying to obtain a premium-priced deal with strong protection in the representations and warranties, while the second part defines how those obstacles can be overcome. As a frame of reference, the middle market includes companies with a transaction price between $2-$250 million.

Obstacles Faced By A Selling Middle Market Owner

1. The vast consolidation of many, if not most, industries 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 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 has heightened the acquisition interest in many foreign markets and companies. This has minimized what was once buyers’ preeminent emphasis on the US market for acquisitions. Furthermore, in certain industries and for certain companies, where a seller only possesses a significant sales presence in the US, 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 reduce acquirers’ price aggressiveness in pursuing this type of deal.

4. In general, acquirers are used to taking advantage of middle market sellers. As I have always said, most acquirers are trying to steal your company. 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. These advisors are too often willing to accept sub-standard 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 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 that executes the sale process with skill and expertise, it requires an advisor that has considerable sophistication to generate 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 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.

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 (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. These trends have all had a negative impact on a seller’s ability to obtain a secure, premium-priced deal; however it should not be, and does not have to be, that way.

Seller’s Responses To Overcome These Obstacles

The major overriding point a selling middle market owner must understand is that any strategic acquirer who really wants their niche will eventually buy it at a premium price. However the acquirer usually must be forced to pay this price, as they know 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 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 that utilizes 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.

1. 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 do not have to give the right strategic 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.

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. To sustain this position, you need the strength, fortitude and confidence to convey to an acquirer that frankly, “it’s your way or the highway”, not their’s. 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 (to). 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 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 simply not the case. If market conditions force an abnormally long sale period on a seller, it can work to their advantage. For example, an acquirer that pursued the acquisition of your company 2 years ago that 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. They will realize the passing of time has not diminished your resolve. In my opinion, a delay will fortify your ability to sustain your pricing expectations.

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 “Greenfields Approach”. A “Greenfields Approach” is a market entry scenario, where an acquirer enters 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 “Greenfields Approach” have been documented by many studies. An acquirer should be aware that you not only understand this, but are aware that if they really want a strong entry position into your market, it will be easier and less expensive to obtain it by buying you than by 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. They 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 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 and guiding force that will govern the acquirer’s final decision to pursue and price the deal. This requires a knowledgeable and sophisticated 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. They must perceive the problems that might be faced at various junctions of the deal and the appropriate responses to those problems. They must employ the deal strategy that will assure your realization of a premium price.

6. 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. This is especially important in early-2005, as the value of the dollar now provides foreign acquirers the capability of paying a premium price.

Summary

Even though the transacting of premium-priced deals with strong deal 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 successfully accomplish, if they utilize the approaches and procedures defined in this article. A seller should not be intimidated by an acquirer’s arrogant and demanding attitude. They should understand that large acquirers are used to bullying middle market sellers into accepting minimally-priced deals. These prior successes of large acquirers, as they prey on poorly advised, uninformed, and weak-spirited sellers, produces an attitude that I have found can always be overcome by the strong-willed approach of a seller that employs the right advisory team to guide them. Do not be daunted by the obstacles you face, as your eventual success will be realized, if you expertly handle the transaction.