The United States may be in the midst of its biggest financial crisis since the Great Depression. Congress approved a $700 billion bailout package for the financial industry Oct. 3. This infusion of capital is the most massive governmental intervention in the financial markets in this country’s history.

After the initial rescue package was denied, the second version passed relatively quickly, as the consequences of not doing so were too dire. Had Congress not approved the package, there would have been a complete freezing of the credit markets, many experts said.

Congress’s delay in passing a rescue package caused an intensification of the anxiety and fear gripping the financial markets. This significantly contributed to the overwhelming crisis of confidence that now impacts the U.S. financial markets and has spread around the globe.

Subsequent aggressive and prudent measures instituted by the Federal Reserve and U.S. Treasury did not immediately stem the panic devastating the financial markets. However, the former will eventually loosen up the commercial paper and general credit markets for numerous reasons, and the latter will have a positive impact on overall economic activity. More dramatic actions are likely to occur as a new Congress and president enters the White House.

Not the end

This is not financial Armageddon. The stock market should hit bottom very soon. At that point, the return to normal will begin. It should arrive much before most people expect. Despite what you have witnessed, there is no reason to panic.

What brought the country to the brink? Very simply, the reckless — verging on idiotic — residential mortgage lending that took place starting in 2004, combined with the use of modern technology to design exotic financial derivatives of which almost nobody fully understood the consequences. The massive use and distribution of these products was almost completely funded by debt.

Why did it happen? The crisis was fostered by a culture of greed that has permeated this country since the “dotcom” explosion of the 1990s. This culture reached its apex on Wall Street, where the so-called experts felt that no amount of money was enough. It was nurtured and brought to maturity by the easy money policy of the Federal Reserve. It resulted in the most excessive and imprudent lending and use of leverage seen in U.S. history. The consequences should have been realized at least three or four years ago.

What hasn’t happened in the financial crisis? The impact has been limited to the banking industry, which has been devastated by the losses sustained in the residential mortgage lending market and the losses related to credit defaults and other issues.

Although the economic figures indicate the country is in a recession or an economic downturn — define it as you like— the overall profits of many U.S. industrial companies remain strong. The results for public companies indicate that although profitability is moderating, it remains at historically high levels.

Stay on course

The intermediate and long-term impact of the financial crisis on the economy is going to be negligible, many say, and by the second half of 2009, the country will be coming out of the economic downturn.

Owners and executives of middle-market companies, defined as companies with a transaction price between $5 million and $250 million, will now continue to get their ceaseless level of calls from brokers, intermediaries and low-grade investment bankers. However, their storyline will now be, either at the beginning or as a deal progresses, something similar to:  “You better sell at a discount price before the carnage gets worse,” or “You should be thankful to receive this price due to current financial conditions.”

There is no justification for those types of statements.

Most buyers will tell you the devastation in the financial markets means you will have to accept a substantially discounted price. You will be told that pricing will be “dirt cheap” into the foreseeable future and might even deteriorate further. Don’t pay any attention. Here are likely impacts of the financial crisis on the sale of middle-market companies.

In the short term, there will be a period of three or even six months where there is some turmoil in the acquisition market. Conceivably, there could be a degree of transaction pricing weakness through the end of the second quarter of 2009, but this is unlikely.

In the next one to three years, there should not be any impact on transaction pricing, unless the effect of the guarantees made by the Federal Reserve and the Treasury on the federal deficit have a greater impact than expected.

And after three years, the impact will be negligible.

Recommendations

Don’t change the overall strategy regarding the sale of your company. If selling satisfies your personal and business objectives, you should proceed with the process. You might delay contacting potential acquirers until after the first quarter of 2009, but that will not be necessary in most cases. Furthermore, don’t modify your expected transaction price at this time.

For companies not yet in the market or ones at the very start of the sale process and whose fundamentals and business foundation are somewhat deficient, they might want to delay the sale, while they strengthen and reposition the company. However, where there is no need to strengthen the company’s fundamentals or foundation, don’t delay past the start of 2009.

Don’t be intimidated by acquirer’s doomsday scenarios. The financial crisis has not changed anything in the industrial sector of the U.S. economy. Most companies remain very profitable and the intermediate and long-term business outlook remains good. There should be no transaction price concessions. If patience is necessary, it will provide you a bountiful reward.

These are times when you truly need a strong-willed, determined, and knowledgeable investment banker who understands the causes of the financial crisis and how it is likely to play out. He or she will provide you the proper guidance in how to proceed in these exciting — but turbulent — times. If you have this strength and expertise on your team, you will get a premium price. Don’t let acquirers intimidate you. Don’t accept less than you deserve.

George Spilka is president of George Spilka and Associates, a Pittsburgh-based merger and acquisition consulting firm that specializes in middle-market, closely held corporations. They have a broad-based service that advises clients through the entire acquisition process. These firms include a diverse group of contractors, distributors and manufacturing companies throughout North America. For more information, write Castle Town Square S., Suite 301, Allison Park, PA 15101. Also call (412) 486-8189, fax (412) 486-3697 or e-mail spilka@nauticom.net; see www.georgespilka.com on the Internet.