The best deal
In the last 25 years, there have been changes that have negatively impacted business owners' ability to obtain top price for their companies.
These include industry consolidation, which has led to a reduction in potential buyers, business globalization and a harsher U.S. corporate culture.
This article defines the many weapons available to owners of middle-market companies to overcome these and other obstacles when selling their company.
The middle market includes companies with a transaction price between $2 million and $250 million, which includes many sheet metal firms.
Obstacles1. The consolidation movement in many, if not most, industries has reduced the number of prospective buyers. Usually with only a minimum number of buyers available, those remaining 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 buyers. The globalization of business has depressed the price of many businesses. The cost advantages often available to companies based outside the United States has heightened interest in many foreign markets and companies. This has minimized what was once buyers pre-eminent emphasis on the U.S. market for acquisitions.
3. In certain industries and for certain companies, where sellers only possess a significant presence in the United States, many buyers' interests have been reduced, due to the selling company's inability to generate foreign sales. These factors have had a tendency to reduce buyers' price aggressiveness in pursuing this type of deal.
4. In general, buyers are used to taking advantage of middle-market sellers. Many are trying to "steal" the company. Many sellers retain advisers with only limited negotiating skills or that lack the toughness necessary to obtain a premium price. These advisers are too often willing to accept substandard prices and deal terms.
Other sellers try to handle it without an acquisition adviser. Instead, they rely on themselves and their personal attorney to take care of the details. However, only sellers that execute the process with skill and expertise will obtain a premium price.
5. For many companies, the 2001-2003 recession has depressed earnings. These lower, cyclical earnings have given buyers the leverage to demand substandard deal pricing despite the future positive economic outlook, which should be the driver of current deal pricing.
6. Many buyers 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 number of bank notes as part of the transaction price, or using a partial contingency purchase price to shift post-closing earnings risk back to the seller. These trends have all had a negative impact on sellers' ability to obtain a secure, higher-priced deal; however, it does not have to be that way.
Middle-market sellers must understand that buyers who really want their niche will eventually pay a premium price for it. However, buyers usually must be forced to pay this price, as they know that most people settle for lower prices.
The only buyers that will be scared off by sellers' aggressive deal positions are the ones that only have a lukewarm interest in buying a company. These people will never buy a company unless they receive a bargain price.
The right approachCompany owners who use the following approaches in pursuing a sale will always be able to eventually achieve strong deal terms that protect them from unreasonable post-closing problems.
1. When your market niche is the best use of a buyer's money, he or she will buy your company. If you are talking to the right type of buyer, this will eventually happen at a good price. You do not have to sell at a bargain rate. However, you must sell at the optimal time.
2. You must also convey that your pricing expectations are firm. If you do not get your price, you simply are not going to sell the company.
You should emphasize that you don't have to sell. However, you must be prepared to pursue another option, even if it's only temporary. You want to put the fear of losing the deal in the mind of buyers. To make it believable, you might hire a young, 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 that you are prepared to retire from the company and allow independent management to run it for you.
3. Some misguided executives believe their 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, it can work to their advantage. For example, a buyer who pursued your company two years ago who re-approaches you later 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.
4. Emphasize to such buyers that you are aware that it's better for them to buy a company instead of entering a market through a "greenfields approach." A greenfields approach is when a company enters 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 have been documented by many studies. Buyers should be aware that you not only understand this, but also are aware that if they really want a strong entry position in your market, it will be easier and less expensive to obtain it by buying you out than by competing against you for market share.
5. Get a tough, knowledgeable negotiator to advise you. He or she must understand the corporate culture of large companies. He or she must know how and when to involve operating personnel in the negotiating process.
This requires a knowledgeable and sophisticated adviser, who possesses considerable deal skills. Your adviser must be able to see the flow of the deal from inception to completion.
6. You must have an adviser that has access to foreign buyers. This will tremendously increase the number of people available to purchase your company. This is especially important now, as the value of the dollar now provides foreign buyers the ability to pay a higher price.
Sellers should not be intimidated by buyers' arrogant and demanding attitudes. They should understand that large companies are used to bullying middle-market sellers into accepting lower-priced deals. Such a hostile attitude can be overcome by the strong-willed approach of sellers that employ the right advisory team to guide them.
Do not be daunted by the obstacles. You will succeed if you expertly handle the transaction.
(George Spilka is president of George Spilka and Associates, a Pittsburgh-based merger and acquisition-consulting firm that specialize 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, 4284 Route 8, Allison Park, PA 15101. Also call (412) 486-8189 or fax (412) 486-3697 or e-mail firstname.lastname@example.org; see www.george spilka.com on the Internet.)