A middle-market owner’s prospects for selling his or her business have dwindled over the years — it is now more difficult than ever before for a U.S. seller to obtain a premium price for his or her company. This is due to the consolidation of most industries, which has led to fewer potential acquirers, the globalization of business, and the callousness of U.S. corporate culture.

That said, there are many strategies a selling owner can use to overcome these obstacles. They are all tried-and-tested techniques that have been used to persuade many acquirers to pay premium prices and provide the protective deal terms sellers seek.

Knowing these techniques and how and when to use them will enable selling owners to successfully sell their companies despite the many obstacles they face. In this way, selling owners will be compensated adequately for the years of blood, sweat and tears they’ve poured into their companies.

This article discusses some of the major obstacles faced by middle market sellers trying to obtain premium-priced deals, while achieving strong protection in the representations and warranties. It also covers how those obstacles can be overcome. A middle market company is one with a transaction price between $2-$250 million.

The Obstacles Faced By A Seller
There are a number of obstacles today’s seller must face in order to get a fair price for his or her company:

• The vast consolidation of many, if not most, industries has reduced the number of prospective acquirers available to enter the bidding contest. Usually, with only a minimum number of strategic acquirers available, the few remaining prospective acquirers tend to be less aggressive price-wise than they might have been before.

• Middle-market sellers usually have a defined, somewhat limited, market niche that reduces the number of potentially interested acquirers.

• The globalization of business has had many negative effects on middle-market acquisition pricing. The cost advantages often available to many foreign companies have heightened the acquisition interest in those markets and companies. This has minimized what was once buyers’ preeminent interest in the U.S. market for acquisitions. Furthermore, in certain industries and for certain companies, where a seller only possesses a significant sales presence in the United States, 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 these deals.

• 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 resolve necessary to obtain a premium price.

These advisors are too often willing to accept sub-standard prices and deal terms that don’t maximize 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 attorneys to consummate the acquisition.

This is a mistake — there is much complexity involved in getting a large acquirer to pay a premium price while providing reasonable deal terms that provide protection to a seller. Because a premium price can only be obtained if the seller executes the sale process with skill and expertise, having an advisor that has considerable sophistication to generate a premium price is recommended.

• 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 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 most recent economic recession. These depressed cyclical earnings have given acquirers the leverage to demand sub-standard deal pricing despite the future’s 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), forcing sellers to accept a substantial amount of 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 effect 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.

Overcoming The Obstacles
The major point a selling middle-market owner must understand is that any strategic acquirer who really values the seller’s niche will eventually buy it at a premium price. However, the acquirer usually must be convinced to pay this price, as they know that most sellers settle for inferior deal pricing.

An acquirer must be forced to pay the premium price. Furthermore, the only acquirers that will be scared off in the long-term by a seller’s aggressive deal positions are the ones that have only 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.

• 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, they will eventually pay 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.

• 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 you are in control. The acquirer must be convinced that you are not “married” to the sale at any cost.

You should make it clear that you don’t have to sell — that it is but one of many options available to you. But, you must be prepared to pursue these other options, even if only for a period of time. You want to make the acquirer fear that they will lose the deal. 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.

• 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 two years ago that re-approaches 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. At times, a delay can fortify your ability to sustain your pricing expectations.

• Emphasize to the acquirer that you are aware of the entry advantages they have in buying a company as opposed to entering a market through a “Greenfields Approach.” A “Greenfields Approach” is a market-entry scenario in which 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 buy your company rather than compete against you for market share.

• 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. They must know when to make their desires to obtain the operating and marketing benefits of the seller the driving and guiding force — the force that will govern the acquirer’s final decision to pursue and price the deal.

Your advisor must be able to conceptualize the flow of the deal from its inception to its completion. They must perceive the problems the seller might face 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.

• In some cases, you should 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 2005, as the value of the dollar now provides foreign acquirers the ability to pay a premium price.

Your Sale, Your Terms
Although not an easy task in the current business environment, it is possible to attain a premium-priced deal with strong terms that protect a seller against unreasonable post-closing exposure.

A seller should not be intimidated by an acquirer’s demands. They should understand that large acquirers are used to bullying middle-market sellers into accepting minimally priced deals. These large acquirers’ prior successes produce an attitude that can always be overcome by the strong-willed approach of a seller who has a good advisory team in their corner. Do not be daunted by the obstacles you face, as your eventual success will be realized, if you expertly handle the transaction.

George Spilka is president of Spilka & Associates, a Pittsburgh-based merger-and-acquisition consulting firm.




POSTED ON: 9/1/2005