If middle market owners want to sell their distribution companies during the next 10 years, it is in their best interest to consummate a sale no later than 2014, preferably sooner.

Although most points discussed in this article pertain with equal relevance to all companies regardless of size, the article is primarily directed at middle market companies, which are firms with transaction values between $5 and $250 million.

I am more optimistic about the prospects for the short and intermediate-term (the next two to three years) acquisition market than I was last year. 2012 should be the best time to sell a company because of the likelihood that market conditions will be strong. They will probably continue that way through 2013 and quite possibly 2014. After that, the market becomes problematic.


I expect a severe downturn to occur that will have a devastating impact on the U.S. — and probably the global — acquisition and financial markets sometime before the end of the decade. Its impact is likely to be far worse than the Great Recession and last much longer.

Why You Should Sell Promptly

The following are certain reasons why you should consummate a sale by not later than 2014, and preferably by the end of 2012 or 2013:

1. Acquisition pricing is very strong now. I would anticipate it will remain this way through the end of 2013.

2. It is likely there will be a second Obama Administration. In order for them to start significantly reducing the deficit, it will require more than spending cuts, as there are not enough spending cuts to make without harming the very structure and fabric of the United States. Correspondingly, it will necessitate an increase in taxes. These revenue-raising measures will primarily be focused on increasing the taxes on the wealthy.

One of the taxes almost certain to be increased is the capital gains tax. I expect it to be increased from 15 percent to at least 20 percent, if not 25 percent. If it is increased to 25 percent, your net after-tax sale proceeds have just been reduced by 10 percent. This is a sizeable hit.

3. Numerous private equity (PE) acquirers have a pressing need to invest capital promptly. Many of these funds received money from their investors in 2008 before the market crashed. That money basically sat idle for 2-and-a-half years. The PE firms are now under tremendous pressure from their investors to get that money invested. This is driving these firms to invest that money quickly. For certain good companies they are willing to overpay if they have to, rather than risk losing the deal. This has produced some attractive selling opportunities.

4. U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market and willing to pay strong multiples.

5. The stock market performance during the first two months of 2012 has been extremely good. This has been a contributing factor to an increasing level of optimism and buoyancy in the business community.

6. The interest rates are low and should remain low through the foreseeable future. I don’t anticipate the Federal Reserve deviating from its stated policy of keeping interest rates low until 2014. The majority of the Fed Governors don’t feel it is worth the risk to implement a restrictive monetary policy, as they believe that the premature implementation of a restrictive monetary policy was a major factor causing the depth and length of the Great Depression.

The Need for Expert Advice

When its time to sell, you should retain an investment banking (IB) firm that can position your company and guide and time its sale. You do not want to do this yourself or use a firm that doesn’t have unique and specialized acquisition market knowledge.

It is essential that you do not miss the “window of opportunity” that you have to realize a premium transaction price during the next two or possibly three years. This becomes even more critical, when we remember the devastated acquisition market conditions caused by the Great Recession from late-2008 through the third quarter of 2010. You need an IB firm, whose fundamental philosophy is to consummate a sale only when their clients have obtained the optimum price, not one that just wants to close a deal quickly at any price. Your advisor should be willing to spend the time to position and time the sale, so that it generates the maximum transaction price.

George Spilka is president of George Spilka and Associates, a national investment banking firm, which he founded in 1978 that advises middle market clients through the entire acquisition process, and also in preparing a company for sale. Their client base has included a diverse group of distribution, manufacturing and service companies. You can contact him by email at spilka@georgespilka.com or by calling 412-486-8189. Please go to www.georgespilka.com to learn more about the firm. Look for an article next month describing the reasons jan/san distributors can expect a discouraging future economy. 




POSTED ON: 5/4/2012