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ACQUISITIONS
Obtaining a premium price — The optimum time to sell your company
BY GEORGE SPILKA Special to TheWholeSaler
A
brief description of the his- tory of recent deal pricing is necessary to put things in
perspective. During 2006 and the first half of 2007, the greatest market bubble in middle market deal pricing in over 50 years occurred. As I men- tioned in an article written during that period, any middle market exec- utive that had plans to sell their com- pany within the next 20 years should have sold then. Those pricing levels will probably not be seen again in our lifetimes. During the second half of 2007 and
the first half of 2008, deal pricing re- verted to normal levels. However, as the business downturn started in the third quarter of 2008, which led to the Great Recession (my terminology for the period encompassing from the fourth quarter of 2008 to the start of the third quarter of 2009), deal pric- ing collapsed. In fact, 2009 was the first year the world economy con- tracted since the 1930s. Fortunately, although economic and market conditions were awful,
• Top-dollar prices gone • Beware lowball offers • Changes in China could impact market • 2011-12 looking up
they never deteriorated to the levels realized during the Great Depression. Middle market deals, however, de- fined as transactions with values be- tween $5 million and $250 million, were few. Those that were completed were usually at deeply discounted prices. This pricing level continued until the start of the third quarter of 2010. At that time, deal activity and pricing started to improve.
Current deal pricing
As we begin 2011, deal pricing is making strides to return to normal levels, and middle market deal activ- ity, which is not necessarily compa- rable to large deal activity, has greatly improved. Many acquirers, however, still believe that they can “steal com- panies,” primarily due to the de- pressed earnings most companies realized during the Great Recession. Many sellers are susceptible to ac- cepting these discount prices, as the scars created by the Great Recession make them concerned that they won’t be able to sell their companies. I ex- pect that by the latter part of 2011 middle market deal pricing will in- crease to above normal levels. During 2011, as many acquirers
use the depressed earnings realized by a seller during the two-year period ending 6/30/10 as justification for a substandard offer, it is imperative for middle market executives to under- stand that their company is a long- term asset whose sale price should not be impacted by short-term transient consid- erations. Furthermore, any serious acquirer does not an- ticipate earnings returning to 2009 and 2010 levels in the foreseeable future, or they would not be interested in buying companies. Middle market executives must re- member that the true and most significant determinant of a transaction price is a company’s expected future E BIT DA/ e a rni ngs (“EBITDA”) and the risk in achieving that EBITDA from the business foundation given an acquirer. This is an acquirer’s major considera- tion in determining a seller’s value. Any other factors that they cite are merely used for negotiating leverage, to jus- tify an unwarranted discount price. Consequently, you should not entertain any dis-
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cussions regarding your earnings dur- ing the two-year period ended 6-30- 10 being a factor in establishing a transaction price. They simply are not a consideration, and you should de- mand they be treated accordingly.
Expected deal pricing through 2012 The optimum time to sell a com-
pany should be the latter part of 2011 or 2012. This is due to a number of factors: • Most companies’ earnings began
to show some strength during the sec- ond half of 2010. Earnings should continue to grow in 2011 and in- crease at an even higher rate during 2012. Furthermore, 2013 should be a very good earnings year, supported by a healthy economy. These earn- ings levels make it possible to realize a premium price. • During 2011 and 2012, the capi-
tal gains tax will remain at a reduced level of 15%, compared to the prior rate of 20%. It is unlikely that the 15% rate will be extended beyond 12/31/12. This 5% tax savings on the realized gain is a significant consid- eration when determining the timing of a sale. • The cheap money that is a by- product of the excessive credit pro- vided by the Federal Reserve should contribute to strong acquisition prices during this period, while still en- abling the acquirer to have a solid re- turn on invested capital. • As 2011 begins, the majority of
banks are loosening the credit spig- ots. By the latter part of 2011, I antic- ipate the availability of credit to be at normal levels. • Around the end of 2010, acquir-
ers began to aggressively pursue deals.
These factors mandate that an
owner interested in selling his com- pany within the next seven years should seriously consider selling it during the latter part of 2011 or 2012.
Possible deal pricing factors in 2014 and later Beginning in 2014, the intermedi-
ate and long-term economic outlook gets pretty murky. It is not inconceiv- able that the economy could stay strong during 2014 and 2015; how- ever, a number of factors give off warning signals that trouble could be on the horizon, which could affect these and/or possibly later years. These factors could negatively im- pact middle market deal pricing and activity, possibly significantly. Some
•THE WHOLESALER® — MARCH 2011
of these concerns, which could have a major negative impact on the world economy, are: • The condition of the credit mar-
kets, especially in Europe, could be an intermediate to long-term financial problem. • Major issues are impacting the Chinese economy and banking sys- tem, including the Chinese Central Bank increasing the “benchmark” lending rate and the reserve require- ments for the commercial banks in an attempt to reduce an increasing infla- tion rate. Potentially, these could have a negative impact on the Chi- nese economy. As the Chinese econ- omy is one of the most dynamic and important economies in the world, a negative impact on it will likely have
spigots. By the latter part of 2011, I anticipate
As 2011 begins, the majority of banks are loosening the credit
the availability of credit to be at normal levels.
global consequences. • The political and economic insta-
bility in the world at this time could provide the basis to produce an event that would have wide ranging reper- cussions. • There are many global “hot
spots” that could erupt at any time. The impact of any of these events could produce fear and tremendous instability in the financial markets. I am not saying that intermediate
and long term economic and market conditions will definitely be bad. However, I am advising clients that I strongly prefer that they consummate the sale of their company in the latter half of 2011 or 2012, due to the sub- stantial risk facing the economy and acquisition market in 2014 and sub- sequent years. The risk factor is too great to delay a sale until 2014 in light of all the positive reasons why a sale should take place before 12/31/12.
How to obtain a premium price For a middle market seller to ob-
tain a premium-priced deal with terms that fully insulate them from post-closing liability, it is imperative that they find an investment banker/acquisition consultant (IB) that has certain capabilities and char- acteristics. A seller should be looking for the following things in their in- vestment banker: • An investment banker that real-
izes, and actually relishes, that a sale (Turn to
Opportunity...page 98.)
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