Optimum Time to Sell a Company to Obtain Premium Price4 Apr, 2011 By: George Spilka, Spilka & Associates imageSource
Optimum Time to Sell a Company to Obtain Premium Price
First, a brief description of the history 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.
During the second half of 2007 and first half of 2008, deal pricing reverted to
near normal levels, however, as the business downturn started near the third
quarter of 2008, which led to what some call “The Great Recession,” for the
period encompassing from the fourth quarter of 2008 to the start of the 3rd
quarter of 2009, deal pricing collapsed. In fact, 2009 was the first year the
world economy contracted since the 1930’s. Fortunately, although economic and
market conditions were awful, they never deteriorated to the levels realized
during the Great Depression. However, middle market deals, defined as
transactions with values between $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.
As we begin 2011, deal pricing is making strides to return to normal levels
and middle market deal activity, which is not necessarily comparable to large
deal activity, has greatly improved. However, many acquirers still believe they
can “steal companies” primarily due to the depressed earnings most companies
realized during the Great Recession. Many sellers are susceptible to accepting
these discount prices…as the scars created by the Great Recession make them
concerned they won’t be able to sell their companies. However, by the latter
part of 2011, I expect middle market deal pricing to increase to above normal
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 understand
that their company is a long-term asset whose sale price should not be impacted
by short-term transient considerations. Furthermore, any serious acquirer does
not anticipate earnings returning to 2009 and 2010 levels in the foreseeable
future, or they would not be interested in buying companies. Middle market
executives must remember that the true and most significant determinant of a
transaction price is a company’s expected future EBITDA/earnings and the risk in
achieving that EBITDA from the business foundation given an acquirer.
This is an acquirer’s major consideration in determining a seller’s value. Any
other factors, which they cite, are merely used for negotiating leverage to
justify an unwarranted discount price. Consequently, you should not entertain
any discussions regarding your earnings during 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 demand they be treated accordingly.
Expected Deal Pricing in Late-2011 / 2012
The optimum time to sell a company should be the latter part of 2011 or 2012.
This is due to a number of factors:
1| Most companies’ earnings began to show some strength during the second
half of 2010. Earnings should continue to grow in 2011 & increase at an even
higher rate during 2012. 2013 should be a very good earnings year, supported by
a healthy economy. These earnings levels make it possible to realize a premium
2| During 2011 and 2012, the capital gains tax will remain at a reduced
level of 15% compared to the prior rate of 20%. It is unlikely the 15% rate will
be extended beyond 12-31-12. This 5% tax savings on the realized gain is a
significant consideration when determining the timing of a sale.
3| The cheap money, which is a by-product of the excessive credit
provided by the Federal Reserve, should contribute to strong acquisition prices
during this period, while still enabling the acquirer to have a solid return on
4| As 2011 begins, the majority of banks are loosening the credit
spigots. By the latter part of 2011, I anticipate the availability of credit to
be at normal levels.
5| Around the end of 2010, acquirers began to aggressively pursue
These factors mandate that an owner interested in selling his company within
the next seven years should seriously consider selling it during the latter part
of 2011 or 2012.
Deal Pricing Factors in 2014 / Later
Beginning in 2014, the intermediate and long-term economic outlook gets pretty
murky. It is not inconceivable the economy could stay strong during 2014 and
2015; however, 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 impact middle market deal pricing and activity,
possibly significantly. Some of these concerns, which could have a major
negative impact on the world economy, are:
1| The condition of the credit markets, especially in Europe, could be
an intermediate to long-term financial problem.
2| Major issues are impacting the Chinese economy and banking system,
including the Chinese Central Bank increasing the “benchmark” lending rate and
the reserve requirements for the commercial banks in an attempt to reduce an
increasing inflation rate. Potentially these could have a negative impact on the
Chinese economy, one of the most dynamic & important in the world, and a
negative impact on it will likely have global consequences.
3| The political and economic instability in the world at this time
could provide the basis to produce an event that would have wide ranging
4| 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 to consummate the sale of their company in the latter half of
2011 or 2012 due to the substantial risk facing the economy and acquisition
market in 2014 and subsequent 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.
Obtaining a Premium Price
For a middle market seller to obtain a premium-priced deal with terms that fully
insulates them from post-closing liability, it is imperative they find an
investment banker/acquisition consultant (“IB”) that has certain capabilities
and character-istics. A seller should be looking for the following things in
their investment banker:
1| An investment banker that realizes, and actually relishes, that a
sale is not a win-win situation. In reality, it is actually much closer to a
win-lose situation. This type of IB recognizes that negotiations are a
psychological war between disparate interests that have conflicting goals. The
seller wants the maximum attainable premium price, while the much larger,
sophisticated acquirer expects a discounted price, as they normally get their
own way in middle market acquisitions. There is no way these diametrically
opposite interests can’t result in a psychological battle where the better
prepared, more determined party will prevail.
2| An investment banker with compassion and concern for their clients
that understands most acquirers will try to steal a seller’s company. The right
IB for you will be steadfast and resolute, concerned only with protecting and
maximizing your realistic interests. If an acquirer won’t optimize your
interests, the right IB will not consummate a deal under lesser terms.
3| An IB that has the aggressiveness, determination, toughness and
force of personality combined with the market and financial knowledge to force
their will on large corporate acquirers or sophisticated private equity firms.
If those traits are not present in the investment banker, you can be assured
that a premium price will not be yours.
4| An investment banker that has the executive and business skills,
transcending the financial skills that any IB should have, to fully-understand
your company, its strengths, market niche and potential. They also must have the
ability to present and articulate these facts clearly. The investment banker has
to better understand your company than the acquirer and understand your industry
at least as well, if they are to prevail. This knowledge when combined with the
attitude described will intimidate an acquirer and convince them they can’t
steal your company, but buy it at a realistic premium price.
5| An IB that has the patience and confidence to wait, if necessary,
to obtain a premium-priced, all-cash deal. In certain situations, they must be
willing to allow the power of their knowledge and personality traits to have the
time necessary to wear down the acquirer to agree to the deal and terms that are
essential to the maximization of your interests. This is the only type of deal
George Spilka, Pres., George Spilka & Associates, a national investment
banking firm based in Pittsburgh that specializes in middle market, closely-held
corporations; advise on acquisition process; preparing a company for sale.
Client base includes distribution, service, retailing & manufacturing co’s. At