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A Time to Sell
By: George Spilka
Posted: June 7, 2011, from the June 2011 issue of GCI Magazine.
Before examining the current climate for acquisitions, a brief review of recent deal pricing is necessary to put things in perspective. In 2006 and the first half of 2007, the greatest market bubble in middle market deal pricing in more than 50 years occurred. Any middle market executives that had plans to sell their companies within the next 20 years should have sold then—those pricing levels will probably not be seen again in your lifetime. During the second half of 2007 and first half of 2008, deal pricing reverted to normal levels. However, as the business downturn started in the third quarter of 2008, which led to the Great Recession—the period encompassing the fourth quarter of 2008 through the start of the third quarter of 2009)—deal pricing collapsed. In fact, 2009 was the first year the world economy contracted since the 1930s.
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.
Current Deal Pricing
During the first quarters of 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 economic downturn. Many sellers are susceptible to accepting these discount prices, as the scars created by the economic downturn have them concerned they won’t be able to sell their companies. However, by the latter part of 2011, middle market deal pricing is expected to increase to above normal levels.
During 2011, as many acquirers use the depressed earnings realized by a seller during the two-year period ended June 30, 2010, as justification for a substandard offer, it is imperative for middle market executives to understand that their companies are long-term assets, and sale priceS 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 is assumed by an acquirer. This is an acquirer’s major consideration in determining a seller’s value. Any other factors cited are merely used for negotiating leverage and to justify an unwarranted discount price. Consequently, you should not entertain any discussions regarding your earnings during the two-year period ended June 30, 2010, as a factor in establishing a transaction price. Those earnings simply are not a consideration.