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Over the past 25 years, there have been numerous changes in the acquisition market. Many of these changes, including the consolidation of most industries (which has led to a reduction of potential acquirers) and the globalization of business, have negatively impacted a U.S. seller’s ability to obtain a premium price. There are also many tried and tested techniques available to a selling owner to overcome these obstacles and garner premium prices and protective deal terms.
The first part of this article discusses the major obstacles faced by middle market sellers, defined as companies with a transaction price between $2 million and $250 million, in trying to obtain a premium-priced deal with strong protection in the representations and warranties, while the second part defines how those obstacles can be overcome.
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Middle Market Sales Obstacles
1. The vast consolidation of many, if not most, industries has reduced the number of prospective acquirers involved in a bidding contest. Usually with only a minimum number of strategic acquirers available, the few remaining prospective acquirers tend to not be as aggressive, price-wise, as they once were.
2. Usually a middle market seller has a defined, somewhat limited, market niche that reduces the number of potentially interested acquirers.
3. The globalization of business has had many negative effects on middle market acquisition pricing. The cost advantages often available to many non-U.S. based companies has heightened the acquisition interest in many foreign markets and companies. This has minimized what was once buyers’ preeminent emphasis on 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 U.S., 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 this type of deal.
4. In general, acquirers are used to taking advantage of middle market sellers. Acquirers are trying to obtain a company for the lowest price possible. If a seller’s advisors have only limited strategic deal capabilities, they are often susceptible to accepting substandard prices and deal term norms that are not conducive to the maximization of a seller’s economic interests. Worse, if uninformed sellers try to handle a sale without an acquisition advisor, they often don’t grasp the complexity involved in getting a large acquirer to pay a premium price while providing reasonable protection to a seller in the deal terms. As the attainment of a premium-priced deal will only be obtained by a seller that executes the sale process with skill and expertise, it requires an advisor of considerable sophistication.
5. Acquirers are used to getting unreasonably protective terms in the representations and warranties. This shifts an unfair amount of the post-closing deal risk to a seller.
6. The inability of sellers and most advisors to access foreign markets for potential acquirers greatly reduces the number of strategic acquirers available.
7. For many companies, earnings remain depressed. These depressed cyclical earnings have given acquirers the leverage to demand substandard deal pricing despite any positive future economic outlooks, which should be the drivers of current deal pricing.
8. Acquirers have become too used to either paying for companies with their stock, forcing sellers to accept a substantial amount of notes as part of the transaction price or utilizing a partial contingency purchase price to shift post-closing earnings risk back to the seller.
The major overriding point a selling middle market owner must understand is that any strategic acquirer who really wants their niche will eventually buy it at a premium price. However, the acquirer usually must be forced to pay this price, as they know that most sellers settle for inferior deal pricing. The sophisticated execution of the acquisition process often secures the premium price for the seller. The only acquirers that will be scared off for the long-term by a seller’s aggressive deal positions are the ones that only have a lukewarm interest in buying or in buying at a bargain price.
A selling middle market owner that utilizes the following approaches and methodology in pursuing a potential sale will be in a position to achieve a fully priced deal with strong deal terms that protect them from unreasonable post-closing exposure.
1. When your market niche is the best deployment of an acquirer’s capital, they will buy. If you are talking to the right type of strategic acquirer, this will eventually happen at a premium price. Sellers do not have to give the right strategic acquirer a bargain price to make the acquisition the best deployment of their capital. However, to be successful it is imperative to sell at the optimal time. Correspondingly, sellers must not put time pressure on themselves to consummate a sale quickly.
2. Sellers must convey that their pricing expectations are firm. If the price is not met, there will be no sale of the company. To sustain this position, sellers need the strength, fortitude and confidence to convey that position to an acquirer. A seller is in the position of strength when the acquirer is in fear of losing the deal. Make it clear that there are alternative options to the sale in place, such as acting on succession plans.
3. A seller’s position is not weakened if it takes a long time to sell a company. If market conditions force an abnormally long sale period, it can work to the seller’s advantage. A delay will, in fact, fortify a seller’s ability to sustain pricing expectations.
4. Sellers must emphasize to the acquirer that they are aware of the entry advantages in buying a company as opposed to entering a market through a “Greenfields Approach,” a market entry scenario in which entrance is gained through a new geographic area or product market by developing operations and a sales base from scratch. The advantages of entering a market through acquisition have been documented by many studies, showing that a strong entry position into your market is easier and less expensive to obtain by acquisition than by competition.
5. Get a tough, knowledgeable negotiator for an advisor—one who understands the corporate culture of large companies and is 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 and how to make their desires to obtain the operating and marketing benefits of the seller the driving and guiding force that will govern the acquirer’s final decision to pursue and price the deal. An advisor must be able to conceptualize the flow of the deal from inception to completion. They must perceive the problems that might be faced at various junctions of the deal and the appropriate responses to those problems, and must employ the deal strategy that will assure the seller’s realization of a premium price.
6. Obtain an advisor who has access to foreign strategic acquirers. This will tremendously increase the breadth of acquirers available to purchase the company.
Even though the transacting of premium-priced deals with strong deal terms that protect a seller against unreasonable post-closing exposure is not an easy task in the current business environment, it is a task that can always be successfully accomplished if the previous approaches and procedures are utilized.