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Achieving a Premium Price During A Recession

By: George Spilka
Posted: September 5, 2008, from the September 2008 issue of GCI Magazine.

Despite being in the midst of a U.S. recession and at the end of the highest level of middle market deal pricing that I’ve seen during my 30-year career as an investment banker, there is positive news for owners and CEOs seeking to sell their middle market companies (those with a transaction price of between $5–$250 million).

In a previous feature, I recommended that any owner or CEO with an interest in selling during the next 10 years should avail themselves of the “bubble pricing” that was prevalent. Although that “window of opportunity” has closed, the acquisition pricing remains at solid, normalized levels. Downward price adjustments are not necessary now or in the foreseeable future. For companies looking to sell in the near or intermediate-term, there is no reason to be hesitant about proceeding with the sale now.

There are, however, strategic considerations that owners or CEOs must be aware of and prudent courses to follow during the current economic conditions.

1. Regardless of conditions, middle market companies should be priced based on their expected future earnings and the risk in achieving those earnings from the business foundation given an acquirer.

Savvy corporate acquirers consider acquisitions an opportunistic way to grow. They realize they must take advantage of an opportunity when it is available or risk losing it.

2. Never sell until you get a premium price—again, regardless of economic or market conditions. Experience shows that recessions and economic downturns do not have to impact middle market deal pricing.

Even if you are not initially successful in selling your company due to economic or market conditions, there are many corollary benefits from proceeding with the sale promptly.

If you are initially unsuccessful in obtaining a premium price for your company during a recession, don’t overreact and accept a substandard offer. Instead, suspend the sale process and take advantage of the additional time as the opportunity to allow your advisor (an investment banker or acquisition consultant) to guide you in strengthening your long-term business fundamentals. Note that the stock market is known as a predictive indicator, not a historical barometer. A recession is usually priced into the average stock either by the time one starts or shortly after its inception. At that point, the stock market generally begins to rise in anticipation of improved economic conditions. And just as the stock market is a predictive indicator, so too should be deal pricing of middle market companies. An acquirer solely determines the value of a company based on its expected future earnings and the risk in achieving those earnings from the seller’s business foundation. The buyer’s return on investment will be determined by the company’s profitability from the date of the acquisition forward. Historical earnings have no impact on the buyer’s return. Therefore, don’t allow an acquirer to intimidate you into accepting the concept that recent historical earnings should determine the deal price during an economic downturn.

Opportunistic Growth