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The Impact of the Financial Crisis on Middle Market Acquisitions

By: George Spilka
Posted: November 14, 2008

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As I survey the landscape, although the economic figures indicate the country is in a recession or an economic downturn (define it as you like), the profits of U.S. industrial companies remain strong. The results for public companies indicate that, although profitability is moderating, it remains at historically high levels. In my opinion, the intermediate and long-term impact of the financial crisis on the economy is going to be negligible, if any. I believe that by the second half of 2009, the U.S. will be coming out of the economic downturn. One major concern regarding future economic performance is the amount of guarantees that have been made by the Federal Reserve and Treasury. These could possibly lead to a significant worsening of the Federal deficit. If it does, it will exacerbate U.S. dependence on on the global community. In this scenario, without foreign governments increasing their already large purchases of U.S. debt instruments, we will likely have a significant increase in the inflation rate and a further weakening of an already weak dollar. However, I still believe the financial crisis will have limited impact on the intermediate and long-term economy.

Owners and executives of middle market companies, such market defined as companies with a transaction price between $5-$250 million, will now continue to get their ceaseless level of calls from brokers, intermediaries and low-grade investment bankers. However, their storyline will now be either upfront or as a deal progresses, something similar to “you better sell at a discount price before the carnage gets worse," or “you should be thankful to receive this price due to current financial conditions.” There is no justification, though, for those type of statements.

Most acquirers will tell you the devastation in the financial markets means you will have to accept a substantially discounted price. You will be told that pricing will be “dirt cheap” into the foreseeable future and might even deteriorate further. Don’t pay any attention.

The Impact of the Financial Crisis on the Sale of Middle Market Companies

  1. Short-term impact  (up to 1 year): There will be a period of three (possibly even six) months where there is some turmoil in the acquisition market. Conceivably, there could be a degree of transaction pricing weakness through the end of the second quarter of 2009, but I doubt it.
  2. Intermediate-term impact (1-3 years): There should not be any impact on transaction pricing, unless the impact on the Federal deficit of the guarantees made by the Federal Reserve and the Treasury have a greater impact than expected. Therefore, deal pricing to be similar to the first half of 2008, which was reasonably solid.
  3. Long-term impact (3 plus years): None. Many things will affect pricing, none of which will be the current financial crisis.

Based on my economic outlook, I don’t feel the financial crisis should have any significant impact on potential sellers of middle market companies.

The Recommended Course of Action

Don’t change the overall strategy regarding the sale of your company. If selling satisfies your personal and business objectives, you should proceed with the process. You might delay contacting potential acquirers until after the first quarter of 2009, but that will not be necessary in most cases. Furthermore, don’t modify your expected transaction price at this time.