October 11, 2005
Owners of mid-sized businesses (those that sell for $2 million to $250 million) should know that the environment for selling such a business has grown increasingly harsh over the past 25 years or so. Many of the competitive forces at work in the global arena that have made manufacturing overseas attractive have made overseas manufacturing companies attractive investments, to the detriment of U.S. business owners. However, knowledge and planning can help an owner of a mid-sized manufacturing firm get a premium price for his business.
Manufacturers know that change is a fact of life. Products change, markets change, competitors change—nothing is constant in the manufacturing business. If you're an owner of a midsized business and are coming to the end of your career, you should know that factors that influence the business acquisition market change too.
During the last 25 years, many of the changes in the middle market have not been favorable for business sellers, and many of them thwart a business seller's efforts to obtain a premium price for the business. These changes include industry consolidation, which has reduced the number of potential acquirers; globalization of business; and an increased callousness and harshness of corporate culture in the U.S.
If you are a business owner interested in selling a midsized business—one with a transaction price between $2 million and $250 million—you must arm yourself with knowledge and learn some strategies to execute a successful sale. Following are tried and tested techniques that I have used to force stubborn acquirers to pay premium prices and provide the protective terms my clients were entitled to. Knowing these techniques and how and when to use them can enable you to sell your company successfully despite the many obstacles. In this way, you can reap the benefits of your lifelong commitment to your company.
Sellers of midsized, U.S.-based companies face several obstacles these days. Such obstacles include a decreasing number of potential buyers; a growing interest in foreign companies with a corresponding decrease in interest in U.S. companies; and a tendency to purchase a company, in part, with overvalued stock or other noncash considerations.
The vast consolidation of many, if not most, industries has reduced the number of prospective acquirers that otherwise would have gotten involved in a bidding contest. With only a minimum number of strategic acquirers available, the few remaining prospective acquirers tend to be less aggressive pricewise than they once were.
The globalization of business has had many negative effects on middle-market acquisition pricing. In many foreign countries, the cost of doing business is lower than it is in the U.S., which has heightened the interest in acquiring foreign companies. This has minimized what was once U.S. buyers' principal emphasis on the domestic market for acquisitions. Furthermore, in certain industries and for certain companies with a significant sales presence only in the U.S., many acquirers' interests have been reduced because of the selling companies' inability to generate foreign sales. These factors have tended to reduce acquirers' price aggressiveness in pursuing U.S. companies.
For many companies, earnings have been depressed because of the recession, which lasted from 2001 through the first half of 2003. These depressed cyclical earnings have given acquirers leverage to demand substandard prices despite the positive economic outlook, which should be the driver of current deal pricing.
Acquirers have become too accustomed to paying for companies with overpriced stock (based on stock values through early 2005), or forcing sellers to accept a substantial amount of notes as part of the transaction price, or using a partial contingency purchase price to shift postclosing earnings risk back to the seller.
All these trends have had a negative impact on your ability to obtain a secure, premium-priced deal. It should not be, and does not have to be, this way.
The major overriding point is that a strategic acquirer that really wants your company in its business niche eventually will buy it at a premium price. However, the acquirer usually must be forced to pay this price, because it knows that most sellers settle for inferior deal pricing. The only acquirers that will be scared off by your determined and tenacious deal position are those that have only a lukewarm interest in buying your company. These potential acquirers wouldn't buy your company at a bargain price.
Using the following approaches and methods in pursuing a potential sale will put you on the path to achieving a fully priced deal with terms that protect you from unreasonable postclosing exposure.
First, be patient. Wait for the optimal time to sell the company. Don't set a deadline for completing the sale. The pressure of selling a company in a specified time frame does not help you to maximize the price. The right acquirer will eventually buy your company at a premium price.
Some misguided executives believe a seller's position is weakened if it takes an extended period of time to sell a company. This is simply untrue. If market conditions force an abnormally long sale period on you, it can work to your advantage. For example, an acquirer that pursued you two years ago and approaches you again will understand if your pricing expectations have not changed, that you are determined not to sell until you get the price you want. The potential acquirer will take the long duration as a sign of your resolve. In my opinion, a delay will fortify your ability to sustain your pricing expectations.
Second, you must convey to acquirers that your pricing expectations are firm. As far as I'm concerned, most acquirers try to steal companies from sellers. You must convince the acquirer that you simply are not going to sell the company if you do not get your price. To sustain this position, you need the strength, fortitude, and confidence to convey to an acquirer that it's your way or the highway. You must convince the acquirer that you are not committed to a sale at any cost. You should emphasize that you don't have to sell, and selling is just one of many options available to you. You must be prepared to pursue another option, even if only for a temporary period. You want to put the fear of losing the deal in an acquirer.
To make it believable that you are comfortable pursuing alternatives other than selling, you might hire a general manager, if you do not already have one. This tactic makes it clear that you don't have to sell the company—it says that you are prepared to retire from the company and allow independent management to run it for you and, eventually, your heirs.
Third, emphasize to the acquirer that you are aware of the entry advantages of buying a company as opposed to entering a market through a greenfield approach—that is, attempting to enter a market by developing an operation and sales base from scratch. A acquirer should know that you understand this and is aware that it is easier and less expensive to obtain a strong position in your market by buying your company than by competing against you for market share.
Fourth, don't focus solely on price. Experienced acquirers are used to getting unreasonably protective terms in representations and warranties. This shifts an unfair amount of the postclosing risk to you.
Finally, get a tough, knowledgeable negotiator for an adviser. Look for an adviser who understands the corporate culture of large companies. Get one who is aware of the differences 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 adviser must know how and when to involve the operating personnel in the negotiating process so that their desires to obtain your company's operating and marketing benefits will be the driving force in the acquirer's decision to pursue and price the sale.
Your adviser must have enough experience to be able to conceptualize the flow of the deal from its inception to its completion. He or she must perceive the problems that might arise at various junctures of the deal and must develop appropriate responses to those problems.
You should choose an adviser who has access to foreign acquirers. This greatly increases the breadth of acquirers available to purchase your company. This is especially important when the value of the U.S. dollar is low against foreign currencies, which gives foreign acquirers the capability of paying a premium price.
Get an adviser who has the strategic deal sense, perseverance, and determination necessary to obtain the protective deal terms in the representations and warranties you need. Inexperienced advisers willing to accept a buyer's demands in this area risk putting you in a precarious postclosing position.
Many sellers retain advisers with only limited negotiating skills or strategic deal capabilities, or advisers who lack the toughness necessary to obtain a premium price. Other uninformed sellers try to handle a sale without an acquisition adviser at all. They rely only on themselves and an attorney.
This is absurd if one has any grasp of the complexity involved in getting a large acquirer to pay a premium price while providing reasonable protection to a seller in the representations and warranties. A premium price can be attained only by a seller who executes the sale process with skill and expertise, and it requires an adviser with a good blend of experience and strength of will.
In general, acquirers are accustomed to taking advantage of middle-market sellers. Do not be intimidated by an acquirer's demanding attitude. Although many large acquirers are accustomed to bullying middle-market sellers into accepting minimally priced deals, you can overcome this attitude by taking a strong-willed approach and employing a strong advisory team.
Do not be daunted by the obstacles you face—your eventual success will be realized if you handle the transaction expertly. Thereby, you will reap the benefits you so justly deserve for your lifelong devotion to your company.
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