Selling during good times, bad times

Achieving a premium price is possible regardless of the economy

THE FABRICATOR® MARCH 2009

March 19, 2009

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Although tough times are upon us, an economic downturn doesn't have to put all plans on hold. If you own a middle-market company (one that has a transaction price between $5 million and $250 million) and you are interested in selling it, a slumping economy is no reason to hesitate. In fact, putting your company on the market during a slowdown can have several benefits.

You're thinking about selling your company, but you're not sure if the time is right. The economic news is confusing. The Dow Jones Industrial Average veered from more than 14,000 in the second half of 2007 to less than 8,000 a year later, a decline of more than 40 percent. On the other hand, gross domestic product (GDP) in the U.S. grew from $13.7 trillion to $14.3 trillion (annualized) from 2007Q2 to 2008Q2. If you look for manufacturing data, you'll find that in September the PMI slipped to 43.5 from 49.9, the biggest one-month drop in nearly 25 years. Furthermore, equipment usage among durable goods manufacturers fell from a recent peak of 78.8 to 72.3, a decline of 8.3 percent, whereas fabricators fared far better with utilization declining just 4.5 percent.

Are any of these good indicators that the time is right—or wrong—to put your company on the market? Do factors such as these affect the sale price? Should you focus closely on these numbers?

No, no, and no. Forget all about the big-picture economic data and industry statistics. They have little if any bearing on the worth of your company. The value of a middle-market company, one that has a transaction price between $5 million and $250 million, is based on the company's fundamentals and potential growth.

Middle-market companies were selling at unsustainable prices during the past few years, and despite the recent economic turmoil, their intrinsic values remain strong. In a previous issue of The FABRICATOR®("Merger ahead? Acquisition pricing high but unsustainable," June 2007, p. 68), I advised that anyone with an interest in selling a middle-market company during the next 10 years should consider the price bubble that was prevailing at the time. Although that window of opportunity has closed, the good news is that acquisition pricing should remain at levels realized during the first half of 2008.

Why not modify the selling price? Because experience has shown that acquisition prices do not have to be adjusted downward when times are tough. If you are an owner or CEO of a middle-market company and you are interested in selling the company in the near or intermediate term, there is no reason to hesitate. Timing is a factor, but it's not the only factor in negotiating a premium price for a business. Several strategic considerations are critical regardless of current economic conditions.

  1. The selling price of a middle-market company should be based on the expected future earnings and the risk in achieving those earnings.
  2. 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.
  3. Recessions and economic downturns do not have to impact middle market deal pricing.
  4. If you haven't been able to negotiate a sale successfully, you'll find many corollary benefits in continuing to market the company.
  5. If you do not obtain 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 to allow your investment banker or acquisition consultant (hereafter referred to as adviser) to guide you in strengthening your long-term business fundamentals.

In other words, do not sell until you get a premium price, regardless of economic or market conditions.

Expected Future Earnings

The stock market is known as a predictive indicator, not a historical barometer. Stock prices tend to drop before a recession starts or shortly after one begins. Shortly thereafter the stock market tends to rise in anticipation of improved economic conditions.

Just as the stock market is a predictive indicator, so too should be the sale price of a middle-market company. An acquirer determines the value of a company based solely on its expected future earnings and the risk in achieving those earnings from the seller's business foundation. The buyer's return on investment is determined by the company's profitability from the date of the acquisition forward. In other words, historical earnings have no impact on the buyer's return. Therefore, you shouldn't allow an acquirer to intimidate you into accepting a substandard offer during an economic downturn.

Looking for Opportunities

When the CEO of a leading international distributor was asked whether his company would continue its aggressive acquisition program despite the pressing need to effectively integrate recent acquisitions, he responded that acquisitions are an opportunistic way to grow, and that it is necessary to take advantage of them when they are available or lose the opportunity forever.

His comments are right on the money. If the potential acquirer has a real interest in your company, it will strike while the iron is hot. A motivated acquirer will pay a reasonable, but aggressive, premium price at the time you want to sell, even if that is during a recession. Correspondingly, the current condition of the economy should not be a deterrent to consummating a deal at a premium price.

Economy Slowing Down, Prices Holding Steady

Although many acquirers do not reduce their acquisitive drive during a recession, the majority attempt to use the downturn as an opportunity to prey on poorly advised, weak-spirited sellers by telling them they will be able to sell during a downturn only if they accept a reduced price. Unfortunately, most selling owners accede to the demands of these acquirers. They accept the premise that the acquirer must be protected against an earnings shortfall during the downturn without demanding that they receive additional value for the increased earnings when economic conditions improve. These owners don't know, or forget, that middle-market deal pricing should be a predictive indicator.

No Sale? Keep Marketing

Unless your company is in an industry with major structural problems, such as home construction, or has specific problems such as weak long-term business fundamentals, you should continue to market the company during a recession.

Why? Well, let's assume you are not successful in completing a sale during hard times. You'll benefit two ways if you continue to market the company. First, acquirers that were initially contacted are aware that you are interested in selling your company. Although they rejected the terms of the original deal, they are aware that the company is on the market. If their needs change and they later perceive your company as a growth opportunity, they will be able to contact you quickly.

Second, it can have a beneficial effect on the price. Many novices believe that keeping the company on the market for a long time has a negative effect on the sale price. Nothing is further from the truth. When a middle-market company owner indicates that he is willing to sell at a premium price, it is not unusual for many acquirers to be skeptical of the seller's resolve and ability to achieve a good price. They believe that if the seller isn't initially successful, he will lower his pricing expectations. A seller who doesn't reduce the price sends a clear message that his resolve is unbreakable. Acquirers then realize the only way to buy the company is to pay a premium price.

Strengthening the Foundation

The business foundation comprises the company's long-term business fundamentals—the strength and protection of its market niche, the scope of its market presence, the breadth and depth of its customer base, the efficiency and cost-effectiveness of its production and warehousing operations, the capabilities and depth of its management team, its ability to take advantage of future growth opportunities, and so on. To the extent these fundamentals are strong, an acquirer will pay a multiple for future earnings that is higher than it would pay if the company's fundamentals were merely average.

Therefore, if you have retained an adviser capable of evaluating your business fundamentals, he can guide you in establishing a program to strengthen them. You can implement this program before reinstituting the active marketing of your company. This program should eventually increase your earnings while reducing the threats to and volatility of future earnings, and thereby fortify your ability to obtain a higher transaction price.

A Final Thought

When you have determined that the time is right to sell your company, you have a lot to think about. You have a financial stake in the sale, and you get to sell it only once. You likely also have a huge emotional investment in the company, so while you are dealing with your feelings of letting the company go, you probably will face a long, arduous battle with any potential acquirer.

That said, you shouldn't accept anything less than a premium price. If you meet initial price resistance from acquirers, remain firm in your demands and don't discount your price. If your advisor knows value and has properly established the premium price, eventually you will obtain it.

George Spilka and Associates is a national investment banking firm that specializes in middle market, closely-held corporations in industries such as manufacturing, distribution, construction and services.



George Spilka


George Spilka and Associates
Suite 301
Castle Town Square South
Allison Park, PA 15101
Phone: 412-486-8189

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The FABRICATOR® is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971. Print subscriptions are free to qualified persons in North America involved in metal forming and fabricating.

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