For one reason or another, companies of all sizes maybe looking to get out of the grain handling or feed manufacturing business. George Spilka, president of George Spilka and Associates, a national investment banking firm based in Pittsburgh specializing in middle market, closely-held corporations, offers Feed and Grain readers his advice for getting the right price for your business.
Current Deal Pricing
Deal pricing is making strides to return to normal levels and middle market deal activity, but many acquirers still believe they can “steal companies” due to the depressed earnings realized during the Great Recession. Many sellers are susceptible to accepting these discount prices, as the scars created by the Great Recession make them concerned they won’t be able to sell their companies; however, by the latter part of 2011, middle market deal pricing is expected to increase to above normal levels.
During 2011, as many acquirers use the depressed earnings realized by a seller during the two year period ending June 20, 2010 as justification for a substandard offer, it is imperative for middle market executives to understand that their company is a long-term asset whose sale price should not be impacted by short-term transient considerations. Furthermore, any serious acquirer does not anticipate earnings returning to 2009 and 2010 levels in the foreseeable future, or they would not be interested in buying companies. Middle market executives must remember that the true and most significant determinant of a transaction price is a company’s expected future EBITDA/earnings (“EBITDA”) and the risk in achieving that EBITDA from the business foundation given an acquirer. This is an acquirer’s major consideration in determining a seller’s value. Any other factors, which they cite, are merely used for negotiating leverage to justify an unwarranted discount price. Consequently, you should not entertain any discussions regarding your earnings during the two-year period ended June 20, 2010 being a factor in establishing a transaction price. They simply are not a consideration, and you should demand they be treated accordingly.
Expected Deal Pricing in Late-2011 and 2012
The optimum time to sell a company should be the latter part of 2011 or 2012. This is due to a number of factors:
- Most companies earnings began to show some strength during the second half of 2010. Earnings should continue to grow in 2011 and increase at an even higher rate during 2012. Furthermore, 2013 should be a very good earnings year, supported by a healthy economy. These earnings levels make it possible to realize a premium price.
- During 2011 and 2012, the capital gains tax will remain at a reduced level of 15% compared to the prior rate of 20%. It is unlikely the 15% rate will be extended beyond 12-31-12. This 5% tax savings on the realized gain is a significant consideration when determining the timing of a sale.
- The cheap money, which is a by-product of the excessive credit provided by the Federal Reserve, should contribute to strong acquisition prices during this period, while still enabling the acquirer to have a solid return on invested capital.
- As 2011 begins, the majority of banks are loosening the credit spigots. By the latter part of 2011, I anticipate the availability of credit to be at normal levels.
- Around the end of 2010, acquirers began to aggressively pursue deals.
These factors mandate that an owner interested in selling his company within the next seven years should seriously consider selling it during the latter part of 2011 or 2012.
Possible Deal Pricing Factors in 2014 and Later
Beginning in 2014, the intermediate and long-term economic outlook gets pretty murky. It is not inconceivable the economy could stay strong during 2014 and 2015; however, a number of factors give off warning signals that trouble could be on the horizon, which could affect these and/or possibly later years. These factors could negatively impact middle market deal pricing and activity, possibly significantly. Some of these concerns, which could have a major negative impact on the world economy, are: