- The condition of the credit markets, especially in Europe, could be an intermediate to long-term financial problem.
- Major issues are impacting the Chinese economy and banking system, including the Chinese Central Bank increasing the “benchmark” lending rate and the reserve requirements for the commercial banks in an attempt to reduce an increasing inflation rate. Potentially, these could have a negative impact on the Chinese economy. And as the Chinese economy is one of the most dynamic and important economies in the world, a negative impact on it will likely have global consequences.
- The political and economic instability in the world at this time could provide the basis to produce an event that would have wide ranging repercussions.
- There are many global “hot spots” that could erupt at any time. The impact of any of these events could produce fear and tremendous instability in the financial markets.
I am not saying that intermediate and long-term economic and market conditions will definitely be bad. However, I am advising clients that I strongly prefer to consummate the sale of their company in the latter half of 2011 or 2012 due to the substantial risk facing the economy and acquisition market in 2014 and subsequent years. The risk factor is too great to delay a sale until 2014 in light of all the positive reasons why a sale should take place before Dec. 31, 2012.
How to Obtain A Premium Price
For a middle market seller to obtain a premium-priced deal with terms that fully insulates them from post-closing liability, it is imperative they find an investment banker/acquisition consultant (“IB”) that has certain capabilities and character-istics. A seller should be looking for the following things in their investment banker:
- An investment banker that realizes, and actually relishes, that a sale is not a win-win situation. In reality, it is actually much closer to a win-lose situation. This type of IB recognizes that negotiations are a psychological war between disparate interests that have conflicting goals. The seller wants the maximum attainable premium price, while the much larger, sophisticated acquirer expects a discounted price, as they normally get their own way in middle market acquisitions. There is no way these diametrically opposite interests can’t result in a psychological battle where the better prepared, more determined party will prevail.
- An investment banker with compassion and concern for their clients that understands most acquirers will try to steal a seller’s company. The right IB for you will be steadfast and resolute, concerned only with protecting and maximizing your realistic interests. If an acquirer won’t optimize your interests, the right IB will not consummate a deal under lesser terms.
- An IB that has the aggressiveness, determination, toughness and force of personality combined with the market and financial knowledge to force their will on large corporate acquirers or sophisticated private equity firms. If those traits are not present in the investment banker, you can be assured that a premium price will not be yours.
- An investment banker that has the executive and business skills, transcending the financial skills that any IB should have, to fully-understand your company, its strengths, market niche and potential. They also must have the ability to present and articulate these facts clearly and persuasively to an acquirer. The investment banker has to better understand your company than the acquirer and understand your industry at least as well, if they are to prevail. This knowledge when combined with the personality traits and attitude previously described will intimidate an acquirer and convince them they can’t steal your company. They can only buy it at a realistic premium price. There is no other way to win the psychological war of negotiations.
- An IB that has the patience and confidence to wait, if necessary, to obtain a premium-priced, all-cash deal. In certain situations, they must be willing to allow the power of their knowledge and personality traits to have the time necessary to wear down the acquirer to agree to the deal and terms that are essential to the maximization of your interests. This is the only type of deal you want.
Although the 18 month period ending June 30, 2007 was the most lucrative time to sell a middle market company in over 50 years, the latter part of 2011 and 2012 should present a great opportunity to sell a middle market company at a premium price. This is true for the myriad of economic, tax, financial and market reasons, which were defined in this article.
If you are to realize the premium price you deserve, your investment banker must have the commitment to protect and maximize your interests and the determination, toughness and strength of will to force an acquirer to price your company on its expected future EBITDA and the quality of its business foundation. If, and only if, they have these traits and abilities will you be able to obtain the premium price that should be available to middle market sellers during the latter part of 2011 and 2012.