A Win-Lose Situation
First, let's understand the process for what it is. It is a win-lose situation. One side prevails. If you are selling a middle market company, your primary objective is to generate the maximum attainable premium price in an all-cash deal. If you are acquiring, your sole objective is to purchase the company at the minimum possible price; in fact, you hope to "steal the company."
If the seller is being advised by a sophisticated acquisition consultant, the eventual acquirer will be a large synergistic domestic or foreign acquirer. As this article is being written, the value of the dollar makes foreign acquirers unusually attractive. Synergistic acquirers will be able to pay the highest premium price for the seller and still generate an adequate return on investment.
The previous definition of the logical acquirer implicitly recognizes that it will be much larger than the seller. Consequently, the acquirer will likely come to the transaction feeling more knowledgeable and sophisticated than the seller; believing that this gives them the ability to obtain a vastly discounted price. The seller must be aware that the acquirer will likely attempt to "steal their company." The seller's challenge is to convert this large synergistic acquirer form one convinced that it can "steal" the company into one who feels forced to pay a premium price. This is a complex task requiring considerable experience, cunning, and determination; however it can consistently be accomplished by those who have "mastered the game." This article will tell you how.
Aggressively Price Your Company
It is imperative that the seller aggressively price his company. To do otherwise substantially decreases the probability of attaining the maximum price. It is extremely rare that an acquirer pays more than the asking price. Consequently, be aggressive when establishing this price. Unless you are an expert on middle market valuation, you would be prudent to retain an aggressive, experienced acquisition consultant to advise you in this matter.
There should be a reasonable differential between the asking price and the expected transaction price. There are two major reasons for this:
1. It gives an overly-aggressive acquirer the opportunity to make a mistake and overpay.
2. It affords an acquirer the opportunity to negotiate a deal where he feels that he has received reasonable concessions. This minimizes the likelihood of emotional and ego considerations interfering with the completion of the deal.
However, the differential must be reasonable. An unreasonably high asking price usually is financial suicide. Large acquirers are quite familiar with unrealistic, poorly-advised middle market owners. These shrewd, sophisticated acquirers will usually not spend their time and money investigating an unreasonably priced company.
Investigating a selling company is not a simple process, like purchasing a piece of real estate. Consequently, your asking price, although it should be aggressive, must be reasonable; or the potential purchaser is lost as an acquisition candidate before he commences the process. I would suggest a 7-15% differential between the asking price and the expected transaction price.
After the asking price has been established, the acquirer must be located. When the acquirer has been found, the psychological war begins.
A Deal's Critical Juncture
Selling a company is not for the faint-hearted. You must be courageous and set aggressive goals. This will enable you to obtain a premium price and win the war. If a premium price is to be realized, there is usually a point during negotiations when the deal almost falls apart. However if the transaction is realistically-priced and negotiations are properly conducted; this critical juncture, although a tense situation, will not be an insurmountable obstacle.
Critical junctures can occur at any time from the letter of intent to the closing. If one is encountered, it is imperative that you be patient. Don't force things. If you are talking to the right acquirer, one who brings considerable synergistic benefits to the transaction; the acquirer will come to you. Of course, this is contingent on the fact that your advisor has made a proper valuation of the synergy between you and the acquirer. If so, have confidence in your position and don't weaken.
When the acquirer comes back to you, don't overreact. Be patient and get every dollar available. Maintain your aggressiveness and punish the acquirer for his assertiveness. This ensures your ability to control the acquirer throughout the deal. It will prevent the acquirer from reverting to trying to "steal your company" and guarantees a successful closing.
During this process, it is mandatory that a selling owner have an experienced acquisition advisor, who knows how to evaluate an acquirer's needs and to accurately determine the synergies between the seller and acquirer. The acquirer's motives must be ascertained during preliminary conversations and initial meetings.
The synergistic benefits produced by the acquisition have a significant impact on the incremental profits it generates. Without this knowledge the seller cannot know an acquirer's maximum feasible acquisition price. In effect, this is the deal's breaking point. Once a seller has this knowledge, he never has to worry about pushing a deal too far. Consequently, he can have complete confidence in the outcome despite taking strong negotiating positions.
To illustrate this point, my Firm represented a Midwestern manufacturer of an industrial product. We closed the deal with a publicly-held synergistic acquirer in early-1995. I had located the eventual acquirer early in the acquisition process. They exhibited an immediate interest in the company and quickly made an offer approaching our asking price. In fact, the offer was 12% more than our expected transaction price. It appeared that we obtained immediate control of the negotiating process and would control it until the closing. It seemed to be the rarest of all situations - a simple transaction. However, at what was scheduled to be the final meeting before closing, the acquirer and the attorney inexplicably took an unreasonably harsh position on certain relatively minor points. This eventually led to their precipitously breaking-off negotiations. I told my client not to be concerned; I expected them to reinstitute contact within a week. Six days later the acquirer contacted us.
I had already determined what our response would be. I indicated that we had no concessions on the issues that produced the suspension of negotiations, furthermore I demanded a 3% price increase. We prevailed on all issues. Two weeks after discussions were resumed, the transaction closed and my client obtained an all-cash deal.
The major point to be learned from this case study is that when things reach a critical juncture, do not panic. Reevaluate the situation to make sure you have not misread it, and then act decisively but with patience. Determine the price that you will extract when the acquirer comes back to you, and then make them pay for taking you to the critical point. This should establish your permanent control of the situation.
The ability to control things at a critical juncture in negotiations is truly an art. It requires the experience and savvy of a sophisticated negotiator. He must have the persistence, fortitude and self-control to withstand the emotional pressures brought by the acquirer. Critical junctures are often characterized by angry and emotional outbursts by the acquirer and their advisors, as they become frustrated at their inability to force their will upon the seller. Once the seller has convinced the acquirer that he will prevail; a sophisticated acquirer who was intent on "stealing the company" will become resigned to paying a premium price. This will occur because of the seller's ability to control the psychological aspects of the negotiating process. These aspects are the art of the process; the mastering of them enables one side to prevail.
When you are convinced that an acquirer's will has been broken and that a premium price can be obtained, an extra day should never be allowed to pass before closing the transaction. If the acquirer appears to be pushing to consummate the deal quickly, cooperate in every possible way to expedite a timely closing. In fact, if you can camouflage your own anxiety, do your own pushing for a quick closing. This has always been my firm's policy, and I am pleased to say that we have not had a deal fall apart between the letter of intent and the closing since 1984.
The following example illustrates the benefits of assisting an acquirer who is pushing for a quick closing. In the 1980s, my firm was advising an acquirer that wanted to purchase a manufacturer serving the aerospace industry. A considerable portion of the seller's business was with NASA at Cape Kennedy.
The closing had been delayed a week due to the unnecessarily slow pace of the seller. It was rescheduled to close the day after the Challenger exploded. However this tragedy had considerable implications on NASA's future funding levels. I immediately canceled the closing and temporarily suspended negotiations. After one month our reassessment of the situation was complete. We reduced our offer by 40%.
As the Seller's business had been considerably hurt, he was forced to accept the price reduction. If he had not unnecessarily delayed the closing, the transaction would have been completed before the tragic destruction of the Challenger. He would have received a fair price for a previously thriving business. Instead, he absorbed the total loss related to the company's reduction in value due to the decrease in sales from its major customer. Never allow this to happen to you. After your control of negotiations has been solidified, move quickly to close.
The major points that will assure the attainment of a premium-priced, all-cash deal are:
A. Remember that acquisitions are a win-lose process. Don't allow others to confuse you by implying that a deal can be a win-win situation.
B. Obtain proper professional guidance in all aspects surrounding the sale of your company.
C. Establish aggressive goals including an aggressive asking price. Have a significant but logical differential between the asking price and the expected transaction price.
D. Control all psychological aspects of the transaction.
E. Be patient at the critical juncture of the acquisition. Be prepared for all alternative courses that an acquirer might pursue at this time. Determine the alternatives available to you that can bring additional leverage on the acquirer.
F. Be persistent and determined at the critical juncture. Make sure that all your homework has been done. Then have confidence in your judgment. Force the acquirer to make concessions at this point.
G. When the acquirer concedes at a critical juncture, make sure that you get every additional dollar possible.
H. When final control has been obtained, allow the acquirer to rush to a closing. Appear patient, but do everything possible to expedite a timely end to the process.
Never think that selling a company is primarily a scientific process. Although considerable financial skills and analysis are required, the end result is truly determined by who controls the psychological aspects of the negotiating process. This control will produce the premium price and is truly "the art of the deal."
George Spilka, who has written previously for ID Access, is president of George Spilka and Associates, a Pittsburgh-based merger and acquisition consulting firm that specializes in middle market, closely-held corporations. His website is located at www.georgespilka.com