Selling a privately held middle-market company is an art, not a science. Middle-market deals are those with transaction prices in the range from $2 million to $250 million. Even experienced professionals realize few sources exist for empirical data that can help price a middle-market deal. The available information is usually sparse and superficial, and therefore of limited use in setting a transaction price. In addition, the procedures to sell or value a middle-market company — the valuation multiple to apply, the appropriate transaction structure, and the likely events that will occur after a closing — are usually substantially different from those for major public deals. The uniqueness and complexity of middle-market deals and the lack of meaningful information on the subject make it essential for sellers to know these seven critical rules if they hope to successfully sell their company:

  1. Obtain a principally all-cash deal.

  2. Retain a competent acquisition consulting/investment banking firm (advisory firm).

  3. Define your expected transaction price before going to market.

  4. Demand minimal exposure from a buyer to post-closing issues and liabilities arising from the Definitive Purchase Agreement.

  5. Negotiations tend to be adversarial — accept that fact.

  6. Be patient.

  7. Divulge proprietary information only at the appropriate time.

All-Cash is not Unreasonable

In an acquisition, as in running a business, you are trying to maximize price and minimize risk. There's no better way to minimize risk than by doing a principally all-cash deal. Only two reasons exist why an acquirer wants a seller to accept notes:

A. There's a lack of bank or institutional financing available to the acquirer, or it's available at an interest rate much higher than they're willing to give the seller.

B. Notes can be an easy conduit for an acquirer to collect for alleged seller breaches of representations and warranties. This could force a seller to pursue litigation to collect on the notes.

It's my firm's philosophy to only do deals that are principally all-cash. Over 92 percent of the deals that I have closed during the past 15 years have been for all cash. No deal has been transacted where the cash component was less than 87 percent of total consideration. This track record proves that it's not unreasonable to demand an all-cash deal from an acquirer.

In a similar vein, I would almost never consider a deal with a contingent price factor unless the contingency portion exceeds my expected transaction price. There's no way to protect the seller's ability to meet the contingency goals without unreasonably restricting the actions of the acquirer after the deal.

Hire a Competent Advisory Firm

As a seller, you'll need an advisory firm to guide and direct you through the entire process. This includes planning the sale, valuation, development of an enticing Offering Circular, search for a synergistic acquirer, and conduct and control of all negotiations leading to a closing. The advisory firm's approach should include a review of all aspects of the seller's business foundation and niche. Such a review must go far beyond mere analysis of the financial statements. The advisory firm should be committed to closing a sale only after an aggressive premium price has been obtained. It should have a reputation that the seller's best interest is the only factor that dictates an acceptable deal. The advisor must thoroughly understand the economic implications of legal issues likely to arise in negotiating the Definitive Purchase Agreement, and should control all negotiations with the attorneys working under their guidance. In a middle-market deal, an advisory firm with entrepreneurial flair will have a background and psychological make-up similar to the selling owner's. They will understand the feelings that the seller will be dealing with during the acquisition process. Negotiations leading to the closing are the most critical phase of an acquisition, and the seller will want an advisor who is a strong-willed, articulate and persuasive negotiator. An advisor with these skills, approach and characteristics is necessary for a seller to obtain a premium price.

Define Your Price Upfront

Acquirers are trying to steal your company. That's how the capitalist system works. Unfortunately, the acquirer usually is larger, has greater resources and is more knowledgeable about acquisitions. Sophisticated, hard-working sellers can level the playing field. Prior to going to market, a seller should have the advisory firm evaluate all facets of the company's business foundation. Its major future opportunities and risks should be determined, evaluated and quantified. When this process is completed, the seller and his advisory firm should feel their knowledge of the company's future earnings potential is greater than an acquirer's. A company's value will be determined by its expected future earnings (usually earnings before interest, taxes, depreciation and amortization, or EBITDA) and the risk of achieving those earnings. This value will be affected by short-term future earnings potential and long-term growth factors. The stability of the business foundation will have an impact on the multiple applied to the company's earnings. Depending on synergistic benefits, internal corporate needs and differing perceptions of valuation factors, most prospective acquirers will see a company's value differently but within a price range of 10 percent to 15 percent above or below an average market price.

Be aggressive in your pricing expectations. Demand a realistic premium price. Remember, you only sell your company to one buyer. You are not trying to get five acquirers to pay a normalized price; your objective is for one acquirer to pay a premium price. Once your pricing expectations are set, be confident and firm in your position. Most acquirers will try to convince you of the exorbitance of your pricing position.

Minimize Exposure to Post-Closing Issues

Large acquirers are accustomed to shifting most deal risks to the seller. This is the norm, and it could be injurious to your economic health. After a company is sold, the seller has no upside. Correspondingly, the seller should have no downside risk for occurrences that become known after the deal closes. To assure a more equitable sharing of deal risk between seller and buyer, a seller should want most representations and warranties to be limited to “seller's knowledge.” A few representations (reps) and warranties normally require a higher standard of seller guarantee. However, for these the seller usually is aware of any problems prior to the deal closing, so the risk of the unknown should be limited. As a general rule, the vast majority of reps and warranties should be limited to “seller's knowledge.” An acquirer will fight this position; but a seller should not relent unless the deal price compensates him for the added risk.

Negotiations are Adversarial — Accept It

Negotiations are a test of wills — a battle for control. By its very nature, negotiation is a confrontational process. A seller should accept that. In most sales, the seller is much smaller and less knowledgeable about acquisitions than the buyer. Thus, buyers are used to deals being priced the way they want. If an acquirer is forced to pay a price beyond their target price, there will be difficult and adversarial negotiations before the acquirer acquiesces. If negotiations go smoothly and amicably, the acquirer is probably getting his price, and rarely would this be a premium price to the seller. Accept the confrontational nature of negotiations; it's normal if a seller is to get a good deal.

Be Patient

To be successful, sellers must be patient throughout the acquisition process. Patience should not be confused with lethargy. Instead, it's the seasoned response when a slow pace works to the seller's advantage. To a seller who has thoroughly evaluated all factors surrounding the sale, being patient should be easy. Patience is a by-product of confidence in one's position. A patient seller usually produces anxiety in an acquirer. An acquirer won't be aware of the full dynamics of the sale process, so a patient seller usually is interpreted as one that has many attractive alternatives. This usually makes acquirers more flexible in negotiations.

Protect Proprietary Information

As a general rule it's best not to consider customers, competitors or suppliers as potential acquirers. If there are unique or compelling circumstances for pursuing such prospects, they must be approached much more cautiously than a typical acquirer. In these cases it's often best to strengthen the Confidentiality Agreement in some of the following ways:

  • Limit the acquirer's right to solicit the employees and/or customers of the selling company in the future.

  • Limit the detailed information provided to the acquirer at the initial stage of the process.

  • Require much more detailed financial and business information about the acquirer at the initial stage than is normally obtained.

Regardless of the acquirer, you should divulge proprietary information only in the latter stages of negotiations. This information usually includes the following:

  • Information regarding sales levels or pricing specifics for individual customers or products.

  • Purchase or production costs for specific products or customers.

  • Specific pricing strategy by product, volume or other pertinent factors.

  • Specific future operating courses of action.

This information should not be divulged until the seller and prospective acquirer have signed a Letter Of Intent. At that time, the parties would begin to negotiate a Definitive Purchase Agreement and the acquirer would start its due diligence process. Sensitive information will have to be divulged to the acquirer at this point, especially if a seller seeks to minimize his exposure in the rep, warranty and indemnification areas. In certain high-risk situations, when the Letter of Intent is signed sellers might expand the Confidentiality Agreement to prohibit the acquirer from hiring any of their key employees or soliciting key customers for a 12-18 month period if the deal does not close.

If these seven rules are followed, it's likely that a seller will obtain a premium price with favorable terms in the Definitive Purchase Agreement. To achieve this ultimate success, there is no substitution for hard work, knowledge, determination and patience. The sale of a company is usually the culmination of an owner's career or, in many cases, of the efforts of many generations of a family at the company. It usually will be the legacy of decades of effort. The seller who follows these rules is likely to put a crowning touch on a successful career. Make sure you do it right and allow the legacy to speak for itself.


George Spilka is president of George Spilka and Associates, Allison Park, Pa. The firm specializes in mergers and acquisitions. The author's Web address is www.georgespilka.com. Reach him at (412) 486-8189 or by e-mail at spilka@nauticom.net.