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George Spilka and Associates
Investment Bankers & Acquisition Consultants

Common Misconceptions That Can Prevent The Successful

Sale of Your Company

Owners of middle market companies with a transaction value up to $200 million have limited access to reliable information that can provide insight into the proper pricing and structuring of middle market transactions. Major business periodicals principally report on large public deals with transaction prices from $200 million to several billion. The pricing and structure of these deals bears no resemblance to middle market transactions. Correspondingly, they provide no insight as to what a selling middle market owner should expect. The problem is compounded by the generally poor quality of advice available to these owners. Prospective sellers often turn to seminars sponsored by financial advisory firms. Most of these tend to play on the ego and naiveté of the selling owner about the middle market acquisition process. Consequently, they often entrap owners in delusions of wealth that are unfortunately transformed to feelings of frustration and anger when hollow assertions cannot be translated into reality.

However the prudent middle market owner will be able to convert their company into the wealth that they have diligently worked to build. They don't operate under misconceptions and delusions; instead, they understand their shortcomings and knowledge gaps and most importantly are willing to pay the price required to convert their company into the "gold mine" that it can be. These owners don't operate under the 12 common misconceptions that are discussed below.

1. The Seller Must Finance A Significant Portion Of The Acquisition Price.

Many acquisition 'experts" state that a selling owner should only expect to get 40-50% of their transaction price in cash at closing.

This is nonsense. Acquirers are trying to "steal" a seller's company. Notes are often the conduit used by an acquirer to collect for alleged breaches of representations and warranties. This is accomplished by not paying the notes and forcing the seller to file suit for collection. To demonstrate the absurdity of this misconception, my Firm has not consummated any transaction during the last 10 years, where the cash component was less than 88% of the total transaction price. In fact, over 80% of the transactions closed were for all-cash. These are the type of results that selling owners with respectable companies have a right to expect.

2. Historical Earnings Or Book Value Are Major Determinants Of The Transaction Price.

This misconception is espoused by acquirers to justify substandard offers. Historical earnings or book value are usually used as a price justification during:

Difficult economic conditions,
When a company had temporary problems that have since been resolved, and
For rapidly growing companies whose long-term future is much brighter than the past.

If you are being represented by a top negotiator who is an experienced acquisition advisor, only one thing governs a transaction price, that being the expected future earnings and the risk in achieving those earnings from the business foundation provided an acquirer.

3. Acquirers Make Realistic Offers At A Price That Justifies The Deal.

The capitalist system dictates that an acquirer buy a company as cheaply as possible. An acquirer will first evaluate the sophistication of the seller's advisory team. This forms the basis of their judgment of the seller's ability to find a synergistic acquirer and force such acquirer to pay a premium price. This judgment dictates the aggressiveness and equity of the acquirer's initial offer.

4. The Deal Is Basically Completed When A Price Is Established.

The price is established at the Letter of Intent ("LOI") stage. However, this is only the beginning of the deal not the end. The negotiation of the Definitive Purchase Agreement ("DPA") and the ancillary agreements must still be completed. These documents define all conditions legally governing the sale. The DPA contains the critical representations, warranties and indemnifications. These "non-financial" areas conceivably can have a greater impact on the deal than the transaction price itself. In 1993, my Firm spent 5 months negotiating a DPA for a client. During that period, the transaction price (which had been negotiated as a premium-priced all-cash deal) was never in contention or even discussed. However I refused to complete the deal, until a strong DPA was obtained that completely protected my client against post-closing issues and litigation. Circumstances that developed after the deal proved that the time required to negotiate these "non-financial" issues was well-spent.

5. Negotiations Should Proceed Smoothly In A Non-Adversarial Manner.

To the contrary, if negotiations flow smoothly and amicably, the seller is usually not getting a premium price or protective terms. Acquirers of middle market companies are not known for initially making their best offer or even a fair one. In most deals, if negotiations are not eventually pushed to the absolute breaking point, a seller can be certain that they have not received a premium price.

6. A Seller Doesn't Need An Acquisition Advisor To Guide Them Through The Transaction.

Brokers generally try to complete a transaction at any price. Typically, they are not familiar with how to conduct an international search for a synergistic acquirer, nor with how to aggressively negotiate a deal that assures a seller a premium price. In addition, brokers usually are not aware of all the ramifications of the critical representations, warranties and indemnification issues. A seller requires an acquisition consulting or investment banking firm that will guide and direct them through the entire process. This includes planning the sale, the valuation, the search for a synergistic acquirer, and the conduct of negotiations leading to a closing. The acquisition advisory firm must be concerned only with the seller's best interest, and not with simply closing a transaction at any price. A deal must not be consummated, unless the seller is getting a premium-priced, principally all-cash deal with a strong, protective Definitive Purchase Agreement.

7. Financial Buyers Pay A Fair Price For Your Company.

The expected incremental future earnings dictates the acquisition price. Synergistic benefits related to an acquisition increase the incremental future earnings realized by an acquirer. These benefits make the companies' combined profitability after a sale higher than the total for the two operating separately. Financial buyers bring no synergy to a deal and, therefore, are incapable of paying a premium price. This is compounded by the fact that most financial sponsors of buyout groups (the major institutional sources of capital) demand an unreasonable rate of return on their investment. This comes out of the seller's pocket in the form of a substandard transaction price (usually 10-25% less than normalized market price).

8. The Acquirer Does Not Need To Divulge Meaningful Information To The Seller.

Acquirers should not be given a "free look" at a company. Many companies feign interest in an acquisition to obtain information about the selling company and its business. If an acquirer wants to investigate your company, in addition to signing a Confidentiality Agreement (of limited practical benefit); they should provide your advisor with 3 years' financial statements, before a site visit is permitted. A seller's truly proprietary information should not be divulged to a prospective acquirer, until a LOI has been executed.

9. Planning The Sale Doesn't Increase The Transaction Price.

Certain factors should be addressed prior to the sale, if a seller is to get a premium price. These have nothing to do with increasing short-term profits or cleaning-up the balance sheet. The multiple applied to expected future earnings or cash flow will vary depending on the long-term growth projected for the selling company and the strength of its business foundation at the time of acquisition. Having a knowledgeable acquisition advisory firm investigate and strengthen the seller's business foundation will increase the transaction price.

10. The Seller Or Their Accountant Can Establish The Expected Transaction Price.

There is limited meaningful empirical date available on middle market transaction prices, even to acquisition consulting and investment banking firms. Correspondingly, the valuation of middle market companies is more of an art than a science. The validity of any valuation depends on the expertise and market familiarity of the professional who performs the valuation. That person must devote all their time to middle market acquisitions and have many years of experience to season their judgment. Only then can they provide a knowledgeable opinion of a seller's market value.

11. The Seller's Generalist Attorney Can Handle The Legal Aspects Of The Deal.

An acquisition is an extremely complex transaction. Problems in drafting the DPA and, to a lesser extent, the ancillary agreements can place a seller at serious risk to lose part or all of the transaction price subsequent to the closing. An acquisition usually requires a law firm that has specialists in mergers and acquisitions, labor law, and environmental law, amongst others. It is impossible for a small law firm to have substantial expertise in all of these specialty areas. This expertise is essential, if a seller is to be protected against post-closing issues.

12. Pricing Of Middle Market Deals Is Significantly Affected By The Economy.

My experience is that economic conditions have little, if any, impact on middle market acquisitions, if a synergistic acquirer is located. In a normal recession, a middle market transaction price will decrease by less than 3%, if at all. A synergistic acquirer will usually purchase a seller when it is available, if the company provides access to a market niche they covet. To do otherwise, could mean missing the opportunity to purchase it. During the last recession, mid-1990 to the end of 1991, my Firm closed 6 deals per professional person for the 18 month period ending 12-31-91. All deals were fully-priced; over 75% were for all-cash.


It is essential for a prospective seller to locate the best acquisition advisory firm. The seller's major decision is determining what firm can produce the greatest benefits. Cost should be of secondary concern, because the right firm can be the difference between success and failure. This firm should be able to increase the transaction price by 10-15%, as they will not operate under the common misconceptions previously described. This will enable a selling owner to reap the benefits that they rightfully deserve.


George Spilka and Associates

Email: spilka@georgespilka.com

Phone: 412.486.8189