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George Spilka and Associates
Investment Bankers & Acquisition Consultants

Successfully Selling Your Company: The Necessary Ingredients

Is the time to sell your company approaching? If so, you must ask yourself, "How do I execute a task that I probably have never faced before?" This article answers that most difficult question. It also provides a brief overview of the entire acquisition process.

Your major challenge will be finding the most talented acquisition advisory firm to guide you through the process. This firm will advise you in all phases of the transaction. Their expertise can add 10-15% to the transaction price. Only the acquisition advisory firm will be involved in all phases of the process.

Assemble An Acquisition Advisory Team.

The acquisition advisory firm, although the foundation, is only part of the advisory team that is needed to successfully sell your company. This team should also include a corporate finance attorney and a tax specialist in merger and acquisition related items. Depending on your age, it might be advisable to have an estate planning specialist on your team.

The corporate finance attorney should be a specialist who is familiar with the most recent developments in legal strategies relating to mergers and acquisitions. This will protect you from post-closing litigation. Many are the deals where post-closing legal surprises have caused unsuspecting owners to lose a majority, if not all, of their transaction price due to a weak Definitive Purchase Agreement. I am proud to say, that in fifteen years of advising selling owners, none of my clients have ever been involved in post-closing litigation. The tax specialist will provide advice on the impact of various deal structures on your corporate and personal tax situation.

It is not only important to put together a talented advisory team, but one that works effectively together under the leadership of the acquisition advisory firm. This is essential as the negotiating process itself is very adversarial. All team members must be pulling in the same direction, as opposed to having their own "ego confrontations."

Phases of the Acquisition Process.

In a later section, this article defines how to ascertain that you have the best acquisition advisory firm, however a brief review of the overall acquisition process will be of benefit at this point. The process can be separated into five distinct phases:

1. Plan and time the sale

2. Determine the expected transaction price (valuation).

3. Prepare the Memorandum of Information.

4. Execute the search for an acquirer, and

5. Negotiate and close the deal.

Phase 1: Plan and Time the Sale.

The company's business and business foundation must be reviewed in depth. All factors that contribute to and define the company's niche and future profitability must be evaluated for their impact on a transaction price. These factors transcend historical financial results and are the reasons that companies in the same industry sell for vastly different multiples of earnings. It should also be determined whether the company's present business foundation is capable of generating the maximum attainable transaction price. If not, the acquisition advisory firm must provide the selling owner guidance on how to strengthen the foundation to realize a premium price. It is their judgment in this area that will enable the proper timing of the sale.

Phase 2: Determine the Expected Transaction Price (Valuation).

In determining the value of a company, the important thing is not the consistency or the level of past profits. The book value or the economic value of the assets is not a significant factor. In reality, a transaction price is established based on the expected future earnings and the risk in achieving those earnings. The determination of projected earnings and the related risks to their attainment are dependent on the strength of the company's business foundation. It is critical that the acquisition advisory firm understands how an acquirer makes these judgments.

Phase 3: Prepare the Memorandum of Information.

Phase 4: Execute the Search for an Acquirer.

This phase includes many steps. The first is the development of a Search Plan to locate domestic and foreign acquirers who bring synergy to the transaction. Synergy between companies produces a higher level of expected future earnings and, consequently, a premium acquisition price. It is essential for the acquisition advisory firm to have the capability of locating both domestic and foreign synergistic acquirers.

This phase also encompasses the proper screening of an acquirer to assure the propriety of their intentions and the independent verification of their financial capabilities. It also includes the initial meeting(s) with the prospective acquirer, during which the acquisition advisory firm should be present to direct and control the process.

During all steps of the search and negotiations, extreme care should be taken to protect the confidentiality of the sale. Extreme care and thorough screening should be made before talking to a company's customers, suppliers or competitors. In fact, my Firm's philosophy is to avoid these types of acquirers in almost all situations.

Phase 5: Negotiate and Close the Deal.

This step encompasses the process from the receipt of an acquirer's initial offer through the closing of a transaction. It includes all negotiations and strategic considerations leading to the execution of a Definitive Purchase Agreement (DPA) and ancillary documents. When a price has been agreed upon with a prospective acquirer, a Letter of Intent (LOI) is usually executed. The LOI summarizes the basic financial considerations surrounding the sale. It forms the basis for drafting the Definitive Purchase Agreement and ancillary documents. The acquisition advisory firm and the law firm must operate very closely from just prior to the execution of a LOI until the transaction is consummated. They are jointly involved in negotiating all strategic considerations to assure that non-financial terms negotiated in the DPA do not expose the premium price previously obtained to post-closing litigation.

The normal time from the execution of a LOI to the closing of a transaction is usually 40-60 days, however at other times the process can be extremely tedious and frustrating. In an all-cash, premium-priced deal that my Firm consummated for a truck parts distributor, it took 5 1/2 months between the signing of the LOI and the execution of the DPA. During that time, there were no substantive disagreements on financial issues; but the acquirer would not agree to representations and warranties, and other non-financial issues that adequately protected my client. Although there was no immediate dollar impact from any of these terms, the risk they presented my client made it impossible to close a deal. However when the transaction was finally consummated, my client received not only the financial terms that had long since been agreed upon but also a package of representations, warranties and other protections that insulated him against the possibility of any post-closing litigation. It takes patience, cooperation and strong-willed determination to prevail in both the financial and non-financial areas, however top-quality acquisition advisory firms always find a way. A more comprehensive look at the overall acquisition process will be made in a subsequent article.

How to Locate the Best Acquisition Advisory Firm

The next section pertains to middle market transactions. These are defined as deals having a transaction value between $1 million and $125 million. In my opinion, the most critical question that these selling owners face is, "How do I select an acquisition advisory firm?" It should be remembered that no federal licensing laws regulate who can advise selling owners of closely held corporations. Consequently, the number of less-than-qualified advisors and "experts" is abundant. In reality, a considerable portion of these firms probably should not even be practicing. Not only are many incapable of helping their clients, but they can easily cause considerable damage.

So the question is, "How do you locate a top-quality acquisition advisory firm and avoid these charlatans?" A selling owner obviously wants to locate a firm that can provide advice and guidance in all five phases of the acquisition process. In other words, a firm should be capable of providing a client guidance from the beginning to the end of a transaction including planning the sale. In middle market deals, it is essential for the acquisition advisory firm to be "street smart" as well as "book smart". The middle market is heavily populated with self-made men and women. An advisor must know what motivates business people to do a deal in this environment. They also must understand the psychology and dynamics that are so uniquely different in the negotiation of middle market transactions. A broker/finder who is merely trying to consummate a deal at any price to collect a fee is not needed. A selling owner requires an acquisition advisory firm that has the skill and determination to persevere until a properly-structured, premium-priced deal can be consummated. This deal must protect an owner's interests in all non-financial areas.

How to Avoid Pitfalls - Factors That Must Be Investigated

When you begin your search for the right acquisition advisory firm, be very aggressive in scrutinizing the various candidates. Your investigation should be thorough, probing and challenging. Don't accept big talk; make sure it is substantiated by past performance. If the firm does not have a demonstrable record of successful past performance, it is unlikely that they will begin with you. Investigate the following factors thoroughly

1. Deals closed per person.

2. Detailed list of references.

3. Philosophies on transaction consideration.

4. Personnel involved in the transaction.

Deals Closed Per Person

This is the most accurate measuring gauge of your likelihood of success. Find out how many people the firm employs and how many deals that they have completed per year. A good firm should close 1.5 to 2 deals per person annually. An outstanding one will close in excess of 2.5 deals per person per year. A firm's figures should be supported by their deals done over a specified period. I would suggest that a three year summary be obtained. It should define the sellers and buyers, and their locations. This provides you the capability of verifying the validity of the firm's assertions. By using this as a measuring gauge, you should be able to find the best firm.

Detailed List of References.

This listing should be correlated with the firm's completed deals. You should talk with 4-6 prior clients, in different industries if possible. As you talk to references, you want to evaluate not only what is said but what is not said. Read between the lines for a true portrayal of the firm's services. Certain questions to ask include:

"Did the acquisition advisory firm basically set the transaction price or did they allow the selling owner to establish the price?" This might indicate the determination and firmness that they bring to a transaction. Without determination and perseverance a premium price will not be obtained from a sophisticated acquirer. It is always easy, and good for initial client relations, to agree with a selling owner's price expectations. However when those expectations are unrealistic, an acquisition advisory firm that doesn't challenge them is guaranteeing failure or disappointment. Firms that truly care about their clients ascertain that their expectations are in the real world, because acquirers almost always are.
"Was the eventual transaction price as high or higher than the valuation? Did the acquisition advisory firm ever recommend taking an offer less then the valuation price?" It shouldn't have unless there was a substantive change in the foundation of the seller's business. In fifteen years, my Firm has never recommended that a client settle for an offer less than the valuation.
B. "Did the acquisition advisory firm guide and direct all negotiations?"
"Did they work closely with the law firm during negotiations? Were they as concerned about protecting the seller in the non-financial areas of the DPA, as they were about the financial considerations?" It is imperative to have a firm that is cognizant of the importance and potential impact of the non-financial issues.

Philosophies on Transaction Consideration.

What is the acquisition advisory firm's philosophy and record on the composition of consideration? What is their track record in executing all-cash deals? Regardless of economic conditions there is no reason not to get a premium price for your company in a principally all-cash deal. If you are told otherwise, it could be indicative that a firm:

A. Does not understand the difference in pricing between middle market and larger public deals.
B. Doesn't have access to domestic and foreign synergistic acquirers capable and willing to consummate a premium-priced deal.
C. Lacks the negotiating strength to make the acquirer finance the deal from its own resources.
D. Doesn't have a problem with introducing clients to undercapitalized acquirers who lack the capability of closing a deal without seller financing.

Personnel Involved in the Transaction.

Determine the firm's process and who handles the various facets of the sale. The important thing is not the personality or skills of the person trying to obtain you for a client. The skills and expertise of the personnel handling the transaction will determine your success. You need sophisticated, experienced professional(s) on your side from the pre-sale planning to the closing of the transaction. Anything less places your major objective, obtaining a premium price, at risk.


If you are to achieve ultimate success in the sale of your company, it is essential that you put together a highly-skilled, experienced advisory team. This team should include an acquisition advisory firm, a law firm specializing in corporate finance work, a sophisticated tax advisor and, in certain cases, an expert in estate planning.

The sale of a company is a long and arduous process. You should be comfortable personally with your acquisition advisory firm. They should not be selected until their record is extensively checked. It is imperative that you find the most qualified firm. A highly skilled and sophisticated acquisition advisory firm should add at least 10-15% to the eventual transaction price. They should not only be familiar with the academic and technical factors surrounding a middle market acquisition, but must also be street-smart and knowledgeable in the real world considerations that impact the attainment of a premium price. This firm must be capable of guiding you through the entire process. You need a tough-minded, hard-nosed negotiator, who is capable of extracting the last penny from an acquirer. A large acquirer must be convinced that the selling owner is in control. If your advisory firm is not capable of controlling the negotiating process, a premium price will not be obtained and a significant amount of consideration will be left "on the table".


George Spilka and Associates

Email: spilka@georgespilka.com

Phone: 412.486.8189