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Selling my company

Six common pitfalls that can produce failure

By George Spilka

For many owners, the sale of their company is the largest, most complex transaction of their career. It also is one of the most stressful. A seller will often find solace and security if they have an experienced, determined but compassionate acquisition advisor who can provide guidance during this process. It can be especially helpful for selling owners if the advisory firm is headed by a self-made person. Usually this advisor will fully understand the intensity and depth of emotions an owner faces.

Middle market transactions are defined as deals valued between $5 million to $250 million. There is very little information available on these deals to enable a potential selling owner to know what is involved in the sale process. Correspondingly, prospective sellers are often under numerous misconceptions that can be harmful. During my many years in acquisitions, I have talked to thousands of owners/entrepreneurs. From these conversations I have determined the following six pitfalls.

1) Is a valuation basically a “numbers crunching” process?
Nothing could be further from the truth. A properly conducted valuation involves the complete investigation of a company’s business foundation. It includes defining the company’s future opportunities and major risks along with their projected impact. The following factors must be evaluated during this process:

A. The strength of the company’s marketing program, including the diversity and control of its customer base.

B. For manufacturing companies, the ability to produce a high-quality, low-cost product, and the caliber and productivity of its research and development function.

C. For distribution or service businesses, the demographics of its trading area, the quality of its product and/or service line, the attractiveness of its locations and the ability to run its operation on a cost-effective basis.

D. The quality of the management team and the presence of a reasonably paid, well-motivated work force.

These factors become a prime determinant of the multiple to apply to the company’s expected future earnings.

2) Will timing a sale increase the transaction price?
Prudence dictates that a selling owner plan and time the sale to maximize the transaction price. As part of the planning process, all factors defined in question No. 1 are evaluated and suggestions are made to strengthen the business foundation. Solidifying the business foundation increases the transaction price. In addition, planning the sale prepares a company to “go to market” at the appropriate time to generate the maximum price. It also enables an owner to respond intelligently to the unsolicited interest of a prospective acquirer.

3) Is the deal fundamentally complete when a preliminary price is established at the letter of intent?
An LOI is merely the start of the negotiating process. Unless you have a sophisticated, experienced advisory firm with a strong personality and the ability to control the deal, it is not unusual for an acquirer to demand a price reduction between the LOI and the closing. You must make sure that an acquirer knows that will never be productive. Negotiating a Definitive Purchase Agreement (DPA) is a difficult, confrontational and time-consuming process. The DPA includes all the critical representations, warranties and indemnifications that are of potentially equal financial importance to the deal price itself. If they are not negotiated to provide the seller maximum protection, it can give the acquirer a post-closing opportunity to recover a considerable portion of a seller’s deal proceeds.

4) Should owners only sell when they are at or near the end of their business career?
The answer is definitely no. Most owners don’t understand many benefits that can arise from a sale. Usually owners of closely held corporations have a vast majority of their personal wealth concentrated in the business. In and of itself, this is poor financial planning, but it is a typical by-product of owning a closely held corporation. By selling all or part of the company, owners can reduce their concentration of wealth in the business and put their estate in more liquid condition. I have advised many younger owners who wanted to improve their financial condition and enjoy the finer points of life for a few years while still in prime health. After their covenant-not-to-compete expires, which could occur after a five-year period, they can get back in business. However, they will commit only a small portion of their sale proceeds to the new business endeavor to assure lifetime financial security.

Where owners want to reduce their concentration of wealth in the business, but still want to run the company, a recapitalization with a private equity firm might be the answer. In this situation, a selling owner can get approximately 90% of the deal value while still retaining a 30% interest in the recapitalized company. As most private equity firms strongly prefer management to stay, the selling owner should be able to continue to run his business in basically an unfettered manner. The only likely change is that the owner will now report to a board of directors. To pursue this alternative, it is essential to find the right private equity firm. Only a few pay a price comparable to a strategic acquirer. Certain firms might have companies in their portfolio that are a strategic fit with the seller. This should enable them to pay a price comparable to a strategic acquirer. An experienced advisory firm will know if a recapitalization makes sense for the owner and know which private equity firms pay a strong price.

5) Should a seller accept notes as part of their proceeds?
Many unsophisticated people and advisory firms, which are not overly concerned about maximizing their client’s interests, believe that acquirers will always want a seller to take back a significant portion of the purchase price in notes. They rationalize that an acquirer needs protection against legitimate hidden problems that might be uncovered after the business is sold, and because growth-oriented companies must use all available leverage to fund future expansion. This is nonsense. When an individual sells their company, they have the right to receive their proceeds in cash except for the equity portion retained in a recapitalization.

6) Should a seller employ special legal counsel for the transaction?
If the law firm is a large firm with specialists in the critical areas of environmental law, human resources, intellectual property, corporate finance, and certain other areas, it might be appropriate to retain the current counsel. However, if the seller utilizes a smaller law firm of fundamentally generalist attorneys, they want to employ new counsel with specialists in the numerous functional areas to advise them in the transaction. If the seller employs a sophisticated advisory firm to direct the deal negotiations, it is often advisable to allow the advisory firm to bring in a large, experienced law firm to assist. This will ensure a blending of compatible negotiating styles.

George Spilka is president of George Spilka and Associates, a national investment banking firm in Pittsburgh specializing in middle market, closely held corporations. The firm advises clients through the acquisition process, and in preparing a company for sale. Contact or (412) 486-8189 or e-mail


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