I recently was on a panel for NAPL at their M&A Workshop and was asked the question, “What are the obstacles that you see today when a print owner is acquiring another print shop?” A majority of my consulting time is spent helping print owners buy or sell their shops, so I will share my experiences with some of the obstacles and offer ideas on how to overcome them.
Here are the major obstacles that I encounter.
Most sellers feel their business is worth more than a willing buyer will pay for it. After all, the seller has years invested in their business and it’s hard to swallow that their business is not worth what it may have been worth before the recession. Since most printing businesses are purchased as a tuck-in (the buyer is essentially buying their book of customers, hiring selected employees, and perhaps purchasing some of their equipment), traditional valuation methods may not be relevant. The best way to overcome this obstacle is to get a formal valuation done or hire a professional to act as an intermediary.
Too Much Debt
Unfortunately, many printers survived the recession by borrowing against their credit lines and some made major equipment purchases when money was easy to borrow just before the recession. Some have leases in which the amount owed is more than the equipment value. One way to overcome this obstacle is for the buyer to assume the debt or renegotiate the lease with the financing company. If the buyer is strong financially, banks and financial leasing companies will reassign the debt and, in many cases, reduce it.
Landlords are usually willing to break the lease if they are convinced that the selling printer will have a problem continuing to pay the rent for the remaining term. Give the landlord notice that a sale is impending and negotiate a settlement, which may be mean only having to pay two or three months’ rent. If the seller owns the property, it could be an opportunity to sell the building or lease it out to another business that can pay the proper rent.
Most buyers do not want all the equipment, plus the seller thinks the equipment is worth a lot. Today there is a glut of equipment (especially offset presses and platemakers). In most cases, buyers only want a few select pieces of equipment. One way to overcome this obstacle is for the buyer to purchase all of the equipment and then immediately liquidate via an auction after the closing, keeping only what they want. There are auction companies that will value the equipment and even guarantee a minimum dollar value.
High Concentration of Sales in a Few Customers
The seller may not see this as a risk, as they may have operated that way for many years. Buyers get nervous if the loss of one of the top customers could mean significant erosion in the sales they are purchasing. Overcome this obstacle by paying for the deal based on sales that are retained. It’s almost the rule today that at least part of the purchase price is based on paying commissions or royalties for retained sales.
Outside Salesperson May Leave
Many times the seller has a salesperson or two who are responsible for a high portion of the company’s sales. Buyers fear that when the business is purchased, one or more of the salespeople will leave and go with a competitor or broker the work on their own. One way to overcome this obstacle is to require, as part of the deal, that the salespeople sign a non-compete with the purchasers before the closing. Or offer a bonus at the end of year one, and perhaps even subsequent years, if they stay on and hit sales goals.
Usually, this is not as big a deal as buyers may think. Most jobs are not repeated, and unless the seller is underpriced the buyer can either continue to honor the old prices for a period of time or raise them gradually. Buyers may also take a position that they know they will lose some business due to price and consider that loss in the way the deal is put together.
Selling Owner Wants to Stay
This can be very tricky, especially if they want to be in sales and be paid commissions. The buyer cannot pay a full commission plus pay the selling owner for the accounts. You can overcome this obstacle by paying a small commission on their existing clients and a much higher one on new business or on growth of those accounts.
Financing the Deal
Sellers want cash at closing, which is extremely rare except in highly distressed situations when the cash is very little, or when a very large printer buys a small printer. Sellers need to be in a position to hold a note or to be paid royalties or commissions on retained business. Today, buyers hold the upper hand as there are many more companies hoping to sell that companies looking to buy. One way to overcome this obstacle is to guarantee a minimum amount on the royalties or commissions. That guarantee may be based on how much of the sales both parties feel will safely move over to the buyer. My experience has shown that retained sales are between 50 and 125 percent of the previous 12 months’ sales. (Yes, a few deals had sales increases.) On average, I would estimate that 80 percent of the sales remain in the deals that I have seen.
Usually, the seller and buyer pay their own transaction costs for the deal. The costs are for professionals such as attorneys, accountants, consultants, and brokers. If the seller is distressed or has little cash, the buyer may offer to pay all the transaction costs as they need to be paid by or at closing. The buyer will only do this if they are getting concessions on the entire deal, and will incorporate those costs into their total cost of the acquisition.
Sellers are proud people and many built their business from scratch many years ago, or perhaps are second or third generation print owners. Buyers have to be aware that they have to be sensitive to the selling owner’s need to exit the business gracefully.
I am sure there are many other obstacles that our readers have experienced and I would love to hear about your experiences in M&A. Any obstacle can be overcome and I recommend using professionals who have the experience to make the deal work.
One tip though, is to never fall in love with the deal. Always be prepared, even at the last minute, to back away. Don’t overlook red flags that come up, especially during the due diligence period. Acquisition is a wonderful way to grow your business, especially in today’s environment. Just do it smartly and slowly.
Mitch Evans is VP and senior consultant for NAPL, concentrating on working with quick and small commercial printers (MyPRINTResource.com/10006811). Contact him at 561-351-6950 or firstname.lastname@example.org.