The printing industry is seeing unparalleled consolidation. The reasons are simple – the recession, the Internet changing communications away from ink or toner on paper, the aging of the average print owner and lack of succession planning.
Most transactions today are tuck-ins or mergers as very few printers want another physical location. Organic growth is flat, and the smarter printers are looking to acquire a competitor primarily for their customers and to keep their offset presses and digital printers busier.
Sellers need to realize that the best value they may get for their business is to merge their business with a successful competitor. The good news for a seller is that their current financials are not too relevant to the buyer but rather their customers, the type of work they do, their employees, and possibly some of their equipment. The perceived value to the buyer is simply what is the “value added” that the buyer will get from the seller’s accounts.
Value added is basically the percentage of sales that it costs for the materials and the labor to produce the products and services. The higher the value added, the more a seller should expect from a sale. I have seen value added ranging from 40 percent to 50 percent of the sales. While buyers do worry about the acquired company’s selling prices, the reality is that they are more concerned with the impact on their business with the added sales.
What should a seller do to position his or her company for a successful merger?
Here’s a short list
• Get closer to top customers to insure that they will remain after a merger.
• Keep key employees happy as a potential buyer is looking for talent, and one big risk is if the key employees will not stay on after a merger.
• Keep good customer history records and sales records, especially for the top 10 or 25 customers.
• Clearly define expenses on a profit-and-loss (P&L) statement—keep the cost of goods sold separate and the production payroll separate from the other payroll.
• Sell or dispose of any obsolete or rarely used equipment—most buyers are not looking for older equipment and it is easier to sell it while you are up and operating rather than after you close.
• Dispose of old records, stale inventory, and anything that you do not need to operate.
• Watch your cash; pay down any debt that a buyer will not assume (credit line or working capital loans) and do not incur any new debt.
• Continue to prospect and seek new clients.
• Hire a mergers and acquisition consultant to seek out a seller’s best opportunities—this may lead to having two or three companies bidding to acquire the company, which will get more value for the seller.
What does a buyer do to find a successful merger candidate?
• Get closer to the owner(s) of a printing company you would love to acquire. Meet for coffee or lunch and just get to know each other better. Suggest that a merger might make sense. You might be surprised at their reaction that they are open to merge/sell.
• Talk to your primary suppliers about your desire to find someone to acquire. Your suppliers know who may be willing to talk or may need to merge.
• Hire a consultant to conduct an outreach program to identify and qualify candidates. While there are fees associated with this process, it is usually the most successful; plus, it saves lots of time that the buyer should be spending on their business and keeps them from being distracted.
As a buyer, you need to make sure your business shows well. A seller must be confident that the buyer will continue to service their clients and also be a good home to their employees. Some selling owners also want to continue to work for the buyer.
What does a transaction look like in today’s environment? I have been in involved in dozens of transactions in the past couple of years. Every transaction is different, so there is no one formula that works most of the time. Here are some key elements that may be included in the structure of the deal:
Cash Up Front—buyers today want to pay little up front but sellers do need some cash to close down their operation and to pay off any debts.
Note—buyer may want seller to finance part of the purchase price—usually the part related to the hard assets purchased such as equipment and inventory.
Earn-out—commission or royalty paid on retained sales for a period of two to five years.
Assumption of Debt—most common is to assume equipment leases for desirable equipment by the buyer.
Employment Contract(s)—for the seller who wants to stay on to work, manager, or outside sales person who will stay.
Non-compete Agreement—usually required when a seller will not stay on except perhaps for a transition. The term is normally for at least the time period of any note or earn-out period.
The “Price” and “Structure” of any deal reflect the risk of future performance.
• Higher price = more risk = less certainty in structure
• Lower price = less risk = greater certainty in structure
While I am biased, you should seek professional help when looking to buy or sell. For many, this is the first time you have been in involved in such a transaction and you need guidance. For even the most experienced, a professional can insure a better deal, save time, and achieve a smoother transition. Avoid the risks that can be associated with even the simplest merger or acquisition.