Remarkably, it’s 10 years ago this month that I was invited to speak at the NAPL Top Management Conference on the topic of “Acquiring Sales Without the Baggage”. Reflecting on “then” and “now”, royalty transactions in 2003 were a negative backwater of printing industry M&A. They grew in popularity from 2003 to 2006, and were literally the only game in town until 2011. We’ve seen a return to EBITDA-based transactions since then, and our M&A practice has also seen cases in which investment paradigm such as ROI or cash yield on investment has worked their way into recent negotiations.
n 2003, we were coming off the internet boom and blowback from the wave of consolidations that had shook up the landscape of the print and graphics communications industry. “Healthy” M&A valuations made some private company owners rich before mid-2000. Then the stock market downturn crushed the bondholders and public shareholders who financed the good times. Within that backdrop, for private company owners among conference attendees in Phoenix that day, a new way of looking at M&A was introduced.
Royalties arrangements had been around for a long time, but “orderly liquidation” and “debt restructuring” had never come out of the proverbial closet. In fact, they were heresy to the M&A guys before me who valued businesses based on multiples of EBITDA or based on “adjusted net book value.” As M&A lexicon gradually disposed of the term “book value”, and for good reason, the notion that intangible assets, meaning customer relationships (essentially, a “book of business”) can be sold separate and distinct from the underlying tangible assets took hold.
The old mindset that only distressed companies are valued by assets is just that, an old mindset. Today, as a matter of practice, NAPL valuations routinely consider both earnings and underlying assets. We believe that this is prudent, given the capital intensive nature of the industry and the reality that most companies—–those “treading water” or worse—- would eventually be sold “in pieces” as opposed to being sold as a “going concern.”
Although the asset-based valuation approach is sound for both “healthy” and “unhealthy” companies, it is important for the advisor to avoid assuming that the sale of the going concern inherently means a valuation using EBITDA and a transaction structure using a sale of stock or all or substantially all assets.
It’s the “mix” and “match” of methods, concepts, and structures that distinguish the experienced industry-specific practitioner from the country club loudmouth.
In fact, as we reflect back on what’s happened in our industry since 2003, it’s remarkable to consider the wide-spread popularity of “Acquiring Sales Without the Baggage.” I, for one, am proud to have played a role in bringing it out of the proverbial closet.