Hyding Out

Update on Credit Crunch from NAPL John Hyde

Here's the latest update on the credit crunch from the perspective of consulting with owners of print and graphic communications companies:

1. We do not see significant trench warfare between banks and borrowers akin to early 1990s-style bank hardball when banks morphed into collection agencies to transfer capital from borrowers back into the bank;
2. Line of credit renewals are more stringent, particularly for companies with poor financial statements;
3. New financing requests take longer and require more substantiation but it is a mistake for owners to assume "there's no capital out there".......in the words of one lender, "the price and requirements for a loan got higher"......paraphrasing another lender, "we have the pick of the litter so we can charge more and be more picky"

I will be speaking on the credit crunch at PRINT 09 in Chicago on September 13. The presentation will include results of informal research of lending conditions affecting the printing industry. Here's a complete list of my speaking presentations both past and future: Download Speaking History

Use M&A Candidates as Source to Find That Heavy-Hitter Sales Person, Subject Matter Expert, or Working Partner

Owners and senior managers of print and graphic communications companies realize how hard it is to find heavy-hitter employees such as a top sales person, a subject matter expert in areas such as database management, or a working partner.

NAPL member-clients have been advised to look at M&A candidates as a source of opportunities for hiring these kind of top performers.

Two very recent examples from this week's consulting activities:

• a successful digital printing company is in negotiations for an acquisition of general intangibles as a "tuck in" AND as part of the transaction, they would hire a key person who has a ton of customer relationships as well as substantial database management expertise (the talks involve giving this heavy hitter a potential equity position or profit sharing in the marketing services revenue stream)
  

• a treading water general commercial printer is in negotiations for "merging with" a struggling marketing services & display graphics company (the talks involve the owner of the seller becoming a key person in the acquiring company organization, probably with a small ownership stake because the sole owner wants to add a working partner to his team).

Seller Says "Don't Waste My Time Unless Are We in The Ball Park?"; What Do YOU Say?

You are an owner or senior manager of an acquisition-minded print and graphic communications company and, like many of your peers these days, you're in "early courtship" of a potential M&A candidate.

You get to the point of requesting financial statements and other disclosures when the other owner says, "I don't mind sharing financial information if we are in the ball park on the value of the business, but I would like to know what you are thinking of offering before going down the path of due diligence."

What are you going to do?

Option A: forget about it

Option B: make up an offer just by "winging it", but risking over commitment on your part or insulting the other owner

Option C: request preliminary financial disclosure limited to revenue, gross margin or value added, operating expenses, net income, depreciation and interest.....essentially boiling it down to revenue and EBITDA [NOTE: if there is no "E" in "EBITDA", don't worry, just call me to value the general intangibles asset by itself].....then use this limited disclosure to formulate an offer via a non-binding Term Sheet that contemplates further due diligence before Closing.

Here's my perspective:

It is not unreasonable for owners of a potential M&A target to provide very limited disclosure in anticipation of further talks if and when the parties are "in the ballpark" on key terms such as "price" and "structure".

Therefore, we recommend Option C in most cases.

Memo to Acquirers of Distressed Printing Companies: Don't Hold Your Breath for a Perfect Due Diligence Package

It is an axiom of troubled company M&A that there's no such thing as a perfect due diligence package.

If you are one of many growth-minded owners exploring the acquisition of a "treading water" printing business, don't hold your breath on waiting for 3 years financial statements, revenue projection for next 12 months, year to date P&L, current balance sheet that ties to AR and AP, customer analysis by top accounts, sales commission reports by sales person, etc.

Although this information request is plain vanilla, distressed companies face unique challenges in providing this disclosure to potential suitors. For one thing, they are too busy fighting daily fires to spend the quiet time necessary for information organization and analysis.

So what should the acquirer do if they made their information request and it's been slow to arrive?

I suggest sending a financial person to do a one-day on site work session with the CFO, controller, or bookkeeper of the target company. Of course, this should all be covered by a non-disclosure agreement.

Yes, the owner of the seller has to disclose he/she is "talking to someone" and thereby gain the involvement of the financial person. But such is the norm for companies facing today's challenges. Everyone is talking with everyone anyhow, so hardly a financial person is going to be shocked at that revelation!

[By the way: just let me know if you want a PDF of the NAPL Information Checklist, available to members of NAPL without charge].