Hyding Out

An Open Letter to Owners of Highly-Leveraged Print and Graphics Communications Companies: Debt Restructuring --- An Option When Others Have Failed

The name of the distressed printing company owner who contacted me today is withheld for obvious reasons, but I am sharing this communication so that countless other owners of highly-leveraged print and graphics communications companies can recognize that it's never too late to get help for their financially-challenged business.

 

Mr. XYZ,

Based on our conversation today, I understand that XYZ's  cash flow is tight, you're out of compliance with bank covenants, and you're having a tough time making payroll and keeping up on the bills. I appreciate that you have contacted me in search of a professional advisor to navigate this troubled landscape.

A long list of clients would vouch for my ethics and expertise, noting that I have a legal background, specializing in M&A and debt restructuring of privately-owned print and graphics communications companies.

Debt restructuring is best defined as the "art" and "science" of replacing one obligation with another one. It means that the company's loans, leases, and fixed obligations will go under the microscope for examination in search of "hooks" that can be used to open negotiations. The purpose can be to lower cash requirements and/or to prune the balance sheet, or both.

 Debt restructuring is a high risk activity that should only be conducted by experienced professionals who have "been there" in this industry. It should not be done unless the stakes are high, and other options have been explored unsuccessfully. The vast majority of all debt restructuring in the print, mail, and graphics communications industries is conducted without bankruptcy court protection because chapter 11 is brutal on management time and expense, not to mention the disruption to customer relationships.

 If you and your partners at XYZ are interested, I would encourage you to prepare and send a confidential package of financial statements; copies of all loans, leases, and other commitments including AP; include a short term operating cash budget identifying what loans/leases are scheduled for payment in the upcoming month; include a schedule indicating threatened or pending litigation involving creditors. Kindly include a check for $AB as a deposit toward advisory services. We will review the materials, speak with you about Q&A, and then offer recommendations. If you decide to engage our services beyond this review, we will credit the retainer to the fees. If you or us decide not to go forward, $A will be refunded and $B will be considered earned for the review.

Please let me know your thoughts so we can get started this week and have ideas/concepts as early as the week after next.

 

People sometimes ask, how can they afford to get help? The answer is that they have to find the money. Sadly, funding for professional advisors often comes at the expense of personal resources or from deferring payments to free up cash.

Fifteen years ago a family member encountered huge legal problems resulting from a failed business venture. He eventually came out the other end of the process, and, in reflection, thanked me for the introduction to the lawyer that handled the case. Tons of money and time later, he was now free of the baggage from the distressed situation. I am hoping that someone reading this will eventually get the same thank you for the introduction.

 

Warning to Buyers of Printing Company Assets: Do Not Overlook Successor Liability!

Two truisms are increasingly facing each other as the printing and graphics industry continues to consolidate:

1. An axiom of M&A and corporate law is that creditors must be satisfied before selling shareholders receive proceeds for the sale.

2.  Value as expressed in the "price" for the business rarely generates sufficient cash proceeds at closing to accomplish #1 above. At least 75% of deals are laden with royalties, earn-outs, and various other forms of contingent consideration tied to future performance.

The inherent conflict between these two realities means that a signficant number of transactions involve some form of debt restructuring or orderly liquidation as a predicate for consummating the sale. 

Buyers don't think they are involved with the seller's debts because lawyers have always preached "buy the assets, not the stock" as the sure-fire way to be protected. 

But think again. 

In the emotionally charged context of a troubled-company M&A transaction, where family owners are about to lose "their baby", the lines between #1 and #2 often get blurred. Creditors ---especially paper company credit managers---have been known to be the enforcers to protect against fraudulent conduct by the seller. The law of successor liability is complex, outcomes are based on the facts of each case, and decisions on transaction structure must be made in context of the deal without perfect information. The current economic and legal climate affects these cases as much as anything else. 

The battleground between creditors, the seller, and the buyer often takes place without legal proceedings but within the shadow of the bankruptcy court. 

Nearly every case involving an M&A transaction that comes through our offices at NAPL gets vetted out for successor liability.  

Why bring up this issue today? Because the climate for deal-making has improved, and, with that confidence, owners may be tempted to push the envelope on getting value for themselves at the expense of creditors such as leasing companies, landlords, trade binderies, and even the paper companies themselves. 

Are there legal ways to minimize the risk of successor liability? Yes.With experienced professional advisors, owners and managers of privately-held companies can navigate this complicated process without bankruptcy court, as there is an accepted "craft" known to practioners on "how to" unwind the seller's balance sheet.  If you are considering an acquisition and want an expert resource to assess the risk of successor liability, feel free to contact me for a consultation.  It may be the best money you ever spent!

 

Equipment Disposition Done Right Yields Favorable Results

Equipment disposition in the context of Orderly Liquidation of Business is, by definition, a once in a lifetime event that owners don't get to learn from because there is rarely a second time. Lacking experience, and confronted with unfamiliar terms such as "buyer's premium" and choices as to "auction" or "private sale", it's amazing that many owners continue to "do it on their own" rather than engage specialized advisors such as my NAPL colleagues who handle these matters regularly.

A recent case right on my desk illustrates the benefit of seeking outside consultants to guide the owner on HOW to maximize value of equipment in the orderly liquidation scenario.

The owners of a $3.0 million annual sales commercial printer reached the point of decision as to "fix it" or "sell it", and, in the negotiations with a buyer for intangible assets, the discussion turned to the subject of equipment. The buyer had a friend who wanted to make an offer. The number came in at $170,000, far less than a recent equiment appraisal.

The owners started to panic, thinking that at least 170K is better than nothing and fearing the worst.

Thankfully, they calmed down and eventually did not accept this offer. They then retained Bruce Perlstein of NAPL who promptly brought in a resource that will guarantee our client over $50,000 more than the 170K offer. Our client would have left at least 33% on the table if they grabbed the first offer!

In the words of one client, "you'd be nuts to do this yourself".

 

5 Critical Factors for Successful Bankruptcy Reorganization of a Print and Graphics Communications Company

Although there are few examples of successful bankruptcy reorganization in the print and graphics communications industry, owners considering a restructuring of their highly leveraged company should not rule out chapter 11.

Here are 5 critical factors for increasing the likelihood of surviving bankruptcy reorganization:

1. Being Dedicated to Consistent Communications
2. Maintaining Timely and Accurate Financial Reports
3. Identifying Strategic "Good News"
4. Defining a Feasible Turnaround Plan
5. Bridging the Bankruptcy Lawyer's Knowledge Gap

NAPL members can gain these insights and more on a courtesy basis by scheduling a confidential telephone or in person meeting (coordinate through Kathleen Appleton @ 201-523-6309).

Memo to Owners: Negotiate Personal Guarantees When You Can

If you are an owner of a print and graphics communications company, I challenge you to negotiate personal guarantees when you can.  Check out this dialogue:

Q: what personal guarantees?

A: bank term loans and finance company equipment leases

Q: why didn't you mention lines of credit?

A: because it is extremelly rare for a privately owned company to have a bank line of credit with personal guarantees and I wouldn't disqualify my company from having line of credit financing just because of this requirement because there are other ways to moderate the risk of the guarantee ever being called.

Q: aren't personal guarantees just a formality, who cares?

A: Ask the owners who come through NAPL's offices if they care, especially where owners struggle with "getting out of business" or restructuring debt to survive

Q: won't negotiating against a personal guarantee send a mixed signal to my lender?

A: A strong leader of a creditworthy company always looks to gain an edge in managing outside supplier relationships. To this owner, the lender is a supplier of money. Ask my NAPL colleague, Bill Woods, about his experience when negotating as an owner for many years.

Q: will the lender still want to do business?

A: It is a given that there will be negotiations. If the lender wants to play in the sandbox with strong companies, he/she ought to be used to this kind of request.

Q: but what if my company is not so strong financially?

A: then you have little chance to "just say no" to personal guarantee, you missed your opportunity

Q: so is your advice to negotiate personal guarantees only directed to owners of "healthy companies"?

A: It's directed to all owners, but I realize the phrase "when you can" does not apply across the board. The point is to negotiate IF AND WHEN the opportunity arises.

Q: what if the lender offers "no collateral" as a concession to having the owners personal guarantee?

A: RUN FOR THE HILLS!

Q: Huh?

A: I can explain this more fully with actual clients, but would not go further on a blog.

Q: what else should an owner know about when dealing with personal guarantee?

A: get professional help from an advisor that knows where the line is drawn; this is way more "art" than "science", so experience in these kind of matters goes a long way

 

 

Preparing for a Merger, Acquisition or Sale of Business 3/6

This is part three of a 60-minute webinar that will show you how to best position your company whether your goal is to grow your business, navigate through our changing industry, or create an exit strategy from ownership. John Hyde is an industry veteran who has “seen it all” while working with hundreds of companies over a 20 year period. Using his unique insider’s perspective John Hyde will prepare you to use mergers and acquisitions as an ongoing strategy to achieve your short-term and long-term goals.

Please submit any questions that you have about this webinar to Kathleen Appleton via email at KAppleton@napl.org. For part 2/6 click here.

Preparing for a Merger, Acquisition or Sale of Business 2/6

This is part two of a 60-minute webinar that will show you how to best position your company whether your goal is to grow your business, navigate through our changing industry, or create an exit strategy from ownership. John Hyde is an industry veteran who has “seen it all” while working with hundreds of companies over a 20 year period. Using his unique insider’s perspective John Hyde will prepare you to use mergers and acquisitions as an ongoing strategy to achieve your short-term and long-term goals. 

Please submit any questions that you have about this webinar to Kathleen Appleton via email at KAppleton@napl.org. For part 1/6 click here.

 

 

Preparing for a Merger, Acquisition or Sale of Business 1/6

Learn how to prepare your business for a strategic transaction -- merger, acquisition, or sale of business -- in this free webinar featuring John Hyde, NAPL Senior Vice President of the National Association for Printing Leadership (NAPL).

Rapid changes in the graphic communications industry raise new challenges and opportunities for owners and senior managers to redefine their businesses. Some owners considering the risks of further investment may seek to transition from ownership and preserve value in what they built. On the other hand, for those who are looking to grow their business, strategic acquisitions offer a path to gain new customers and capabilities. Most owners will face this choice sooner or later.

This is part one of a 60-minute webinar that will show you how to best position your company whether your goal is to grow your business, navigate through our changing industry, or create an exit strategy from ownership. John Hyde is an industry veteran who has “seen it all” while working with hundreds of companies over a 20 year period. Using his unique insider’s perspective John Hyde will prepare you to use mergers and acquisitions as an ongoing strategy to achieve your short-term and long-term goals. 

Please submit any questions that you have about this webinar to Kathleen Appleton via email at KAppleton@napl.org.

Distressed Sellers of Print and Graphic Co's Prefer Out of Court Managed Liquidation as Alternative to Bankruptcy

I continue to receive frequent inquiries from owners of printing and graphic communications companies who are searching for ways of exiting their debt-burdened balance sheets in the context of selling the business. The usual scenario involves a strategic acquirer who is only taking on the general intangibles. The seller is faced with the double dilemma of too little asset value versus debt levels and the timing difference between future payments from the buyer versus obligations that need funding at closing.

In 20 years of practice, I can only remember a handful of cases in which I recommended bankruptcy as the strategic procedure to enable the sale to be consummated. By contrast, I've recommended Managed Liquidation hundreds of times over the years.

In my opinion, Managed Liquidation remains the surgery of choice for "going out of business" debt resolution within the print and graphic communications industry. Not that there can't be a case or two along the way that would involve bankruptcy, but the out of court Managed Liquidation process carries several important advantages:

1. General Intangibles, the most valuable asset for most of our clients, retains value if the book of business is sold with the customer relationships transitioning to the buyer, and this easier to implement without court notices going into the marketplace;
2. AR collections tend to hold up better without the stigma of bankruptcy;
3. WIP is more likely to be completed without court restrictions on using cash to complete jobs;
4. Inventory can sometimes be returned to suppliers as a credit, which can't be done in the usual bankruptcy cases;
5. Out of court Managed Liquidation can go start to finish in weeks rather than months needed for bankruptcy cases;
6. Professional and administrative costs are less without expensive lawyers going to court;
7. Managed Liquidation avoids the uncertainty, cost, and complication of navigating through litigation over recovery for preference payments that were made to suppliers in the 90 days before filing;
8. Managed Liquidation rarely results in owners  giving money back to the creditors if the owners booked money they took out as principal payments on loans rather than as salary during the 12 months before filing;
9. Resolving personal guarantees among partners is hard enough to accomplish without bankruptcy court requirements to treat these issues as unrelated to the case.

I don't mean to seem biased against bankruptcy, but the above are reasons why Managed Liquidation remains in vogue as a debt solution strategy for exiting ownership of print and graphic communications companies. 

To be clear, this blog post addresses bankruptcy versus Managed Liquidation in the context of an exit from ownership; a discussion of using bankruptcy to "stay in business" while reorganizing is a topic for another day.

Private Equity Firms Prepare to Invest in Print and Graphics Communications Industry

Today's blog post is an early "heads up" that we at NAPL believe there will be a resurgence of interest among private equity firms to invest in the print and graphics communications industry.

We are reading smoke signals and tea leaves that suggest the next generation of financial buyers will be seeking investments among leading companies (as that term is defined in 2010 NAPL Strategic Perspective report). The following criteria is a good starting point for assessing whether your business stands a realistic chance of attracting interest from this kind of buyer:

• consistent profits capable of being valued
• scalable vertical market expertise and/or cross platform capabilities
• modest debt levels
• strong management that extends beyond founder/entrepreneur

There are other important criteria of varying degrees of importance, so if you are thinking of taking chips off the table or formulating a plan to transition from ownership, an NAPL Business Valuation is a great starting point for determining the value of your print and graphics communications business; this is based on valuing the earnings as a "going entity" and also valuing the underlying assets such as general intangibles and equipment.

Feel free to contact me for a confidential discussion on whether and to what extent you should consider meeting the private equity folks as they come out of their caves over the next 12 months.