Hyding Out

10 Success Factors for Buying a Print & Graphics Communications Company as a "Going Concern"

If you are considering an acquisition of a print and graphics communications company as a "going concern", here are 10 Success Factors to evaluate: 

1. Profitable without regard to consolidation savings
   
2. Business does not revolve around the owner-entrepreneur
   
3. "Transaction Ready" financial statements
4. —Strong management
   
5. —Key personnel in place to maintain/expand customer relationships
   
6. —Ethics and cultural alignment
7. —Process driven
8. —Infrastructure up to date— but not necessarily state-of-the-art
   
9. Room for growth without major investment
10. Emotional-readiness of selling shareholder(s)

 

NOTE:

This list relates to privately-owned print and graphics communications companies; it has nothing to do with public companies.

We are assuming that the subject for evaluation is one of approximately 28,000 print and graphics communications companies in the domestic USA as of May, 2012. 

The checklist is for evaluating a "Going Concern" and is not relevant to so-called "tuck in" transactions.

Don't even think of copying and pasting this blog post without permission of or attribution to NAPL, we'll find you.

 

Growth by Strategic Acquisition: Ten Tips for Owners of Print and Graphics Communications Companies

1. Understand that Trust and Comfort are HUGE
2. Maintain ethical reputation
3. Preach financial stability
4. Remember being a “White Knight” does not mean “bailout”
5. Live with confidentiality
6. Explore M&A efficiently
7. Walk the line between “open & honest” and “being too blunt”
8. Provide exceptional capabilities
9. Demonstrate M&A successes
10. Make key employees part of your M&A process

 

 

The Latest on Valuation of General Intangible Assets in the Print and Graphics Communications Industry

At NAPL, our business advisory practice resides at the cross-current of 3 huge drivers of change:

1. the fundamental redefinition of the print and graphics communications industry;
2. the M&A consolidation trend that involves long term redistribution of market share to the "leading companies"; and
3. the debt "hangover" affecting loans and leases of numerous privately-owned and family businesses.

This close-up vantage point affords our NAPL M&A team (Tim Fischer, Mike Philie, Kathleen Appleton, Tom Cobery and I) a unique perspective on "how" and "why" strategic transactions come together or fall apart. 

One common thread clearly emerges from all the activity and noise in the marketplace: buyers want to acquire strong customer relationships and they are willing to pay for a proven book of business.

The so-called "intangible asset", meaning, the customer relationships, continues to attract interested buyers especially if the asset is de-linked from the tangible assets of the balance sheet. This surgery is called "restructuring", and it is a craft I've honed over the past 22 years, leveraging my legal background, M&A expertise, and printing industry acumen. You can count on one hand the number of transactions that come to frution in which some form of debt restructuring is not needed. Other consultants/deal makers may see things differently, but that's our view at NAPL. 

Within this backround and in light of the economic conditions affecting our industry as well-documented by NAPL Chief Economist Andy Paparozzi, here are 3 Key Learning Points about Intangibles value from the NAPL Business Advisory Team:

1. Valuation of general intangible assets have held up and could increase in 2012-2013 because of the imbalance in the marketplace between sellers and buyers; but.....

2. NAPL valuation methods DO take into account likely attrition of customer work due to fundamental changes affecting our industry;

3. Buyers will pay more for intangible assets from sellers who can document their customer relationships with hard data from diagnostic tools such asNAPL eKG Competitive Edge Profile  

Unlike owners 25 years ago who correlated equity in equipment with retirement planning, owners today recognize that the real value in their business resides in the customer relationships. I am proud that NAPL has been a "thought leader" in educating the industry about intangible value over the past 8 years and even as far back as the 1980s.  

Don't hesitate to contact us for a Business Valuation, a "Second Opinion", or an Intangibles Value Assessment. 

Is Your Financial Information "Transaction Ready"?

If you plan to DO NOTHING with your printing and graphics communications business during the next 3 years, stop reading. But this blog post is for you if you are one of the many owners who may engage in one or  more of the following types of corporate transactions by December 31, 2014:

1. bank financing for line of credit
2. equipment financing
3. real estate expansion
4. merger or acquisition
5. sale of business to strategic buyer or entrepreneur
6. private equity or ESOP
   
7. succession planning gifting of shares

The date is relevant because many corporate transactions involve 3 years of financial statements and right now is when a lot of companies are putting together their 2012 information.

The question is: when you are ready to seriously consider a critical corporate transaction, will your financial statements by ready to effectively communicate your story? More importantly, what steps can you take NOW to be sure your house will be in order when the financials go under the microscope?

At NAPL, we suggest that owners and senior managers step back from the usual process of preparing year-end financial statements and assess the extent to which their financial information presents the company in the best light possible.

Here are 3 questions to ask your team (and yourself):

• What conclusions would be reached when you present year over year sales and EBITDA comparisons including documenting adjustments related to owners' compensation, affiliate transactions, and one-time items?
• Are the financial statements prepared by a reputable CPA firm using "review" or "audit"-quality standards complete with footnotes?
• What is the company's break-even point and what observations can be made based on tracking projected vs. acutal results each month?

Remember, a skeptical CFO-level analyst must be able to quickly construct an accurate cash flow model using your information. It's in your best interest to be sure your financial information is "Transaction Ready" before you open the door to a corporate transaction. 

Feel free to contact me or my NAPL colleague Tim Fischer, our resident subject matter expert on financial management issues, to request a confidential evaluation of your transaction readiness.

 

Heard from Owners at Graph Expo 2011

Here are a 5 snippets from owners who attended Graph Expo 2011:

"the show has morphed into a business intelligence gathering as opposed to a place to consider equipment"

"government ought to protect US printers from printing moving offshore"

"the industry needs a national ad campaign to get the word out that print is not dead"

"my company will not be a marketing services provider but I still want to know what's going on with social media and QR Codes"

"I've come to recognize that the end game for selling my business won't make my family rich, as this is really a lifestyle business more than a source of building enterprise value"

The best M&A tip was from the owner of a leading company who is considering an acquisition, and, as part of his due diligence, farmed out a job to the candidate which created the excuse/opportunity to visit the shop, walk the floor, and chat with employees. Brilliant move!

 

A Non-Economist Commentary on US Gov't Loss of Triple-A Credit Rating

Headlines about S&P downgrading US Gov't debt shake me to the core this morning, and I know  owners of print and graphic communications companies are concerned in their own way too. For me, this is the economic reality-changer that reminds me of how 9-11 was the national security reality-changer nearly ten years ago. 

M&A valuation as well as other investment analysis is based on concepts of risk and return. The pillar of these concepts is that U.S. treasury bills are "riskless". That foundation has been cracked today, a shocking reality despite all the news leading up to the event itself. 

I flashback to my  years as a young attorney, working 90 hours a week at a law firm in New York City. I vividly recall going to a book store that no longer exists to read about finance so I could understand what was behind all those mid-1980s Wall Street M&A deals that fueled my employment. Thumbing through Barron's Business Review Series which I've kept on my desk for the next 25 years and two subsequent careers, I learned about risk and return on investment.

"If the investment has no chance of loss and is made for a very short period, it is called riskless," it says on page 65. "The riskless rate is the interest rate paid on assets that have a risk-free or sure return, like U.S. treasury bills which come due in 90 days and are backed by the federal government's guarantee to pay on maturity."

The concept that investors have to be rewarded with a "risk premium" for investment in assets with escalating risk is fundamental to finance, investment, and business valuation, whether the assets are real estate, shares of a publiclly-traded company or a partnership share of a privately-held printing company. Tangible assets such as digital printing devices or sheet-fed offset presses, as well as intangible assets such as customer relationships all go under the valuation microscope to ascertain the risk-reward balance as they compare to "riskless" investments such as U.S. Treasury debt.

Now that "riskless" has new meaning, it will be important for NAPL clients to check with us over the next 12 months or so to ascertain the extent to which today's economic news affects valuation of printing companies, appraisal of equipment, and valuation of intangible assets. 

I could go further into examining the correlation between US Gov't debt ratings and the impact on the printing industry, but I leave all of that to my NAPL colleague, Andy Paparozzi and his team. For me, I'll start by adjusting the thinking that has been embedded in literally hundreds of my clients business valuations and M&A advisory projects over the years, that the "risk free" investment return is based on U.S. treasury bills. 

 

Ten Questions and Ten Information Requests if You are Considering a Strategic Acquisition of a "Treading Water" or Worse Printing Co

For owners/senior leaders who are considering a strategic acquisition of a "treading water" or worse printing company, here are “Ten Questions” and “Ten Information Requests” to help advance your conversations.

The questions relate to assessing the impact of their problems on the value of the business and to ascertain how much time is left on the clock.

 

Ten Questions:

1. To what extent, if any, has customer satisfaction been negatively impacted by current financial problems?
2. Have they been overly aggressive on job pricing to bring in work, resulting in “churning” of cash but training customers to expect unprofitable pricing?
3. Have they lost any key employees recently?
4. How would they assess the impact of the “rumor mill” that is usually fueled by the suppliers?
5. Is the company experiencing daily cash crisis that is eating up time and energy of accounting staff and production?
6. Are any of the suppliers threatening litigation? Any pending lawsuits?
7. Are taxes up to date?
8. Are they behind on lease payments, if any?
9. How would they assess employee morale?
10. Who are the owners and are they on the same page?
    

 Ten Information Requests Beyond Financials:

1. Loan documents including Guaranty documents
2. Lease agreements
3. AP aging with comments on trouble spots
4. Will need to obtain a UCC search ASAP to confirm lien holders on assets
5. Equipment list: any recent appraisal?
6. Customer analysis (no names, just a summary customer by customer, indicating who has the relationship)
7. AR aging
   
8. Summary of the building situation 
9. Summary of compensation for owners and key employees
10. Contact info of advisors

You are probably thinking that the questions and info requests send a negative tone, and you are right. That is one reason NAPL client-members who pursue Growth by Acquisition bring in a consultant to politely ask the tough questions. Frequently the conversation then gets easier once the invisible barrier of humility is gracefully removed. Then the task at hand becomes one of "how can we work together" to achieve objectives. By that point, chemistry is enhanced and there is greater insight on understanding the situation, which leads to creative transaction structuring.

John

"We Don't Have Much 'e' in EBITDA" Says Owner of "Treading Water" Co

Many companies in the print and graphic communications industry offer strategic value to an acquirer but they lack earnings to support using the EBITDA valuation method.

While the EBITDA valuation method receives notoriety, owners of "treading water" companies should not assume they can't participate in the industry's long term consolidation trend.

As one client recently said, "We don't have much 'e' in our EBITDA, but we have an awesome customer base and really talented people that our competitors would want on their team."

From our vantage point here at NAPL, most M&A transactions have nothing to do with EBITDA. Don't let the lack of "e" prevent you from considering options for transitioning from ownership!

 

NOTE: NAPL Business Valuations reflect the EBITDA method and also take into account the value of underlying assets such as general intangibles and equipment.

Classic Graphics acquisition of Belk Printing Technologies: 3 Lessons Learned

Without breaking any client confidences, I can share 3 "Lessons Learned" from the January 2011 announcement of the M&A transaction involving Classic Graphics and Belk Printing Technologies: http://www.napl.org/Media/Classic-Graphics-and-Belk-Printing-Join-Forces 

1. Start M&A talks with a fresh perspective even if prior encounters failed. Owners who rule out potential M&A opportunities because "we already talked with them" can miss the boat by getting caught up in the past. New opportunities come with each new day. Classic and Belk flirted over the years but that did not prevent a "fresh start" to exploring a potential transaction.
2. Trust the recommendations from independent professional advisors. The objectivity and independence of an industry-specific resource (in this case, NAPL) saves time, lowers frustration, decreases risk, and depersonalizes the emotional aspects. In this case, both parties had lots of their own "brain power" but one of the keys to success was that each side trusted the advice from NAPL.
3. Having your financial "house in order" is a prerequisite to successful M&A involving privately-owned print and graphics communications companies. In this case, both companies had excellent data and could efficiently provide inputs and analysis that helped NAPL to quanitfy synergies, establish a realistic valuation, and conceptualize possible transaction structures.

 

 

 

Want the IRS to Use Your Own Business Valuation Against Your Heirs? Then Read This.

This warning comes from my NAPL colleague, Bruce Perlstein, who specializes in Business Valuations that are often used in Estate Planning. Bruce is one of very few Accredited Valuation Analysts with print and graphic communications industry expertise.

Memo to Owners of Print and Graphic Communications Companies:

    "Be careful when you ask for a business valuation EVEN IF IT IS INFORMAL. The IRS can use informal write-ups that brokers routinely provide as well as any more sophisticated business valuation reports from accountants, etc. The IRS can do this even 20 years from now if the IRS audits your estate in seeking to collect estate taxes. The fines, penalties and interest expense could put your heirs at risk."

Key Point: The key for reducing risk is to be clear on the purpose for the Business Valuation, and to understand that "one size does not fit all". The best alternative is to obtain a customized Business Valuation prepared by industry-specific experts at NAPL.