Planning and Executing a Successful M&AApril 2014 By Paul Reilly and Peter Schaefer, New Direction Partners
More useful to follow are trends in M&A transactions that are based on multiples of EBITDA (earnings before interest, tax, depreciation and amortization), the calculation that determines selling price in deals of this type. Compared with a year ago, buyers are more willing to structure transactions around EBITDA multiples as they witness improvement in the general economy and in the performance of individual companies. Multiples for publicly traded printing businesses have gone up, while those of privately owned firms have held steady—a sign that stability and confidence are again parts of the conversation about opportunities in print and packaging M&As.
The Numbers Behind the Letters
We currently are seeing a range of 3.5 to 6.5 times EBITDA in the transactions we are handling for our clients. The distribution generally aligns with business type, meaning that printers serving dynamic markets attract higher multiples than those catering to mature ones. But, exceptions based on individual performance exist: in two of our deals in progress, the multiple exceeds the top end of the range.
A number of things influence how EBITDA multiples are established. In this case, company size does matter, and the larger a firm is, the higher its multiple likely will be. For example, a firm that advances from $3 million to $10 million in annual EBITDA may add up to a full point to the EBITDA multiple range noted above. Buyers will look at profitability. as well as top-line growth, as they decide what multiple the deal should be based on.
EBITDA multiples definitely are stronger than they were in the aftermath of the crash of 2008, a deal-killing downturn that the industry seems finally to have put behind it. We also note increasing interest from sources of private equity capital in financing printing industry M&As, an investment opportunity that had been all but blacklisted by these lenders a few years ago.
What about firms that aren't candidates for acquisition in deals structured around multiples of EBITDA—companies experiencing flat or negative growth in mature markets? The best answer may be a tuck-in, a transaction in which the seller transfers its customer base and other assets to the buyer in return for a payout based on future earnings of the consolidated companies.
As an exit strategy, a tuck-in creates more value for the seller than simply liquidating the business. It may also serve to protect the jobs of at least some of the seller's employees. Tuck-ins can be lifelines for many printing company owners, and we will have more to say about them in upcoming columns.
Can You Afford Not to?
It's no secret that certain segments of the printing industry continue to consolidate and that more shrinkage is on the way. Additionally, there are significant opportunities to grow by acquisition in other segments of the printing industry and in virtually all segments of packaging. Given these realities, having a proactive M&A plan is a matter of necessity for every company. If you are in a declining market, now is the time to prepare for leaving it on terms favorable to you. If your firm is fortunate enough to be on an upward trajectory in a high-value market, your outlook for acquiring strategically or selling at a significant profit is better than it has been in a long time.
Begin by examining your personal priorities, as well as your business objectives. Where do you want to be as an owner in two, three or five years? What rewards do you expect? What emotional issues and family considerations will enter into your decision? How will you manage the extreme sensitivity of offering your company for sale or approaching another company with an offer to acquire it?
All of these questions, and more, are answered in the planning of an M&A and in the consummation of the deal. We look forward to detailing the process with you in this series. PI
About the Authors
Paul Reilly and Peter Schaefer are partners in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing or packaging company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP's partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess over 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, e-mail firstname.lastname@example.org