As M&A advisors, we find that we can never say enough on the subject of valuation. One reason for this, unfortunately, is that most printing companies do not have valuations — they’ve never properly assessed what their businesses actually are worth.
This means that apart from guesswork or wishful thinking, they have no idea of the market value of the enterprises they have worked hard to build. Closing the knowledge gap should be a top priority, and not just for printers who have decided the time has come to place their firms on the market.
The sale of a company can’t proceed until the owner has a good handle on value, and many of our conversations about establishing it naturally are with clients who are taking their first steps toward selling. But, we also urge clients who aren’t in selling mode to conduct valuation as a strategic exercise for sound financial management.
We tell our acquisition-minded clients that if they expect to borrow capital to finance the transaction, an up-to-date evaluation is something that the lender will almost certainly want to see. All of this explains why valuation is a topic of perennial interest. It’s something to think about — and to be prepared to do — at every stage of a printing company’s business life cycle.
A professionally conducted valuation identifies strengths that enhance marketability and weaknesses that could put a ceiling on selling price. When valuation is accurate, expectations are realistic, enabling both parties to find the straightest path to a mutually satisfying deal.
Most of the transactions we help our clients close are based on either of two kinds of valuation: multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) and net value of assets. We typically look at both possibilities, recommending the method that makes the most sense in the selling client’s circumstances.
In most cases, the preferred method will be multiple of EBITDA. Companies that are profitable, technologically progressive, and active in growing markets possess the kinds of EBITDA value that attract buyers’ attention and raise selling price. To a buyer, a valuation that supports a high multiple is a signal that the seller is on firm ground financially and can anticipate equally solid future growth.
In general, we are seeing higher EBITDA multiples for sellers that we did a few years ago, but the advantage isn’t distributed equally.
Because growth potential is always uppermost in buyers’ minds, packaging printers are likely to command larger multiples than commercial printers. Capabilities count as well. Companies that have invested in technologies like digital printing, wide-format output, and Web-to-print e-commerce are likely to get a bigger EBITDA bump than companies rooted strictly in conventional production.
Then there is size. Generally speaking, the greater the EBITDA value in dollars, the stronger the appeal of the deal and higher the multiple it can justify. This tends to increase multiples for large firms — those that can show EBITDA values of $10 million or more.
EBITDA-based valuation is always desirable, but it has its subtleties. For example, a company attempting to buy a company with a higher EBITDA multiple than its own may be creating a situation that will fail to increase shareholder value in the combined entity — another indication of why accurate valuation is not just for sellers only.
Net value of assets usually is reserved for companies that are not profitable or have come to the end of the road in terms of growth. It is the method most commonly used for tuck-ins: a buyer’s purchase of the seller’s active accounts (and possibly other assets) with a payout over time to the seller (as opposed to cash paid at closing).
Here, we appraise everything that represents value: accounts receivable, inventory, plant and equipment, and goodwill. Performing valuation this way establishes a credible selling price and, for firms that have run out of options, provides a less painful alternative to liquidating assets and closing the doors.
A printing business that has not carried out a valuation within the last 12 months — or has never done one at all — is overdue for the exercise. In the printing industry today, every company is an M&A candidate, and opportunities to buy or sell can arise at any time.
This means that it’s critical to be able to identify factors that increase or depress business value. Pluses that a valuation will highlight include:
- solid business plan
- profitable revenue growth
- strong cash position; good quarterly cash generation
- high EBITDA; little debt
- horizontal and vertical market penetration, especially in fast-growing markets such as digital color, wide-format, digital books and photo products
- high-growth customers and a strong prospect list
- capable management team
Factors that hurt valuation are:
- no revenue growth, or, worse, declining revenue
- low or negative profit
- account concentration: high percentage of revenue coming from one customer or a few customers
- weak management team
- inadequate management processes
Once all of the positives and negatives are on the table, the next step is to eliminate or at least minimize whatever hurts valuation and to maximize whatever helps it. Owners with no immediate M&A ambitions can meld these goals into existing business plans and set timelines for their accomplishment. The more closely a business corresponds to the checklist of pluses for valuation, the better prepared it will be to take advantage of the M&A opportunities coming its way.
Again, valuation needs to become a recurring business event — something that happens on a regular schedule (we recommend that it be done annually) according to a formal set of procedures. It should be carried out by professionals who are familiar not only with the relevant rules of accounting but also with the trade customs of the printing industry and the mindsets of its owners.
New Direction Partners has performed more valuations in the printing industry than any other consultancy. This has given us a deep and continuously updated insight into what creates business value and what detracts from it. The experience also has shown us how much peace of mind printing company owners can gain from the knowledge that a correctly done valuation imparts.
We’re happy to keep talking about valuation with anyone who will listen — a definition that we think should apply to everyone who owns a printing business.
Frank D. Steenburgh, partner at New Direction Partners, brings over 45 years of industry experience, including the past 30 years in digital and is internationally recognized as an expert in digital printing and publishing. His experience includes corporate officer at Xerox and president of Indigo’s Americas operations. Frank’s value includes a wealth of global industry contacts, a proven track record in development and implementation of business strategies that drive revenue/profit growth and a deep understanding of horizontal and vertical markets. Contact him at (610) 230-0635, ext. 709.
Thomas J. Williams is a partner 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 more than 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, email firstname.lastname@example.org