Russell/Schaefer | M&A Directions: Keys to Your Succession Plan
Do you, as the owner of a printing business, have a plan for no longer being the owner of that business?
If it’s a question that you have put off dealing with, you have company. Sixty-nine percent of those who attended our recent webinar on succession planning told us that they hadn’t yet taken their first steps toward what we like to call “the walk on the beach:” the point where owners put ownership behind them and move on to whatever life holds in store for them next.
Reaching the beach takes time — more than many owners realize. It requires a thorough understanding of what “succession” means and how planning for it — or failing to — affects the valuation of the business and the payout to the owner at the closing of the sale.
Traditionally, succession was understood to mean the transfer of ownership and management from one generation to the next. This kind of succession still takes place in the printing industry, but transfers increasingly occur between owners and buyers with whom the sellers have no family ties or even personal acquaintance. These successions aren’t bequests — they’re business transactions, and they’re seldom simple to execute.
Often Requires a Post-Sale Commitment
The first fact to appreciate is that closing a transaction does not end the owner’s involvement with the company that he or she has just sold. The new owner, wanting a smooth transition, probably will expect the former owner to stay on in an executive role until the handoff is complete. Budget six to 24 months for this post-closing process to take place — six to 24 months before you can finally get to the beach.
Continuing to build the timeline backwards, figure another six to 12 months to structure, negotiate and close the transaction. Preceding this is the time it takes to prepare the company for sale. Depending on the shape the business is in, this stage could take as long as three years to execute correctly.
In deals where things can happen quickly, the time frame is shorter. All told, we are looking at a sequence of events that either brings the seller to the beach in as little as 15 months or stretches the trip out to as long as six years.
This is why we counsel every owner to begin planning for succession now, even if a final decision to sell hasn’t yet been made. Succession planning is largely about maximizing the value of the business in preparation for a sale. Failing to allow enough time to do it can make selling a frustrating and agonizing experience for owners discovering that what they thought they would get is far from what the market is willing to pay.
There are no bad reasons to sell a company, and even for owners in difficult circumstances, there are almost always alternatives to throwing in the towel and shutting the door. Selling is the usual route to transferring ownership, but a business can also be donated to charity, gifted to family members, or sold to some or all employees. When it comes to motives and methods, no one size fits all.
But, since selling to another business is what most owners will think of as a departure strategy, it’s important to point out that succession planning in advance of a sale has two parts. You need both a replacement plan and an exit plan. The first identifies candidates to take over your role as the leader of the business. In the second, you look at the options for replacing yourself as a shareholder of the firm — in others words, the terms on which you want to be compensated for conveying the business to a new owner.
Groom a ‘Leader’ to Be Your Successor
No buyer wants to acquire a rudderless business, so be objective about picking the leader who will succeed you. Without such a person in place, you remain essential to the orderly operation of the business — a spot you don’t want to be stuck in on your way to the beach. Seeing no one to fill your shoes, the new owner will want you to stay at the helm that much longer. A perceived gap in leadership could depress the selling price, as well.
As for exit planning, here you must ask yourself whether you really know what you want to do once you are out of the day-to-day running of the company; and whether you will have the resources to accomplish your post-sale objectives. In all of your succession planning, be open about your intentions (taking care to share sensitive information with key employees only). Giving those who will remain behind the best chance of success under new ownership is your responsibility — a vital part of your job.
Valuation aims at establishing what your company realistically is worth today and what its sale will contribute to helping you accomplish the goals you identified in your exit planning. The methods most commonly used to arrive at a selling price are a multiple of EBITDA (earnings before interest, taxation, depreciation and amortization); liquidation and earn-out value; and the market asset approach (the formula for tuck-ins).
However it is calculated, valuation has quantitative and qualitative factors as influencers. Quantitative factors drive the estimate; qualitative factors modify it positively or negatively. Shaping these factors in the seller’s favor is the essence of the financial part of succession planning
Strong earnings, sustained top and bottom line growth, and well-managed debt are good qualitative factors to have. If we had to pick one as the key influencer, it would be growth — this is what private equity investors prioritize in targeting printing firms for acquisition. Measurable growth can add from 0.75 to 1.25 points to the EBITDA multiplier in that type of valuation.
Today, growth comes chiefly from being in high-growth markets: digital printing, packaging, direct mail, marketing services, wide-format output, retail POP, and Web-to-print or proprietary interface solutions that make customers “stickier.” Weaker growth occurs in traditional markets such as general commercial and publication printing.
Qualitative factors can be plusses or minuses. The favorable ones are outcomes of good management: for example, up-to-date technology, better than average margins and a strong workplace culture. In contrast, businesses with high customer concentration (a few accounts producing a disproportionate share of sales), unionized workforces and performance swings are qualitatively less attractive to buyers.
Even if you are not now planning to sell, performing a valuation and updating it annually gives you an extremely useful insight into what your management decisions have been doing to drive growth and add value. You will be in a better position to begin maximizing value once you have decided to begin walking that path to the beach.
Given the months or years that the journey could take, timing is everything. You would want to avoid, for example, attempting to sell in the middle of an investment cycle, i.e., just after you have bought a big, expensive new press that you now have to pay down. But it also means getting started ASAP on the tasks that will position your business as a smart play for buyers when they come calling.
Do everything you can to get your EBITDA up and your debt down. Settle any lingering issues related to real estate or union plans. If voting control is shared, identify and resolve conflicting objectives that could get in the way of a sale.
Manage the timing of technology investments, and get busy on appointing your replacement. Look at your business through a buyer’s eyes and ask yourself what problems you would want the seller to fix. Then, fix them. During the transition phase, reward your key managers for the help they have given in bringing the sale to conclusion.
We can’t overemphasize how important it is to rely on professional advisement as you make your way to the beach. You still have a business to run, and the process of transferring ownership of it is complex and extremely time-consuming. For sellers, third-party expertise is the difference between walking away satisfied and leaving money on the table. Make use of this invaluable advice at every stage of the journey.
As an owner, you have always regarded securing the future of your business as job No. 1. It’s no different at the end stage — your stakeholders, clients and employees are still depending on you to make the right decisions. Make them with both their and your interests in mind. Then you’ll be able to spell the “success” in succession planning in big, bright capital letters.
About the Authors
James Russell 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, email firstname.lastname@example.org
James A. Russell, partner at New Direction Partners, brings over 20 years of experience as a printing company executive having served as CEO of two family-owned graphic communication companies. During his tenure as owner and CEO of Arbor Press, a commercial printing company in Michigan, the company was an eight-time winner of the National Association for Printing Leadership’s (NAPL) prestigious Management Plus Awards program. Arbor Press was also recognized twice during his leadership as one of the 50 fastest growing printers in the country. Contact him at (610) 230-0635, ext. 703.
Peter Schaefer, partner at New Direction Partners, is an experienced dealmaker with more than 25 years of investment banking and valuation experience, 20 of which has been focused exclusively on the printing and packaging industries. He has closed more than one hundred transactions in virtually every segment of the printing and packaging industries. In addition, he has performed hundreds of valuations for ESOPs, estate and gift tax planning and strategic planning purposes. Contact him at (610) 230-0635, ext. 701.