Money: Easier to Get for Printing Companies as Financing Picture is Brighter
If there has been one theme running without a letup through the printing industry's valiant efforts to rebuild itself financially over the last seven years, it has been the difficulty of borrowing the money needed to do the rebuilding. Fortunately, the difficulty is beginning to ease—but it has been a long, hard road back to the availability of investment capital for printing businesses.
Banks base loans to printers primarily on the value of their current assets. Until recently, the aging machinery and overcapacity that bankers saw almost everywhere they looked raised red flags when it came to financing. Private equity investors showed even more reluctance to engage with the industry. The result was a climate in which borrowing for capital investment was difficult and borrowing to finance acquisitions was next to impossible for many firms.
Today, as the recession fades and the printing companies left standing are regaining their momentum, the financing picture is brighter. Banks have loosened the purse strings, and we're also seeing significant interest on the part of private equity players who either didn't exist or who weren't being heard from at the bottom of the downturn.
Meet the New Crop of Investors
Although this is good news for the industry as a whole, some types of businesses will fare better than others in their quests for capital. Private equity investors—who, unlike banks, become owners of the companies into which they put money—want firms with niches or specialties that mark them as progressive print service providers.
Packaging companies and digital printers fit this definition; so do wide-format shops and plants with e-commerce portals that keep their customers "sticky." General commercial printers aren't nearly as attractive to private players, although they may still have a shot at securing financing from banks.
Who are these private equity lenders? They can range from giants like Bain Capital to wealthy individuals who piled up cash while they sat on the sidelines waiting for suitable investment opportunities. Lately, we've seen the rise of small, regional private equity firms whose holdings may be limited to a handful of companies. Their interest tends to be in businesses generating $10 million to $50 million in sales. Because they're localized, some of them like investment candidates they can drive to—companies just a few hours up the road from the home base.
At New Direction Partners, we've been in negotiations with a number of these small players on behalf of our clients over the last few months. Our impression of them is encouraging. Although they're recent entrants (one of them is working with us on what would be only its second acquisition), we've found them to be solid in their finances and professional in their conduct. The people in charge of these companies often are veterans of large private equity firms who know their way around valuation, due diligence and the other fundamentals of M&A investment.
The banks are lending by the same playbook that they've always used, but with more openness to proposals from printing firms and their M&A advisors. This summer, we helped a buyer purchase a firm for $3 million. He was able to secure $1.8 million worth of financing from the bank. Having added enough of his own cash to make an upfront payment of 70 percent of the purchase price to the seller, our client is carrying a note for the remaining 30 percent.
A loan as favorably structured as this one would have been very tough to come by just a few years ago—especially in light of the fact that our client had no prior history of borrowing from the bank that provided the funds. In another deal we are completing, the bank's loan of 75 percent of the purchase price and the buyer's contribution of the remaining 25 percent will result in a 100 percent upfront payment to the seller. That's highly unusual even in good economic times, let alone in bad ones.
Still Not Giving It Away
What hasn't changed is the fact that banks generally lend against the value of borrower's equipment, not the value of the purchase price. This practice can constrain the amount of money the borrower ultimately will get. In both cases noted earlier, the banks required complete equipment appraisals and then based the loan amounts on the lowest of three tiers of valuation used for the purpose.
In descending order, they are fair market value, denoting the price obtainable by an owner of a going concern who is under no obligation to sell; orderly liquidation value, for the kind of pricing that would be seen in a voluntary, unpressured shutdown of the business; and forced liquidation value, representing the pricing that an owner would have to settle for in a closure under duress. There can be a dollar spread of as much as 40 percent among the three.
In the industry's heyday—we are talking about 10 years ago—loans based on fair market value of equipment weren't unheard of. Today, forced liquidation value is the yardstick. So, although the banks are lending more readily and more frequently to printers than they used to, the loan amounts are smaller. And, the banks continue to insist on thorough cash flow analysis to make certain that the borrower can handle repayment of the debt.
The term of the loan may be five years, seven years, or, in the case of a loan underwritten by the Small Business Administration, 10 years. Interest rates remain fairly attractive for borrowers, with banks typically offering half a point above prime, or 3 percent to 3.5 percent, on variable-rate loans and under 5 percent for fixed-rate lending. There usually isn't much difference between the rates available from banks and those coming from private lenders.
You May Be Pleasantly Surprised
More borrowing options exist now than was the case a few years ago. The best way to connect with them is to get expert advice from a source that knows the printing industry and its financing requirements. A qualified advisor can vet private equity lenders, streamline dealings with banks and generally make capital for equipment purchase or business acquisition more accessible. That way, you'll leave no money on tables you may not even have known were there. PI
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, e-mail 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.