Reijmer and Russell on M&A Directions: Pick Optimism Over Euphoria
As businesspeople, we always try to base our decisions on facts, numbers and logic. But, as ordinary humans, we also operate on emotion and instinct. In the year we’ve just entered, we should have plenty of opportunity to display both kinds of behavior.
On the whole, 2017 is shaping up as an encouraging time for business. Many owners think, or at least hope, that having a new administration in Washington will mean fewer regulations, more tax breaks and a friendlier climate for expansion. There’s a renewed sense of confidence and, along with it, a greater willingness to take entrepreneurial risks.
The tenor of M&A activity in our industry reflects the upbeat general mood. A good indicator not only of how the industry feels about itself, but also of how it is perceived by outsiders, is the continued participation of private equity investors as buyers of printing and packaging companies. About half of the transactions we closed last year involved private equity capital — proof that the industry has returned to favor among financiers seeking solid investment opportunities.
Printers are buying other printers at a healthy clip as well. We see more openness by larger firms — those in the $10 million to $30 million range — to grow by acquisition. They know that even in an improving economic climate, it is still easier to grow this way than to cultivate organic growth.
The beneficiaries are owners of well-run $2 million to $5 million shops who agree to be acquired by these eager buyers in transactions structured as tuck-ins. A few years ago, a payout of 5% of retained sales for three years was typical. Now, tuck-in sellers with the strongest lists of accounts and/or the kinds of diversified capabilities buyers want may be able to get 6% to 8% over four years. Everybody wins, and everybody smiles.
We’re all in favor of whatever lifts printers’ morale and convinces them to stay in the game. Last year, an owner we know was close to throwing in the towel. Then, his fortunes turned around. He recaptured a major account that he was on the brink of losing, and he persuaded several key salespeople to stay. Now he’s full of optimism about taking his business to the next stage in a future that looks considerably brighter than it used to.
Optimism is like oxygen for business owners. Without it, they wouldn’t be motivated to invest in capital equipment or to pursue new markets. It’s when optimism begins to shade into euphoria that a dose of reality is called for.
Unbridled optimism may feel good personally, but it’s seldom a sound business strategy. From time to time, for example, we have to moderate sellers’ expectations about the offers their companies are likely to attract from buyers.
Consider how sellers have reacted to stories about EBITDA multiples for earnings-based transactions. It’s true that they are trending up, and the buzz about it naturally excites people. Not everyone understands, though, that the highest multiples are to be found only in certain market segments and that only a few companies — usually large and those with a unique niche — manage to achieve them. In the M&A marketplace, as in the economy as a whole, a bright picture can be brighter in some spots than in others.
Growth-promoting economic conditions are good news for all printers, but they can be ambiguous in their effects on M&A decision-making. On the one hand, printers who feel more confident about their business outlook become more comfortable with the idea of growing by acquisition, and this is the mindset we want these prospective buyers to be in.
Owners who have been thinking about selling, on the other hand, may take an upturn as an excuse to shelve those plans in anticipation of growth that either will or will not materialize. This is a mistake, as the most auspicious time to sell a company is when its business is stable and its owner isn’t relying on guesswork.
The most productive way to be optimistic is to channel that upbeat energy into strategic planning. Every owner can take steps to prepare the business for sale or to position it for a future that includes growth by acquisition. Even if closing a deal is not the immediate objective, the business will be in better shape for one when the moment arrives. We recommend that owners:
• Invest in technologies and business processes that make customers “stickier”: less prone to defect to lower-priced competition. Printers build loyalty by making it easier for clients to do business with them and by providing one-stop-shopping convenience.
Personalized digital storefronts for e-commerce are sticky. So are kitting and fulfillment. Stickiest of all are plants that function as full-service agencies for creative and marketing support, offering design, data analytics and other kinds of expertise that customers are delighted to find available where they buy their printing.
• Update management information systems and workflow software. It’s difficult to stay competitive nowadays without MIS and workflow assets for tracking costs and analyzing productivity. What can’t be measured can’t be managed, and what can’t be managed inevitably drains profit.
• Clean up the balance sheet. This is good advice for all seasons. Items to settle or eliminate include loans made to individuals; accounts receivable that can’t realistically be collected; and aging inventory. It’s better to take these things off the books now than to have them there when a potential buyer examines the company’s finances.
• Attend to family matters. Owners of family businesses should be thinking about estate and succession planning in the context of selling the firm or buying another company. Compensation to family members who are not providing value to the business may need to be reconsidered.
All of these steps take time to carry out, so the sooner they’re embarked upon, the better. Don’t take them alone — seek guidance from professionals who specialize in planning and executing M&As for printing and packaging companies.
Optimism is contagious, and it’s a good thing to catch. Medical science tells us that people who are optimistic live longer and healthier lives than people who aren’t. Optimism, combined with sound business strategy, is just what the doctor ordered for individual firms and the industry at large. Go where the feeling takes you — but always let common sense and best practices do the navigating.
About the Authors
Albert Reijmer and James Russell 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.