Succession Planning: Where Do Printers Stand?
The stark truth is that the most important business transaction printing company owners likely will have to make is the one for which they’re least prepared.
This consists of exiting the business by handing off ownership to a successor: an inevitable responsibility that many owners of closely held, small- to medium-sized commercial printing firms either haven’t adequately planned for; or, in some cases, can’t bring themselves to deal with at all.
Lack of succession planning is “almost ubiquitous in that segment of the market,” declares Mark Hahn, senior managing director of Graphic Arts Advisors. So is procrastination. Hahn says that his consultancy often gets inquiries from owners in their late 70s and even their 80s who are only now trying to decide what to do next.
Unaware of their options, “they don’t want to talk about it, oftentimes,” agrees Mike Philie, principal of the PHILIEGroup and a strategic planning counselor to the graphic communications industry. He adds that coming to the end stage can be especially tough for owners whose sole source of retirement income will be the proceeds of the sale.
Owners of printing companies aren’t alone in dropping the ball when it comes to succession planning. John Dini, president of MPN Inc., says surveys indicate that three-quarters of business owners aged 55 and older “have no written documentation whatsoever for dealing with exiting.”
A Burden to Bear for Baby Boomers
Self-made members of this age group “identify with material success and possessions a lot more than the generations before or after them,” contends Dini, author of the book “Your Exit Map: Navigating the Boomer Bust.” The prospect of life after ownership thus turns into “a real psychological burden” that many of these aging entrepreneurs don’t know how to handle.
But, prospective sellers — meaning virtually everyone who currently owns a printing business — can avoid the burden with the help of a realistic attitude, an amply-timed exit window, and an understanding that, as Dini says, “your exit can be a lot of different things.”
The most widely used exit strategies are the sale of the business to a new owner as a going concern; acquisition by private equity (PE) investors; and transfer of selected assets by tuck-in. Some selling owners have done well with Employee Stock Ownership Plans (ESOPs) that rewarded them with cash compensation and their workers with additional retirement income. Still, others have gone the route of being acquired and rebranded by operators of franchise print networks.
No matter what form it takes, a succession of ownership truly pays off when it accomplishes everything that both parties to the transaction want it to accomplish. This was the outcome for Bill Blechta and Michael Kisha in Blechta’s sale of Sun Graphic Technologies to Kisha at the beginning of the year.
Blechta says that in selling the signage and display graphics company he and his father started in Sarasota, Fla., in 1976, his main objective was to “have the business continue as it was” with the jobs of its 23 employees preserved.
Peers in a CEO roundtable group who advised him on planning an exit strategy, urged him to take as much lead time as he would need. An industry friend connected him with New Direction Partners, a consultancy that facilitates mergers and acquisitions among printing and packaging companies.
Valuation Dollars Didn’t Disappoint
With three- and five-year plans in place, and a full business evaluation already performed, Blechta’s company was better positioned for sale than many others of its kind. This meant, he says, that “I didn’t have any sticker shock” when New Direction Partners conducted its own valuation, which came very close to Blechta’s numbers.
All of this pleased Kisha, a former Avery Dennison executive who has a master’s degree in finance and 21 years as a CFO. He says that when New Direction Partners proposed Sun Graphic Technologies as a candidate for the first-time acquisition he wanted to make, “I was comfortable with the soundness of the business. The financials were good.”
Kisha was just as impressed with Blechta’s staff, whom he found to be seasoned, reliable, and extremely capable. “I could close my eyes, and I knew they would get the job done,” he says.
Blechta will be part of the team a while longer as he works in a part-time transitional role, introducing clients and suppliers to the company’s new person in charge. Both he and Kisha say the passage of ownership is going well, and they’re both complimentary of the assistance they received from New Direction Partners.
The moral of the story is that acquisition as a going concern, with the original business intact, is possible — if the business has the attributes that position it for this kind of succession.
According to Paul Reilly, a founding partner of New Direction Partners, these include demonstrable top- and bottom-line growth; competitive critical mass in a market or a territory; a high-value, non-commoditized portfolio of products and services; and an account list that isn’t heavily concentrated in a small number of customers.
These traits are also green lights to private equity investors: financiers with capital to inject into enterprises they believe will produce reliable returns on the money they put in.
One reason that printing and packaging companies appeal to private equity, according to Reilly, is that their EBITDA multiples (a key determinant of purchase price) tend to be lower than those of other industries. Low-cost bank financing, strong receivables, and collateral to borrow against are other deal-sweeteners that PE players have discovered in printing and packaging businesses, Reilly says.
‘Platform’ Location Is in the Catbird Seat
A standard approach for PE investment is to acquire one company as a “platform” and then to surround it with the assets of other acquired companies. The main benefit for a printing business acquired as a platform, Reilly notes, is that “the legacy and culture of your business will carry on. They’re not about to shut you down.”
But this is contingent upon having a fully qualified management team in place at the time of the acquisition. “Private equity investors don’t want to run the business themselves,” Reilly counsels. “They want somebody else to run the business for them.”
Owners of businesses that aren’t candidates for continued operation still have an option for succession in a tuck-in. In this type of acquisition, the buyer acquires the seller’s active accounts and pays the seller over time on the basis of the accounts’ future performance. Plant, equipment, and personnel may be, but aren’t necessarily, parts of the deal.
Hahn notes that three-quarters of the commercial printing acquisitions he chronicles in Graphic Arts Advisors’ deal bulletin, “The Target Report,” are structured as tuck-ins. He urges printers to be open-minded about using them as an exit strategy.
Hahn says owners of commercial printing companies must ask, “Is it realistic and desirable for the company to continue as-is, where-is? You may get more value from the sale if your company is properly tucked into another company.”
One way to extend the life of a business without putting it up for conventional sale is to engineer its succession through an ESOP, an arrangement that pays off the departing owner as it accrues retirement benefits for shareholding employees.
According to The National Center for Employee Ownership (NCEO), about 6,600 ESOPs covering 14 million employees were active in the U.S. in 2019, with the highest percentage (22%) concentrated in manufacturing. Loren Rodgers, NCEO’s executive director, says ESOPs appeal to owners seeking successors “who will protect the legacy and the workforce, not just the customer list and the intellectual property.”
In an ESOP, the company sets up a trust fund that buys or creates shares it then allocates to individual employees, who sell them back to the ESOP upon retiring or leaving the company. The tax-advantaged ESOP may or may not use bank loans to meet its financial obligations, which include compensating the owner for his or her shares.
Not Under New Management
Important to understand, says Rodgers, is that an ESOP is primarily a retirement vehicle, and that the complex rules surrounding it have mostly to do with protecting plan participants — they don’t change the management structure or the governance of the company. As shareholders, employees would have to be consulted in the event of a merger or a sale, but not in everyday decisions.
Rodgers also points out that an ESOP is a much more flexible way to transfer ownership than selling outright to a conventional buyer who’ll likely want to take full possession at closing. The ESOP does not have to transfer 100% of shares to employees (although the single largest percentage of them do), and the execution of the plan, including payment to the owner, can be spread out over time.
All of this encouraged Amy Tardiff and her family as they created the ESOP that has been in place at J.S. McCarthy Printers in Augusta, Maine, since Sept. 1, 2019. Tardiff, the company’s VP and general counsel, says the family added it to an existing, employer-matched 401(k) as “one more door open to our employees to continue saving for retirement.”
She notes that because 100% of J.S. McCarthy stock is being transferred to employees, the company’s future revenues will be fully exempt from federal and state taxes — a savings that, combined with company profit, funds the ESOP. Employees, likewise, enjoy the same kinds of personal tax breaks on their shares that they get with their 401(k) contributions.
But the greatest benefit, according to Tardiff, is how the ESOP turns employees from workers into stakeholders. Now, she says, the company consists of “200 people who come to work every day and think like an owner. They have skin in the game.” Motivated by this collective sense of ownership, “they really can effect change.”
J.S. McCarthy has been doing business in Augusta as one of New England’s leading sheetfed plants for more than 70 years, and the ESOP, adds Tardiff, lets the company preserve its location and traditions. “You can’t promise the future of the business as it stands” in other types of ownership succession, she observes.
Is It Wise to Franchise?
Continuation in situ is one option for independently-owned printing businesses that become parts of franchise printing networks such as AlphaGraphics and Alliance Franchise Brands, each of which has an acquisition program aimed at the commercial printing segment.
Both franchisors, for example, look for companies to acquire either by rebranding them and keeping them in operation under their present owners; or by merging them with existing franchisees who want to expand. Both also acquire by tuck-in.
Bill McPherson, VP of franchise development for AlphaGraphics, says the network has absorbed 125 independents in these ways, concentrating on six regional markets where AlphaGraphics has a strong brand presence.
Alliance Franchise Brands has made about 275 acquisitions for its various brands during the life of its program, according to Kevin Cushing, president of the network’s brands marketing and print division.
“We actively nurture succession planning thinking in our owners,” says Cushing, in part by encouraging them to develop friendly relationships with local competitors who might one day be candidates for acquisition. He adds that, by “marketing softly” to these prospects, Alliance tries to build up a level of trust that will win them over to the brand.
Owners who stay on as rebranded franchisees can do so with a view to selling and exiting later on — a strategy that both AlphaGraphics and Alliance endorse.
McPherson notes that 30% to 40% of owners who have become AlphaGraphics franchisees are working within a five- to
seven-year window to grow their revenues and profits in anticipation of a sale. When this happens, he says, they’ll sell at a higher multiple of EBITDA as AlphaGraphics businesses than they would have as independents, thanks to the improvements they’ll have made by converting to the network.
A program for the Allegra division of Alliance similarly permits franchisees to exit ownership after a specified period of time. A buyer won’t have to “squint hard” to see all the value that a formerly independent company has added as an Allegra franchise, Cushing declares.
The value an owner receives in a sale of any type is the value that she or he has created for the business — and, ideally, has striven to maximize as the time for succession approaches. Hahn says that Graphic Arts Advisors has identified 14 key factors that strengthen valuation, improve selling price, and often lead to a better transaction structure for the seller (see fact box below).
Brought to You by the Letter ‘E’
According to Dini, building value comes down to doing “the same things you should be doing every day” to maintain profitability, with clean financials and documented processes. Philie similarly counsels owners to “make sure there’s a lot of ‘E’ in EBITDA” (earnings).
Rod Bristol, director at Graphic Arts Advisors and a former printing company owner, emphasizes that the “E” ingredient is what primarily determines selling price.
He says valuation for sale “has very little to do any more with what the business owns. All that matters is what it earns, based on profitability.” A seller’s notion of what the business is worth may not be the same as what an earnings-focused buyer is willing to offer, Bristol adds.
As succession nears, sellers should also reevaluate their roles as managers. Philie points out that preparing for a sale is less about working “in” the business than working “on” it: stepping back from the day-to-day operational details and thinking in big-
picture terms about the future of the business as a whole.
The planning should include equipping people for leadership once the owner has moved on — something else that factors into the determination of value. “There is so much institutional knowledge that needs to be transferred” when the main repository of that knowledge departs, Philie observes.
Start the Clock Early
Sellers who fail to share what they know will pay for withholding it, according to Dini, who calls “owner-centricity” the biggest obstacle after lack of profitability to getting an acceptable offer from a buyer.
Once everything is correctly aligned, a sale can happen quickly — but quick sales are exceptions to the general rule. Bristol says it can take two to three years to maximize value in order to prepare a company for sale, at which point “the sometimes arduous marketing process” of finding a buyer begins.
Hahn adds that if a company is “treading water” because of weak financial performance, “time very often is not on the owner’s side.” Firms in these straits, he advises, should proceed to an organized, proactive sale process before their difficulties make selling harder to accomplish.
“Time often erodes the value of the customer base more quickly than owners expect,” Hahn warns.
Good communication is essential in all phases of business management, but never more so than when a sale is in progress. Once there is a clear plan, advises Dini, “don’t keep it a big, dark secret” from employees. “They think you’re going to be here forever.” What they need, he says, is straight talk about the future of the company and the outlook for their jobs.
Hardly 'Grandfathered in'
In fact, playing too close to the vest may be the most damaging mistake a seller could make. Bristol tells the story of an owner who concealed his intentions from his son, a key VP of the company, until the very last moment. When the son finally uncovered the truth, Bristol says, “that was the last time his father ever saw his grandchildren again.”
The fact of business life forgotten here, Bristol comments, is that in family-owned businesses, relationships among family members “are as important as the numbers.”
Finally, succession planners should remember to expect the unexpected, and prepare for it.
“Have a plan or two in place,” advises Philie; a primary plan A, and a contingency plan B to “keep under the blotter” for when something happens to force the seller’s hand. The “triggering event” could be a spousal illness, a family issue, or some other crisis that obliges the seller to abruptly change course.
Revisit and revise the blotter plan to make sure it covers all of the bases, Philie urges. If something triggers the need for a sudden response, “it’s not something you want to have to do in an afternoon.”