Williams/Steenburgh on M&A Directions: Amount Sellers Earn in Tuck-ins
Tuck-ins aren't the only way to accomplish the sale of one printing business to another and, at New Direction Partners (NDP), we wouldn't recommend doing a deal in this manner if a different method promised a better outcome for the client. But, with M&A market conditions being what they are, a tuck-in very often is the best route to a clean acquisition for the buyer and a maximum payout for the seller. That's why it's important to understand how tuck-ins are structured and what enters into the arithmetic of compensating the seller.
Tuck-ins have become popular because many printing companies aren't good candidates for sale as going concerns and because, these days, many buyers simply aren't interested in acquiring other companies lock, stock and barrel. A seller who has failed to modernize or specialize doesn't give a buyer much reason to want to absorb his outmoded plant and equipment. The buyer, in any case, may be aiming only at adding sales volume, not at expanding manufacturing capacity. The disconnect between the two sets of objectives tends to rule out the wholesale transfer of assets that would occur in a sale as a going concern.
A tuck-in solves the problem by conveying only the seller's book of sales to the buyer, who then gradually compensates the seller according to a formula based on what those accounts produce over a specified period of time. The M&A advisor who helps the seller set up the tuck-in also can assist with liquidating physical assets that the buyer doesn't want—a source of cash for the seller in what otherwise may be a cashless initial transaction.
We say "cashless" and "initial" because tuck-ins may not include up-front payments to the seller. Payout is predicated upon retained sales volume from the acquired accounts, and the future performance of these accounts obviously can't be foreseen at the time the deal is closed. The buyer also will be wary of concentration—individual accounts representing very large percentages of the book of business as a whole.
The risk of losing an acquired customer that produces 40 percent, say, of the seller's volume explains the buyer's reluctance to prepay in cash. Concentration may be less of an issue if the big accounts remain contractually bound to the seller in the event of the seller's acquisition by another company. In a few cases, NDP has been able to craft deals that include contracts requiring the highly concentrated accounts to do business with the new account owner (i.e., the buyer) for a mutually agreed-to term.
Once these details have been addressed, buyer and seller can proceed to negotiate how much the buyer will receive in contingent payments and on what schedule the payments will be made. While there are no universal formulas for tuck-ins, the basic rules are straightforward and common to most deals. Payouts typically take place over three to five years based either upon a percentage of retained sales, which could mean new sales volume (as opposed to current level of sales) from these accounts; or upon a percentage of value added (selling price minus cost of sales).
The Cost of Cost
Sellers should understand that during due diligence—the investigative phase in which buyers and their M&A advisors scrutinize every facet of what is being put up for sale—differences between the seller's and the buyer's respective cost structures will have a strong bearing on the calculation of payout. Looking carefully at each account, the buyer will price the book of business as if it were being produced in the buyer's plant at the buyer's cost. This tells the buyer whether the work can be produced profitably in the new environment and, if so, at what margin.
It's good news for the seller with a gross margin of 30 percent when the buyer determines that he will be able to produce the acquired work at a gross margin of 35 percent—this underscores the value of the work and the validity of the payout percentage the buyer hopes to get. If, on the other hand, the buyer finds that the seller has been giving the work away at unrealistically low prices and margins, the seller's bargaining position will be weaker. (As a footnote here, sheetfed work will yield a better percentage than web work and color will yield a better percentage than b&w, since margins on sheetfed and color tend to be higher.)
When all of the specifics are in place, the deal is ready to sign. With the caveat, again, that every deal is different, most tuck-in sellers with desirable books of business can expect to be paid from 3 percent to 7 percent of retained sales over three to five years. Some transactions may specify a dollar-amount cap on total payments to the seller during the payout period. Payments may be made annually, semi-annually or quarterly. Payments made quarterly usually commence at the end of the first full quarter after the deal is closed.
Buyer Be Wise
Sellers, then, have a lot to think about as they contemplate acquisition by tuck-in. So do buyers. As this discussion should make plain, successful tuck-ins are the products of deep research and intensive negotiations—activities that no buyer should undertake without good M&A advisement.
If the owner whose book of business the buyer wants to acquire is a direct competitor, that seller could go into lockdown mode at the first hint of an expression of interest from a rival. In many cases, the most desirable targets may be firms that aren't even on the market: owned by printers for whom being acquired is the farthest thing from their minds. It takes a skilled intermediary to break the ice, overcome the objections and frame the tuck-in as a winning proposition for both sides. No less crucial is the M&A advisor's role in buffering emotions and protecting confidentiality while sensitive discussions are in progress.
It's likely that from now on, organic growth is going to be difficult for most printing companies. The opportunity to grow by acquisition still exists, but not necessarily in the ways that were the norm when the industry consisted of two or three times as many firms as it does now. Tuck-ins are an adaptive response to profound changes in the M&A landscape—and, when managed properly, the key to enabling serious buyers and sellers to get what they want. PI
About the Authors
Thomas Williams and Frank Steenburgh 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, firstname.lastname@example.org