As the World Turns
Cycles in print markets—and in the economy as a whole—can play heavily in sellers’ and buyers’ decisions to move forward with M&A transactions. That may just be a case of stating the obvious, but it’s still helpful to review why these cycles occur and what they imply for dealmaking strategies.
Right now, we’re in the midst of a cycle that should bring a smile to the face of almost any printer with a company to sell. A good percentage of printers are reporting that their business has stabilized or is growing—trends that attract more buyers and promote increased acquisition activity. Because organic growth in the print industry, especially in general commercial print (remains very difficult to come by), acquisitions have proven to be the most effective way to grow sales or to replace sales lost in the 2008-2010 downturn.
The cost of money (interest rates) remains incredibly low, spurring the return of private equity groups to the printing industry after a five-year absence. These investors are now feeling motivated due to improvement in the financial condition of the industry and because there is an abundance of available investment capital that represents the pent-up demand from the recessionary years. Previously, most private equity was only interested in larger transactions (those with $3 million or more in EBITDA). But, with all the investment capital they now have to play with, the PE firms are looking at much smaller companies as well.
M&As are also getting a boost from the participation of a branch of the private equity industry known as "family offices." These are high net-worth individuals and families who like to make professionally managed investments in companies for the long haul, often for much greater periods of time than standard PE firms. Some family offices have been known to invest indefinitely as long as their returns remain favorable.
It’s all very encouraging. However, the nature of cycles is that their high points and good times don’t last. When interest rates rise, as is currently being forecasted, acquisition activity will lessen because financing will have become more expensive. Even a 1 percent to 2 percent increase will dramatically decrease buyer activity. These cycles typically last five to eight years. The previous peak was in 2008.
Another recent report cited what will happen as business owners from the Baby Boomer generation (people born between 1946 and 1964) desire or feel the need to liquidate ownership. You have only to look around our industry to see that there are a lot of owners in this age group. According to the U.S. Census Bureau, about 8,000 Baby Boomers will be turning 65 every day for the next 15 years.
Now couple that demographic landslide with the fact that 70 percent of all companies with more than one person on the payroll are owned by people over 53 years old: 4.2 million businesses in all. If all owners 53 and older were to rely on selling their companies to fund retirement and other expenses, the amount of capital required—estimated to exceed $10 trillion—would easily exceed the funding available to close all of those transactions.
There is currently about $535 billion available to acquire businesses—nowhere near the amount of equity needed to fund even 10 percent of the companies that could be up for sale. Even if additional investment capital becomes available, the volume of supply (the number of companies looking to sell) will considerably lessen seller value.
There will also be competition for capital from other companies wishing to fund internal growth initiatives. Limited or reduced funding opportunities will reduce the number of buyers, and those buyers will need to be very selective. Only the most attractive deals will get done, and likely for reduced values/EBITDA multiples.
We may be in a seller’s market now, but that can and will change with time. It always does. As with almost everything else in life and business, timing can make all of the difference in the degree of success you will achieve in a sell transaction.
For many owners, selling a company is a very emotional experience that breeds procrastination and keeps the process from getting started. You may want to wait, but the cycles won’t wait for you. Act while they’re still in your favor so that you receive the value you deserve for your lifetime of effort as the proud owner of a printing business.