Rock LaManna07.10.19
When you leave your car door ajar, the computerized voice says, “The door is open.” I can’t get that voice out of my head. For owners of well-run and profitable label and packaging companies – digital, flexo and even litho – the door is open.
It’s an optimal time to sell your business.
Business brokers and experts in the world of mergers and acquisitions rarely make declarative statements like that. There are just too many variables. Data from thousands of transactions inform valuation. Profitability and growth potential affect desirability. Market conditions and demand influence multiples.
Well-run companies with high margins that check all the boxes will generally command a higher multiple than those that starve the company to achieve profits. Every seller’s situation is unique, however, and we don’t like to raise expectations about price ranges and multiples.
That being said… the door is open.
WHO’S BUYING WHAT
What will the next three years (2020-2022) bring for buyers and sellers in the label and flexible packaging industry? Will the market continue to support high multiples? Will consolidation continue at the same pace?
I’m not going too far out on a limb when I say that money is flowing right now… and should continue to flow.
The economy is strong. Buyers are eager to invest.
Here are typical buyers who are actively hunting:
Owners of successful companies. They keep their eyes open for situations where they can acquire or tuck in a competitor or complementary business. They tend to buy and hold. I value these buyers in my network because they are not dabblers. They’ve been in the industry, and they know how to be profitable in all kinds of market conditions. These buyers will pursue targets in a hot market because sellers are curious and open to conversations about synergies.
Speaking of sellers’ curiosity driving activity, in a recent SGIA (Specialty Graphic Imaging Association) Research Report, more than a third of the companies surveyed on the topic of convergence in the printing industry reported being “curious about growing by M&A.” This page gives a summary of the reports: https://www.sgia.org/resources/research/2019-q1-summary-reports The study included data on the topics of industrial printing, decals/labels, industrial parts marking, and instrumentation/dials/overlays.
Financial buyers: These buyers are looking for a company in our sector to build and sell in three to five years because print is in favor. They may desire an invest-and-exit opportunity, where they provide a cash infusion and then, at an agreed-upon time, they exit with their profits. Or they may move from a minority to majority position, or even fully buy out the company.
Financial buyers have specific criteria for the types of print market deals they will consider. They may not have a graphic arts background but usually have business and investment experience. Often they need the experience of the seller’s CEO or COO. They may move swiftly in the early stages of the buy-sell courtship to see if there is a match. Once they have completed a purchase, they may bring in their own management team and merge operations into existing locations. Or, they may pursue deals where the selling owner will stay on in an operational role, either as an employee or investor. Private equity firms may desire to roll up many small to mid-cap companies in markets to gain economies of scale.
Deal seekers: When the market is strong and cash is available, distressed businesses are the least desirable to buyers. There simply is no reason to buy a company that is a high risk or requires bandwidth. In a boom market, distressed businesses sit on the sidelines until a deal seeker comes along.
Deal seekers like to acquire or partner with companies that have a platform they can leverage – market share, a good name, newer equipment, customer concentration (less than 20% of sales), technology, infrastructure, marketing, sales people, etc.
With any partnership or sales agreement, protect your interests and pay for expert legal advice.
HOW CAN TODAY’S SELLERS COMMAND TOP DOLLAR?
In each of these situations, sellers need experienced industry advisors to look out for their interests.
It’s critical to value the business properly and not rely on any valuations that are more than a year old or that are not industry-specific. An advisor will help you negotiate not only the fair-market value but help you structure the potential sale. Earn out agreements should be scrutinized and structured to legally protect the seller. Here is a post that explains earn outs: https://exitpromise.com/what-is-earn-out-payment/
A selling business can be enhanced with proper marketing. Although buyers are well aware of what makes a seller attractive, you are in a stronger position if you can package yourself as the ideal option.
My European colleague Jens Brusgaard of LabelCompaniesForSale.com tracks international deals in the label industry. He also crafts marketing teasers and online brochures to help buyers and sellers improve their options.
When marketing buyers and sellers to each other, it helps to have:
For sellers who have growth potential, the door is not only open, it is wide open.
WHAT MULTIPLES CAN SELLERS EXPECT?
It may be a seller’s market, but multiples are driven by buyers.
Experienced buyers are very disciplined. They have ideal targets in mind, and they know the multiple ranges they are willing to pay. That being said, here are basic multiples for desirable companies:
Companies under $10 million. To be honest, companies of this size usually have a low EBITDA because performance is such a large percentage of sales. A $10 million dollar company that has a $1 million EBITDA is, in my eyes, an average company. Once you add back in taxes, depreciation and amortization – and again every case is different – you can run the numbers of with a multiple of, say, four and you’re looking at a $4 million purchase price. In doing a valuation, we’ll look at what other companies like yours have sold for, but we don’t rely on a fixed formula for multiples in this price range. If the deal meets all the buyer’s criteria – if you are super niched or well-situated – you may be attractive. Otherwise, buyers in a boom market are looking for bigger fish to build bigger profits.
Companies under $30 million. This is a desirable size company for a competitor or investor to buy because it adds value and capacity without much upheaval. A multiple of five or six would be expected and could go higher if the seller is, say, a leader in an emerging sector and has thoroughly capitalized with a suite of modern equipment. In that case, a multiple above six is possible. In this scenario, you might ask why the market leader would not be the buyer, and I hear that often. When business owners come to me expecting to buy a company, we run the numbers and explore the objectives. Sometimes we find the potential seller is more suited to sell. This is an area where having expert guidance is absolutely crucial.
Companies over $50 million. This is the type of company where investors get excited if the deal is right. In the world of consolidation, this is still a relatively small transaction, not like the huge mergers you read about. Sellers of this size are expected to have distinct advantages in product pricing, talent, market reach, breadth of relationships, vendor support and so on. Buyers expect to be able to improve the bottom line quickly by right-sizing the workforce and consolidating operations. In addition, buyers and sellers of this size may agree to creative terms, freeing up the buyer’s cash for reinvestment. A company in this range that has promise may ask for a multiple of eight or greater.
If you are interested in how different experts calculate valuation multiples, go to my website and search “The Multiple for the Printing Industry is 4” http://www.rocklamanna.com/blog-rock-lamanna/the-multiple-for-the-printing-industry-is-4
And if you are hearing about multiples of 10 in the graphic arts industry, remember these are numbers without context. Buyers and sellers at this level are making requests and concessions on each side. The terms of a complex acquisition can take many years to come to fruition, and those who benefit along the way may not be easily apparent.
The sales price is rarely the full picture.
SHOULD SELLERS TIME THE MARKET?
Sellers ask me three questions:
Is it worth it to try to grow into the next tier to gain multiples?
Is it worth it to severely cut costs to gain EBITDA?
Should I hold out for a higher price and try to sell next year?
The short answer to all three is no.
As to the answer to number one, it’s hard work to make the leap from a $30 million dollar company to a $50 million dollar company -- or you would have done it already. There are costs and risks to expansion, including adding personnel and equipment. For the first few years after a growth push, your net profits may be the same or even less than they are now. On the plus side, if things are going well, you may catch the eye of an investor who wants to help you fund your growth.
For the second question, if you are trying to maximize EBITDA, be smart about how you optimize. An outside expert can help. Don’t sacrifice quality, underinvest in equipment, underfund your sales department, scrimp on hiring, or underpay key personnel. It erodes your ability to attract the right people. Once you are known as cheap, you will never attract talent.
As for number three, I won’t say we have topped out on multiples, but if you are ready to sell and someone makes you a decent win-win offer, I would seriously consider it. Can you squeeze a few million more from a buyer if you wait? Maybe, but I have seen sellers devalue their companies by dragging their feet or making relentless demands. If you want to time the market, hire an experienced advisor to help you make the right decisions while the selling door is swinging open.
HOW CAN I BUILD VALUE IN MY COMPANY?
When owners express interest in selling, we don’t toss them into the arena and expect them to fight the lions. We guide them through the process. We uncover issues that might impede the sale, and we strengthen the seller’s position. The goal is to smooth the process and reduce surprises when it’s time to agree on a transaction.
Building value in your business is not a one-time proposition. Someone who wants to represent you in the sale of your business might have you believe that a few financial adjustments or tricks will take your company from a multiple of four to a multiple of eight. Not true. Fantasy.
For owners who are curious about what their business is worth today, LaManna Alliance has a simple, free online valuation tool. You can see exactly what must be changed to improve your score. An owner’s attitude and willingness to make those changes has an enormous impact. For that reason, it is not uncommon for us to recommend that owners, especially those of family businesses, invest in coaching to overcome the beliefs and behaviors that hold them back. In addition, the word “value” means different things to different people. If you want to create the kind of value that ensures your employees will be taken care of, for example, you need power at the negotiating table. As I have said many times on these pages, the sale of your business is not only about the money.
HOT, HOT, HOW HOT CAN IT GET?
We’re coming into a presidential election year, which can throw things topsy turvy for businesses. Legislators tend to ram through changes before an election and hedge their bets, preferring to operate in a known environment with friendly foes, rather than face a new line up of faces.
Whether political or economic, any kind of change increases uncertainty. Over the last few years, we have seen changes in tax laws, trade sanctions, immigration, and health insurance. Change is a normal, healthy and necessary part of our democracy, and it keeps our blood pumping. However, owners should try to envision all the possibilities and create contingencies if they plan to sell their businesses after 2021.
As always, buyers are drawn to companies that have a proven ability to be resourceful when times get tight. As 2003 and 2008 showed us, market leaders may falter in a recession but they usually recover more quickly and return to fewer competitors in the field. No matter the market temperature, there are always disruptive events. Whether you plan to sell or hold onto your business, you must be able to survive normal economic peaks and troughs without decimating your reserves.
On the bright side, it looks like buyers will continue to have access to cash to invest. Equity buyers who are hunting across all manufacturing sectors continue to be interested in label and packaging as growth areas. Buyers from adjacent graphic arts segments, including commercial printing, are eyeing labels, packaging and wide format as a way to augment their core offerings and deepen relationships with existing customers.
For specific economic information and hot markets, I highly recommend you read a report researched and prepared by my colleague Vince Mallardi of Printing Brokerage/Buyers Association International. You can find the report by going to my website www.rocklamanna.com and searching “Top 25 Hot Market Forecast of Print Demand for 2019-2020.” Vince is a master of collecting data and interpreting it in a 360-degree manner. In my own observations, hot areas of interest are:
Have we covered everything? Not quite. Don’t forget your people. Idle chit chat about how much the business could command in a seller’s market is just as destructive as parents joking about divorce. Don’t keep employees in a state of protracted anxiety and torment about the future of the company. Be discreet during the early stages of your selling process.
Once you agree to sell, have a plan for how and when you will inform everyone. It’s up to you to keep the rumor mill at bay. Your transparency and compassion for your people will set the stage for the success of the new owner.
WHAT IS THE MULTIPLE FOR INTEGRITY?
Everyone involved in the sale of your business should have the highest personal and business ethics. That goes for you, me, and everyone else in our industry. Integrity is contagious. It flows to your employees, suppliers and customers. I truly believe that businesses that operate with integrity will be increasingly valuable in the coming years.
Carry on with honor and integrity, and you will win in the ways that matter the most. If I can help you in that journey, I welcome the opportunity.
For 35 years, Rock LaManna has helped label and graphics company owners make better decisions. If you are ready to sell your business or improve your bottom line, integrity matters! For more information, email Rock@RockLaManna.com.
In a hot market, emotions and expectations run high on both sides. Improve negotiating success by proactively addressing the challenges that can sour a deal.
On the seller’s side, these can kill a deal:
Greed, suspicion and stubbornness can kill a deal before it even gets started.
To keep the deal moving, sellers should work with an experienced and trustworthy advisor by their side. Buyers should choose a well-connected matchmaker who has a broad network from which to find ideal targets. – Rock LaManna
It’s an optimal time to sell your business.
Business brokers and experts in the world of mergers and acquisitions rarely make declarative statements like that. There are just too many variables. Data from thousands of transactions inform valuation. Profitability and growth potential affect desirability. Market conditions and demand influence multiples.
Well-run companies with high margins that check all the boxes will generally command a higher multiple than those that starve the company to achieve profits. Every seller’s situation is unique, however, and we don’t like to raise expectations about price ranges and multiples.
That being said… the door is open.
WHO’S BUYING WHAT
What will the next three years (2020-2022) bring for buyers and sellers in the label and flexible packaging industry? Will the market continue to support high multiples? Will consolidation continue at the same pace?
I’m not going too far out on a limb when I say that money is flowing right now… and should continue to flow.
The economy is strong. Buyers are eager to invest.
Here are typical buyers who are actively hunting:
Owners of successful companies. They keep their eyes open for situations where they can acquire or tuck in a competitor or complementary business. They tend to buy and hold. I value these buyers in my network because they are not dabblers. They’ve been in the industry, and they know how to be profitable in all kinds of market conditions. These buyers will pursue targets in a hot market because sellers are curious and open to conversations about synergies.
Speaking of sellers’ curiosity driving activity, in a recent SGIA (Specialty Graphic Imaging Association) Research Report, more than a third of the companies surveyed on the topic of convergence in the printing industry reported being “curious about growing by M&A.” This page gives a summary of the reports: https://www.sgia.org/resources/research/2019-q1-summary-reports The study included data on the topics of industrial printing, decals/labels, industrial parts marking, and instrumentation/dials/overlays.
Financial buyers: These buyers are looking for a company in our sector to build and sell in three to five years because print is in favor. They may desire an invest-and-exit opportunity, where they provide a cash infusion and then, at an agreed-upon time, they exit with their profits. Or they may move from a minority to majority position, or even fully buy out the company.
Financial buyers have specific criteria for the types of print market deals they will consider. They may not have a graphic arts background but usually have business and investment experience. Often they need the experience of the seller’s CEO or COO. They may move swiftly in the early stages of the buy-sell courtship to see if there is a match. Once they have completed a purchase, they may bring in their own management team and merge operations into existing locations. Or, they may pursue deals where the selling owner will stay on in an operational role, either as an employee or investor. Private equity firms may desire to roll up many small to mid-cap companies in markets to gain economies of scale.
Deal seekers: When the market is strong and cash is available, distressed businesses are the least desirable to buyers. There simply is no reason to buy a company that is a high risk or requires bandwidth. In a boom market, distressed businesses sit on the sidelines until a deal seeker comes along.
Deal seekers like to acquire or partner with companies that have a platform they can leverage – market share, a good name, newer equipment, customer concentration (less than 20% of sales), technology, infrastructure, marketing, sales people, etc.
With any partnership or sales agreement, protect your interests and pay for expert legal advice.
HOW CAN TODAY’S SELLERS COMMAND TOP DOLLAR?
In each of these situations, sellers need experienced industry advisors to look out for their interests.
It’s critical to value the business properly and not rely on any valuations that are more than a year old or that are not industry-specific. An advisor will help you negotiate not only the fair-market value but help you structure the potential sale. Earn out agreements should be scrutinized and structured to legally protect the seller. Here is a post that explains earn outs: https://exitpromise.com/what-is-earn-out-payment/
A selling business can be enhanced with proper marketing. Although buyers are well aware of what makes a seller attractive, you are in a stronger position if you can package yourself as the ideal option.
My European colleague Jens Brusgaard of LabelCompaniesForSale.com tracks international deals in the label industry. He also crafts marketing teasers and online brochures to help buyers and sellers improve their options.
When marketing buyers and sellers to each other, it helps to have:
- Desirable niche and a diverse customer base
- Unique and necessary role in the product supply chain
- Prime location with real estate capacity
- Market leadership in a strategic geographic area
- Modern equipment
- Experienced talent and cross-trained employees
- Patents, registered trademarks, and intellectual property
- A respected name in the industry
For sellers who have growth potential, the door is not only open, it is wide open.
WHAT MULTIPLES CAN SELLERS EXPECT?
It may be a seller’s market, but multiples are driven by buyers.
Experienced buyers are very disciplined. They have ideal targets in mind, and they know the multiple ranges they are willing to pay. That being said, here are basic multiples for desirable companies:
Companies under $10 million. To be honest, companies of this size usually have a low EBITDA because performance is such a large percentage of sales. A $10 million dollar company that has a $1 million EBITDA is, in my eyes, an average company. Once you add back in taxes, depreciation and amortization – and again every case is different – you can run the numbers of with a multiple of, say, four and you’re looking at a $4 million purchase price. In doing a valuation, we’ll look at what other companies like yours have sold for, but we don’t rely on a fixed formula for multiples in this price range. If the deal meets all the buyer’s criteria – if you are super niched or well-situated – you may be attractive. Otherwise, buyers in a boom market are looking for bigger fish to build bigger profits.
Companies under $30 million. This is a desirable size company for a competitor or investor to buy because it adds value and capacity without much upheaval. A multiple of five or six would be expected and could go higher if the seller is, say, a leader in an emerging sector and has thoroughly capitalized with a suite of modern equipment. In that case, a multiple above six is possible. In this scenario, you might ask why the market leader would not be the buyer, and I hear that often. When business owners come to me expecting to buy a company, we run the numbers and explore the objectives. Sometimes we find the potential seller is more suited to sell. This is an area where having expert guidance is absolutely crucial.
Companies over $50 million. This is the type of company where investors get excited if the deal is right. In the world of consolidation, this is still a relatively small transaction, not like the huge mergers you read about. Sellers of this size are expected to have distinct advantages in product pricing, talent, market reach, breadth of relationships, vendor support and so on. Buyers expect to be able to improve the bottom line quickly by right-sizing the workforce and consolidating operations. In addition, buyers and sellers of this size may agree to creative terms, freeing up the buyer’s cash for reinvestment. A company in this range that has promise may ask for a multiple of eight or greater.
If you are interested in how different experts calculate valuation multiples, go to my website and search “The Multiple for the Printing Industry is 4” http://www.rocklamanna.com/blog-rock-lamanna/the-multiple-for-the-printing-industry-is-4
And if you are hearing about multiples of 10 in the graphic arts industry, remember these are numbers without context. Buyers and sellers at this level are making requests and concessions on each side. The terms of a complex acquisition can take many years to come to fruition, and those who benefit along the way may not be easily apparent.
The sales price is rarely the full picture.
SHOULD SELLERS TIME THE MARKET?
Sellers ask me three questions:
Is it worth it to try to grow into the next tier to gain multiples?
Is it worth it to severely cut costs to gain EBITDA?
Should I hold out for a higher price and try to sell next year?
The short answer to all three is no.
As to the answer to number one, it’s hard work to make the leap from a $30 million dollar company to a $50 million dollar company -- or you would have done it already. There are costs and risks to expansion, including adding personnel and equipment. For the first few years after a growth push, your net profits may be the same or even less than they are now. On the plus side, if things are going well, you may catch the eye of an investor who wants to help you fund your growth.
For the second question, if you are trying to maximize EBITDA, be smart about how you optimize. An outside expert can help. Don’t sacrifice quality, underinvest in equipment, underfund your sales department, scrimp on hiring, or underpay key personnel. It erodes your ability to attract the right people. Once you are known as cheap, you will never attract talent.
As for number three, I won’t say we have topped out on multiples, but if you are ready to sell and someone makes you a decent win-win offer, I would seriously consider it. Can you squeeze a few million more from a buyer if you wait? Maybe, but I have seen sellers devalue their companies by dragging their feet or making relentless demands. If you want to time the market, hire an experienced advisor to help you make the right decisions while the selling door is swinging open.
HOW CAN I BUILD VALUE IN MY COMPANY?
When owners express interest in selling, we don’t toss them into the arena and expect them to fight the lions. We guide them through the process. We uncover issues that might impede the sale, and we strengthen the seller’s position. The goal is to smooth the process and reduce surprises when it’s time to agree on a transaction.
Building value in your business is not a one-time proposition. Someone who wants to represent you in the sale of your business might have you believe that a few financial adjustments or tricks will take your company from a multiple of four to a multiple of eight. Not true. Fantasy.
For owners who are curious about what their business is worth today, LaManna Alliance has a simple, free online valuation tool. You can see exactly what must be changed to improve your score. An owner’s attitude and willingness to make those changes has an enormous impact. For that reason, it is not uncommon for us to recommend that owners, especially those of family businesses, invest in coaching to overcome the beliefs and behaviors that hold them back. In addition, the word “value” means different things to different people. If you want to create the kind of value that ensures your employees will be taken care of, for example, you need power at the negotiating table. As I have said many times on these pages, the sale of your business is not only about the money.
HOT, HOT, HOW HOT CAN IT GET?
We’re coming into a presidential election year, which can throw things topsy turvy for businesses. Legislators tend to ram through changes before an election and hedge their bets, preferring to operate in a known environment with friendly foes, rather than face a new line up of faces.
Whether political or economic, any kind of change increases uncertainty. Over the last few years, we have seen changes in tax laws, trade sanctions, immigration, and health insurance. Change is a normal, healthy and necessary part of our democracy, and it keeps our blood pumping. However, owners should try to envision all the possibilities and create contingencies if they plan to sell their businesses after 2021.
As always, buyers are drawn to companies that have a proven ability to be resourceful when times get tight. As 2003 and 2008 showed us, market leaders may falter in a recession but they usually recover more quickly and return to fewer competitors in the field. No matter the market temperature, there are always disruptive events. Whether you plan to sell or hold onto your business, you must be able to survive normal economic peaks and troughs without decimating your reserves.
On the bright side, it looks like buyers will continue to have access to cash to invest. Equity buyers who are hunting across all manufacturing sectors continue to be interested in label and packaging as growth areas. Buyers from adjacent graphic arts segments, including commercial printing, are eyeing labels, packaging and wide format as a way to augment their core offerings and deepen relationships with existing customers.
For specific economic information and hot markets, I highly recommend you read a report researched and prepared by my colleague Vince Mallardi of Printing Brokerage/Buyers Association International. You can find the report by going to my website www.rocklamanna.com and searching “Top 25 Hot Market Forecast of Print Demand for 2019-2020.” Vince is a master of collecting data and interpreting it in a 360-degree manner. In my own observations, hot areas of interest are:
- Short run digital manufacturing and personalization
- Eco-friendly product designs, prototypes and creative brand designs
- Innovative materials and unique converting methods for both consumer and industrial applications
- Smart labels and packaging, especially for food safety, inventory control and other value-added uses
- Inline embellishments and finishing for luxury, cannabis/edibles, custom beverages, and specialty food
- Wide format graphics, building and vehicle wraps, weatherproof materials
- Color matching or pleasing color for brands across the array of printed products used in integrated marketing campaigns
Have we covered everything? Not quite. Don’t forget your people. Idle chit chat about how much the business could command in a seller’s market is just as destructive as parents joking about divorce. Don’t keep employees in a state of protracted anxiety and torment about the future of the company. Be discreet during the early stages of your selling process.
Once you agree to sell, have a plan for how and when you will inform everyone. It’s up to you to keep the rumor mill at bay. Your transparency and compassion for your people will set the stage for the success of the new owner.
WHAT IS THE MULTIPLE FOR INTEGRITY?
Everyone involved in the sale of your business should have the highest personal and business ethics. That goes for you, me, and everyone else in our industry. Integrity is contagious. It flows to your employees, suppliers and customers. I truly believe that businesses that operate with integrity will be increasingly valuable in the coming years.
Carry on with honor and integrity, and you will win in the ways that matter the most. If I can help you in that journey, I welcome the opportunity.
For 35 years, Rock LaManna has helped label and graphics company owners make better decisions. If you are ready to sell your business or improve your bottom line, integrity matters! For more information, email Rock@RockLaManna.com.
In a hot market, emotions and expectations run high on both sides. Improve negotiating success by proactively addressing the challenges that can sour a deal.
On the seller’s side, these can kill a deal:
- You don’t make time to prepare yourself emotionally or financially.
- You refuse to make concessions that are different from those you anticipated.
- You won’t communicate in the early stages with all the stakeholders or family members.
- You are too demanding once the seller is interested.
- You are unprepared for critique.
- You are small compared to your buyer, and it hurts your ego.
- On the buyer’s or investor’s side, these are common challenges:
- You are racing a funding deadline.
- You need to negotiate terms, and the seller is unwilling to concede.
- You are juggling the priorities of more than one investor.
- You can’t find enough prepared sellers to meet your needs.
- You are bidding against other motivated buyers.
- Your prospect refuses to give you an exclusive opportunity.
- You can’t keep to your schedule because the seller needs more time.
Greed, suspicion and stubbornness can kill a deal before it even gets started.
To keep the deal moving, sellers should work with an experienced and trustworthy advisor by their side. Buyers should choose a well-connected matchmaker who has a broad network from which to find ideal targets. – Rock LaManna
