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Commentary & Analysis

For Sellers, Six Scenarios—and a Word about Timing

Like a weak hand at the card table, a weak offering in the M&A market won’t be improved by the length of time it’s in play. Unlike a poker hand, it can’t be bluffed because the “cards”—the fundamentals of the business—are always in plain sight of the buyer and its due diligence.

By Patrick Henry
Published: April 14, 2010

“You’ve got to know when to hold ‘em, and when to fold ‘em.” This is poker-playing wisdom, not business advice, but there’s a germ of truth in it for those with stakes in the game of selling a printing company.

Like a weak hand at the card table, a weak offering in the M&A market won’t be improved by the length of time it’s in play. Unlike a poker hand, it can’t be bluffed because the “cards”—the fundamentals of the business—are always in plain sight of the buyer and its due diligence.

Unfortunately, say Peter Schaefer and Paul Reilly of New Direction Partners (NDP), the insight into timing comes too late to owners who let their businesses decline and the value of their companies fall as they put off making the correct decision about the terms under which they will be acquired. It’s “heartbreaking,” Schaefer says, when the downward spiral brings a company to the point where “there’s nothing left to sell.”

Another error is to assume that the business can be sold intact and in its original form, like a car or a house or a boat. If a firm is troubled but still relatively healthy, says Schaefer, it’s natural to think in terms of being acquired as a going concern, and “there’s always a chance” of finding a buyer who’s willing to buy on that basis. But the seller of such a business would be “foolhardy,” in Schaefer’s view, to avoid preparing for a tuck-in at the same time. (A tuck-in, as described here last month, is a transaction in which the acquiree’s payout comes in the form of a royalty on future sales.)

Choose or Accept

According to Schaefer and Reilly, there are six scenarios in which most printing companies transition from present ownership to whatever comes next. They emphasize that if a company wants to be in a position to choose its own scenario instead of having one forced upon it, the move must be well timed and well advised so that the seller’s interests can be protected in the negotiations that ultimately will shape the deal.

The scenarios, from least to most desirable, are as follows:

The most drastic final act is outright liquidation—shutting the doors because all other options have been squandered and no merger-worthy assets remain. Owners forced into liquidation, say Schaefer and Reilly, typically are victims of their own foot-dragging—procrastinators who could have found other outcomes had they acted sooner with better guidance.

Filing for bankruptcy sometimes is used as an exit strategy, and Schaefer and Reilly concede that it can help a beleaguered owner obtain a degree of relief from creditors as it buys time to wind the business down or prepare it to re-emerge. But bankruptcy, they caution, is an expensive process that can run to hundreds of thousands or even millions of dollars in fees to attorneys, workout specialists, and others involved in the proceedings.

What’s more, a company’s perception in the marketplace after bankruptcy is likely to be negative. As Reilly says, “bankruptcy is public,” and a company that has gone through it may find itself shunned by firms that have rules against doing business with bankruptcy filers.

A private settlement with creditors is a potentially desirable outcome—if it can be pulled off. Here, the objective is to persuade creditors that reaching a negotiated settlement will serve their interests better than forcing the debtor into bankruptcy. The agreement then would permit the business to continue operating as-is until the debts are settled.

The downside of this solution, says Schaefer, is that “it’s very hard to do.” The negotiations leading up to it are likely to be hard-nosed and fraught with emotion—so fraught that the seller probably will be best advised to leave them to a third-party adviser with experience in transactions of this kind. In this scenario, says Reilly, an M&A specialist “can be tough on your behalf” as it keeps the seller’s emotional turmoil to a minimum.

A mutually favorable deal between seller and buyer can be structured either as a merger of equals or as a tuck-in. In a merger of equals, both parties get a share of ownership in the new entity. There is no ownership for the seller in a tuck-in, but there is the promise of payment on future sales to the active accounts that the seller brought to the deal.

Schaefer reminds those thinking about being acquired via tuck-in that they probably will see little cash when the deal is closed. They must also have enough cash on hand to settle whatever debts are outstanding at closing. The longer the deal is put off, Schaefer says, the harder it may be for a struggling firm to come up with the cash that closing a tuck-in requires.

Owners of firms in the best financial shape have the best shot at the most desirable outcome: sale as a going concern. Here the benefits can include, in addition to cash at closing, the ability to retain the company’s name and its current roster of employees.

But, sale as a going concern probably will work only for a select few. Reilly says, for example, that a specialized print firm with a growing volume of business would be a sought-after candidate for acquisition in this way. NDP is involved in a transaction in which the buyer finds the seller so attractive that it intends to move into the seller’s building when the deal is complete.

Apart from rare cases like that, however, sale as-is may be out of reach for most general commercial printers, particularly those with excess capacity or cash-flow problems. In fact, says Reilly, “if your debt is more than three to four times your EBITDA, sale as a going concern probably isn’t going to happen.”

“Be One or the Other”

Every owner wants to sell on a going-concern basis, but the longer the decision to sell is put off, the less feasible this kind of exit becomes. NDP currently is advising a printer struggling with what Schaefer calls “a major cash issue” in the wake of a 30% decline in its annual sales. While it isn’t impossible for a business in these straits to be acquired as a going concern, Schaefer says, the company also needs to consider other options for the endgame—alternative exit strategies that may be better suited to its financial condition and the realities of the print marketplace.

The realities are such that every printing company should prepare itself either to acquire or be acquired. In a merger done right, the buyer grows, and the seller reaps an appropriate reward. “You ought to be one or the other,” Reilly says, advising sellers to pursue transactions that let them close the gap between what’s desirable and what’s achievable while there’s still time to come out ahead.

He also cautions against “letting egos get in the way” when the end of a company’s life cycle is in sight and dispassionate decisions have to be made. That’s the business equivalent of keeping a poker face—a face best worn by an M&A specialist negotiating on behalf of a seller who hopes to leave the game with a smile.

Patrick Henry, Executive Editor for WhatTheyThink.com is also the director of Liberty or Death Communications, a consultancy specializing in research, education, promotional, and editorial support services for the printing and publishing industries.

Patrick Henry is available for speaking engagements and consulting projects. To get more information contact us here.

Please offer your feedback to Patrick. He can be reached at patrick.henry@whattheythink.com.



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