In last month’s column, Paul Reilly and Peter Schaefer of New Direction Partners (NDP) opened a discussion of what probably is the trickiest judgment call in any merger of printing companies: knowing when to do the deal. Correct timing is a must for both parties, but the responsibility for choosing the right moment to step forward into the M&A marketplace always rests with the seller. It’s a decision, say Reilly and Schaefer, that calls for introspective as well as strategic thinking.
According to Reilly, the successful timing of any sale depends on the seller’s answers to two general questions: one having to do with emotional readiness, the other connected to price. The first is personal and subjective. “Can you see yourself not owning the business?” Reilly asks. “Will there be life after printing?” For the seller who isn’t fully prepared to disengage from the company that he or she may have spent the better part of a lifetime building, says Reilly, the pressures of negotiation will be that much more stressful.
The Price is Right...Right?
“Can you see yourself not owning the business?”
Once the emotional bridge has been crossed, there’s the matter of price: will the anticipated proceeds be enough to fund whatever post-sale personal objectives the owner has in mind? If they are not, what then?
“You must be realistic,” counsels Schaefer. “If you can’t get your price, that doesn’t necessarily mean that now isn’t the right time to sell.” The seller must ask whether market conditions will enable the business to achieve the desired valuation—and be prepared for the possibility that the answer may be no.
Realism is essential, because M&A dealmaking opportunities rarely improve with age. Reilly recalls a company that NDP was called upon to assist in two successive sales—the second at half the valuation of the first. Schaefer tells the “tragic” tale of a seller who abruptly held out for $1 million over the negotiated price, only to see the buyer walk away and, later, watch the company’s two top salespeople do the same. Within six months of the seller’s decision to squander a chance to close what would have been a desirable deal, the failed business was padlocked, and all hope of perpetuating it was lost.
Carpe Diem—Likewise the Deal
The moral of stories like these, Reilly and Schaefer agree, is that the “right moment” to sell is fleeting and that it almost always arrives before, not when, conditions are as good as the seller believes they are going to get. “If things are improving, that’s the time to be thinking about selling, not about not selling,” Reilly says. “Don’t wait for the peak,” seconds Schaefer. The problem with peaks, he explains, is that they’re virtually impossible to time correctly: “If you think you’re there, you probably are past it,” and it won’t escape the notice of a diligent buyer.
Nor should sellers forget that in the nine months to one year it can take to close a deal, the performance of the business can change—and if the change is for the worse, the interest of potential acquirers may wane. “Don’t wait. Sell while you’re still growing,” counsels Schaefer, noting that any downturn in the business will increase the buyer’s risk and diminish his commitment to the deal.
The buyer’s issue, Reilly adds, is that there’s no way to know how long the slump will last or what its ultimate impact on the value of the seller’s company will be. “After the peak, it can be a slippery slope,” says Schaefer. “It’s so hard to find buyers once a business is in decline.”
“If you think you’re at the peak, you probably are past it...”
According to Reilly, in deals that NDP isn’t able to close, the reason usually is a reversal of fortune that clouds the seller’s chances while negotiations are in progress—another indication of why it’s urgent to conclude the sale while the business is still trending up. A case in point, he says, was a transaction initially worth $25 million that dwindled to $5 million after a bank withdrew financing during the credit crunch.
Buy the Press, or Sell the Business?
Something else that determines whether the moment is right is how close the moment is to the seller’s most recent capital investment cycle. Over the long term, notes Reilly, a big investment in production equipment should prove to be a good thing. But in the immediate aftermath of the purchase, it diminishes the value of the business as a growing concern.
“You have debt, you have less cash, but you don’t yet have a return on investment to show in your P&L,” he explains. Until ROI can be recorded, the company’s value to shareholders goes down, and so does its attractiveness to potential buyers.
A business upswing is much more in a seller’s favor than a downturn, making it the moment to seize M&A opportunities
It can be a dilemma, acknowledges Schaefer: “Is now the right time to buy that new press, or is it a better time to sell the company?” On the one hand, the seller doesn’t want to do anything that might negatively affect the company’s selling price. On the other, no owner wants to appear to have failed to reinvest appropriately in the business. This suggests, say Schaefer and Reilly, that the sequence of events should be, buy the press, “wait two years” or however long it takes to demonstrate an ROI, and then proceed with selling the company—without commencing another investment cycle.
As print market conditions start to get better, says Reilly, some owners may see the improvement as an argument against selling. A business upswing, however, is much more in a seller’s favor than a downturn, making it the moment to seize M&A opportunities that may not occur again.
Although tight credit continues to affect M&A activity in the printing industry, there’s evidence that print markets are stabilizing and that access to capital for financing deals is improving. As a result, say Reilly and Schaefer, there are more opportunities for sellers today than there were six months ago.
Their timely advice to printers: “Take them!”