Wake Up and Smell the Coffee: Straight Talk about M&As in A “Cup O Joe”
Editor’s note: each month, the partners at New Direction Partners join their colleagues at the financial management firm MargolisBecker in a “Cup O Joe”: a conference call with printers on a selected topic of interest. The call’s namesake is MargolisBecker founding partner Joe Becker, whose brainchild the monthly teleforum is.
Recently, with the participation of NDP partners Peter Schaefer and Jim Russell, Cup O Joe tackled the topic of “Acquiring A Company from an Owner’s Perspective.” The transcript of wide-ranging discussion was rich in insightful vignettes about many aspects of arranging successful M&As in the printing industry. Some excerpts are presented here.
Finding and Approaching the “Possibility” Companies
“We have a client right now that is a pretty good sized business—about $20 million to $40 million in revenue, very profitable. They have never gotten into digital because they didn’t need to. They have hired us to help them find a local commercial company that has digital capabilities because they will not only get the equipment for less than if they bought it new, but they will also get the customers inherent with that."
...you want to identify the ‘possibility’ companies that might be attractive to you.
“If you are looking for a more specialized acquisition like our client, then you need to do your research to come up with the right companies. How do you do that? One way is to call your local PIA chapter, tell them what you are looking for, and ask if they can suggest someone to call. We’ve found that to be very helpful."
“Or, you might want to hire an independent third party like us, or someone else who knows the market, knows the printing industry, and can relatively easily come up with some candidates for you so you can do the general research. The thought here is that you want to identify the ‘possibility’ companies that might be attractive to you.”
“Once you identify the target companies, you have to identify how to contact them. If you are close to other owners, you may be able to pick up the phone and call them. But that can also be awkward if you are calling competitors. No matter how weak that potential person might be, it’s their first inclination to say, ‘What do you mean? I’m healthy. I’m not a seller.’ You have to be careful."
“That’s why it can be beneficial to use a third party to make that contact, because sellers are less on the defensive. But in other situations, it’s very natural for the buyer to make the call, to make that first contact.”
First and Foremost: Cultural Compatibility
“In the preliminary review of the potential deal, the first thing to focus on is not the purchase price. A lot of times the first thing to come up is, ‘We’ve both got buildings or equipment.’ Those are certainly things you have to talk through. But the key ingredient here is the personalities of the owners and the company cultures. You need to be asking, ‘Are we going to mesh well?’ You can only discover that over time. You may have an image of a competitor’s reputation in the marketplace. Maybe you have some employees who worked there before and can give you a perspective."
“But you need to spend time talking to the owner, the management team, learning about the company. If the cultures are diametrically opposed, your best bet is to walk away and find another deal. Nothing can kill a deal more than opposing cultures."
“Another point in the preliminary review is being sure you understand what the other owner is looking for. In one deal that we worked on for six months, we were thinking that one owner of the stronger company wanted to be the in the driver’s seat, but we finally pried it out of him that he didn’t want to be the top dog in the combined company. He said that he’d been making all the decisions for 30 years, and now he just wanted to sell. You have to be honest about what the true objectives of both owners are.”
Taking What You Don’t Necessarily Want
Nothing can kill a deal more than opposing cultures.
“Some deals seem to die because the seller has a large press, a building, or both that they own, and the buyer does not need either. A deal can absolutely die for those reasons.”
“Structuring a tuck-in can be difficult because, as we’ve discussed many times, you have to enable the seller to liquidate his or her balance sheet. If they own a lot of equipment or a building, they’ve got to come with a game plan to sell those items to pay off their creditors. As the acquirer, you have to be creative to help the seller be able to move forward in this type of transaction."
“We’ve had buyers in that situation agree to either pay the mortgage or lease payments on the building for 12 months. The seller can immediately put the building on the market, and if it sells before the 12 months, that’s great; but if not, at least the seller knows he has that 12-month window to get something done."
“We’ve also had a situation where the buyer realizes that a tuck-in will improve his bottom line by $500,000 a year, so the buyer is willing to buy the press the seller is trying to get rid of. The buyer knows he may take a hit of $100,000 when he resells it. But the buyer also realizes that it makes the deal easier for the seller to jump into, and that the buyer can make that money up in the first year. If the deal is really strong from the buyer’s perspective, he or she needs to be willing to help the seller out to get over that hurdle.”
Passing Safely through the Family-Issues Minefield
“Family involvement can be very tricky. Sometimes a family member is not in management, or it could be a key employee the owner wants to support. You can work that into the deal, that these people have to be part of the organization going forward. That’s doable. The difficult situation is family members who are marginal employees, who wouldn’t be there if it weren’t a family-owned business. The seller has to be prepared to deal with the fact that his son or sister may not have a job when the deal is done, because they are not really contributing to the business."
“We call that the ‘sacred cow.’ You have to find out who the sacred cows are in the preliminary review; the people whom the sellers want to go over to the new organization. As a buyer, you can say, ‘OK, this going to be painful, but we’ll keep them on the payroll for 12 months.’"
“We had that situation recently with a client, and we had to get creative. There were five family members involved and only two that the buyer was interested in. But there was a way to work out the financial part for a six-month period for the other three that everyone could live with. "
“If we are talking about a tuck-in, particularly in today’s market, the seller is often deciding between, ‘Do I shut my doors, or do I do a tuck-in?” Often the seller in these circumstances will say, “I really wish you would take on this person, but I can’t afford to let that kill the deal if it can’t happen.” It’s becoming less of an issue, but it can still be difficult.”