Planning Essentials for Sellers in an Unpredictable Time
In the insurance business, risk management consists of identifying potential causes of loss and then taking steps to eliminate them. In an M&A marketplace still under the shadow of COVID-19, selling owners have to be risk managers as well as printers and converters as they prepare their companies for appraisal by buyers.
Buyers, understandably, are cautious right now — the pandemic and its effects on the economy have alerted them to risks they may not have known they were exposed to. In order to receive a premium valuation, sellers must put those apprehensions to rest by showing that their companies are financially sound, competently managed, and, above all, free of the negatives that exceed a buyer’s threshold of risk tolerance.
For sellers, managing risk is a five-step process that’s really no different from the exit planning strategy we recommend to clients in normal circumstances. But, until COVID-19 starts to recede and market conditions improve, sellers should carry out these steps with special urgency and care.
1. Get the financial house in order. What buyers most want to know is that the seller has been generating profit during the pandemic period, or that the company was able to make a quick rebound after initial losses. Sellers can demonstrate resilience and stability by:
- acting swiftly and decisively to rightsize the workforce as needed;
- raising EBITDA as high as possible;“ buttoning up the books” by taking questionable items off the balance sheet, or, if they must be there, having a plausible explanation why;
- hiring a chief financial officer or a controller if the company does not have one;
- presenting consistent monthly financial statements that don’t contain the kinds of sporadic adjustments that buyers find disconcerting.
We also advise sellers to consider stepping up to a higher level of financial reporting to give the buyer a correspondingly greater degree of assurance. This would mean graduating to a reviewed financial statement if the business has been providing only compiled financial statements; or to an audit for firms presenting reviewed financial statements.
2. Align ownership and management objectives. This is mostly about getting the timing right. A sure way to get it wrong is to delay initiating the sale until the date the owner has chosen as the point at which he or she wants to move on. It easily takes two or more years to prepare a company not just for sale, but for a successful transition to new ownership. Structure the timetable accordingly.However, because of the uncertainty the pandemic has injected into decisions about timing, waiting isn’t always the best option. An owner who wants to hold off selling because the company’s COVID-impacted numbers are weak has no guarantee that they will be better a year from now. Hence, a bet on delaying the sale in hope of a better return has to be weighed against the risk of delaying the owner’s exit plan — potentially by years.
3. Firm up key customer relationships. We recently had a selling client whose contract with one of the company’s major accounts was up for renegotiation at the time discussions with potential buyers were in progress. The gap between the expiration of the contract and its renewal was only a couple of months, but it made the buyers nervous until the new contract was signed.
Sellers should avoid getting into any situation that might make buyers question the solidity of relationships with customers — especially big ones. By the same token, a great time to close a sale is upon re-signing a major existing contract, or inking a deal with an important new customer.
4. Examine CapEx requirements. Just because a company is in selling mode doesn’t mean it should shut off capital expenditures for the production equipment and technology it genuinely needs. If the company needs that new press to stay competitive in the markets it serves, acquiring the press is what a buyer would expect the seller to do. Deferring the purchase will only mean a corresponding reduction in the offered purchase price, since the buyer will now have to make the investment that the seller wasn’t willing to.
5. Get the skeletons out the closet. Buyers don’t like surprises, and they are certain to uncover any potential problems the seller has tried to sweep under the rug during due diligence. So, be absolutely transparent about issues that could cause headaches after the transaction closes — suspicion of concealment will undercut trust and kill the deal. Another obligation along these lines is to remove ineffective performers, including family members, from whatever management positions they may be occupying. This spares the buyer from having to play the bad guy in making these changes as the new owner.
Selling a printing or a packaging business during a pandemic is different for sure, but with focus, determination, and a willingness to adapt, owners still can position their companies as attractive targets for acquisition. We’re thinking of the client who, when the downturn started, promptly reduced the workforce by 25% and took other cost-cutting measures that have kept the company in good financial shape throughout. Another client, a provider of point-of-purchase materials for the retail industry, repositioned itself as a manufacturer of personal protective equipment. Thanks to the switch from POP to PPE, this company is better off financially today than it was a year ago. These businesses have proven to be very attractive in the marketplace despite the challenging times.
This is the time to get out of commodity segments and into specialized product applications that customers can’t easily obtain from other sources. No matter where the business is concentrated, financial discipline is paramount. A conservative balance sheet that shows ample cash and consistent reinvestment tells a buyer that the seller’s company is strong enough to handle whatever additional stress COVID-19 will bring to bear.
We don’t know when normalcy will return or even exactly what it will look like once it arrives. But, printing and packaging companies that prepare themselves for sale as outlined here will be equally well prepared to confront the new normal — and to profit from the opportunities it will bring.
About the Author
Peter Schaefer is a partner in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing or packaging company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP’s partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess more than 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, email email@example.com.
Peter Schaefer, partner at New Direction Partners, is an experienced dealmaker with more than 25 years of investment banking and valuation experience, 20 of which has been focused exclusively on the printing and packaging industries. He has closed more than one hundred transactions in virtually every segment of the printing and packaging industries. In addition, he has performed hundreds of valuations for ESOPs, estate and gift tax planning and strategic planning purposes. Contact him at (610) 230-0635, ext. 701.