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New Direction Partners, the firm that handled the TC Transcontinental/Holland & Crosby deal, shares top tips for successful mergers and acquisitions


May 20, 2020
By Paul Reilly

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The mergers and acquisitions environment in the printing and packaging industries is still strong, and if you are thinking about selling your business or expanding through acquisition, now is the time to prepare. In this article, we’ll look at what is driving buyers to acquire as well as what is driving sellers to consider putting their businesses on the market. We’ll also discuss how to ensure optimum valuation for a printing or packaging business. Keep in mind you don’t just flip a switch and have buyers handing over cash; even finding the right acquisition target can be a challenge. Getting your business ready for sale, and actually selling it, can take up to three years.

As a seller, you may need to stay engaged for another three to five years as part of a buyout plan, so planning ahead, either as a buyer or a seller, is critical. As a seller, you want to get as much as you can out of what is likely your biggest financial asset — one that you have dedicated a good part of your life to. As a buyer, you need to find acquisition targets that are well-positioned to add to your bottom line.

What drives buyers to seek an acquisition?

One driver is the need to expand their geographic footprint. This could be due to saturation in their existing geographic market, which can limit growth, or it could be a key customer who wants them to operate in more than one location.

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Another driver is diversification. One transaction we were recently involved in actually addressed both. TC Transcontinental acquired Holland & Crosby, a manufacturing company specializing in in-store marketing product printing for North American retailers. The acquisition expands TC Transcontinental Printing’s presence in the in-store marketing product market and broadens its manufacturing capabilities with a state-of-the-art platform, gaining it entry into the in-store décor and permanent visual display vertical. It also boosted the company’s geographic reach, adding Holland & Crosby’s dispersed client base to its own.

Diversification often involves acquiring companies in less mature market segments to add to product offerings. As a company becomes more diversified, it is ever more critical to adopt a solution-selling approach rather than a product-focused approach, so salespeople can accurately and effectively represent the company by spending time to thoroughly understand their customers’ business needs and challenges. This allows them to select the right set of offerings from a diversified portfolio to address those needs and challenges. If one of the goals is to acquire both customers and expertise – as was the case in the TC Transcontinental/Holland & Crosby deal – it is important to acquire successful companies that can help integrate the new offerings into an overall strategy.

A popular acquisition method is the tuck-in. This approach, which involves acquiring the seller’s “book of business” and some assets, can offset slow sales growth and the need to be more efficient. When you add sales from a tuck-in to existing sales, costs go down. You are typically reducing operating costs and adding sales. In our industry, businesses have such high fixed costs that for every dollar of sales you add through a tuck-in, about 20 to 30 cents falls directly to your bottom line. It’s a great way to grow and be more profitable. With a tuck-in, you can even purchase a distressed company since the dynamics can be so compelling.

Key drivers for sellers

There is a high percentage of family-owned businesses in the print and packaging industries, and often times the next generation is not interested in taking over the business. Another reason is the need to diversify. In the case of TC Transcontinental/Holland & Crosby, the acquired business now has access to the entire Transcontinental portfolio and the financial backing it might not have been able to access on its own.

Sometimes sellers are looking to invest the net worth of a family in more than one company and industry, or perhaps the owner is simply ready to retire and can’t afford to do so without selling the business. We have also seen cases where people just want to do something different — maybe they found the business challenging and exciting, and now they want to move on to another enterprise. Others might want to devote time to mission work. There are lots of reasons people choose to sell their businesses. The savvy buyer will take the time to understand those drivers.

Ensuring optimum valuation

Whatever the reason for selling, sellers want to ensure they can get the best possible price for their businesses. Because most sellers have invested financially and emotionally in their businesses, they can have unreasonable expectations about the actual value of the company. That’s one reason it is important to engage a third party to assess its value and if necessary, suggest actions that can increase that valuation.

The value of the business is calculated by multiplying profits by a multiple, less debt. One way of increasing value is to reduce debt, but you don’t want to do that at the expense of having an effective technology infrastructure. Sellers should plan to sell their businesses midway through the investment cycle of large investments. If your equipment is obsolete and the buyer will need to invest, that amount will be deducted from the sale price. You want to show that you have paid down as much of the cost as possible and that the asset is generating profitability and growth.

In addition, sellers should spend time examining and addressing the aspects of the business that cause it not to be as profitable as it could be. As previously noted, companies often spend as long as three years getting them into shape for a sale. Shoot for at least 10 per cent EBITDA. Multiples are driven by a combination of how fast you are growing and how sustainable the growth is. A business with flat growth might achieve a multiple of four, while 10 to 20 per cent growth could get you as much as 6 to 7 per cent. This makes a huge difference in the price you can expect to reasonably ask for.

Even if you are not a buyer or a seller today, you might be tomorrow. Following the guidelines above can also deliver real-time benefits in terms of your profitability, even if you don’t plan to sell.

 

Paul Reilly, Founding Partner at New Direction Partners, has been in the industry for over 40 years and for the last 12 years has been providing investment banking and financial advisory services for sellers and buyers, valuation services, financing and refinancing efforts, strategic planning, turnaround and restructuring services, and temporary/interim management consulting. Previously, he was CEO, President and Chairman of Cenveo, one of North America’s leading graphic communications firms. During his 10 years at Cenveo, the firm grew from US$17 million to over US$2 billion in sales while completing some 60 acquisitions.

This feature was originally published in the March 2020 issue of PrintAction, now available online