June 15, 2018 | Daywey Chen

In our last article “Merger & Acquisition” we discussed the M&A trends in the North America region from both the buyer and seller perspective. In this article, we will look into how you should prepare yourself strategically as a small-medium size printer to grasp onto a good sell-off deal.

To secure a good sell off-deal, we first need to understand the buyer’s mindset when they are seeking for potential printers to acquire. Approaching the buyers mind from the quantitative and qualitative point of view.

Quantitative Factors:

Trend demonstrating revenue growth

Is your company demonstrating steady revenue growth over its history? Many of the financial investors look at the printing and packaging industry as a stable source of cash flow that is relatively recession-proof. As an investment to mitigate risk in its portfolio. According to Smithers & Pira, the average annual growth rate for the flexible food packaging sector was 4.0% from the year 2010-2015. Are you above average or below average?

Earning growth

Revenue growth is only part of the story, how are your expenses managed to generate profit at the end of the day. Managing and reducing our cost in the long term through your operation and supply chain management strategies.

EBITDA margins at 12% or more

To reference a few public traded printing and packaging companies such as Bemis Company, Inc, a packaging solution company generating a revenue of 4,004.4M and an adjusted EBITDA of 553.6M giving an EBITDA margin of 13.6% in the year 2017. Amcor Limited, the packaging behemoth with 9,101M in revenue and an EBITDA of 1,409 providing an EBITDA margin of 15.4% in the year 2017. Where does your company stand?

No account concentration above 20%

Having a few big customers is good for your business. However, if your customer base is over concentrated, this may expose your business to extra risk as a few customers could impact your company greatly. Losing one or two customers could lead to large revenue drop or even impact the capability of your company to remain in business.

Healthy Balance Sheet

Overall, have a healthy balance sheet to show that your business is in good shape to operate in the short and long run. To name a few financial indicators such as having an acceptable quick ratio, showing how well your current liabilities are covered by cash and items with higher liquidity. An acceptable debt-equity ratio, to show that if your company is borrowing too much. An acceptable ROA, ROE and profit margin to demonstrate your capability to generate profits. An acceptable asset turnover ratio to demonstrate your capability sell with your existing assets…etc.

Qualitative Factors:

Identifiable, defensible specialties

Is your brand name out there? How’s the relationship with your suppliers? Do you possess any skills, technologies or business models that sets you apart from the competitors?

Growing customer loyalty

What percentage of the customers keep coming back to you. Are the customers entrusting you with more orders as they grow? What is the retention rate like, what are the customer churn like? As research indicate that it is much less expensive to retain existing customers than to acquire new ones. Low customer loyalty could lead to higher operating cost.

Non-union workforce

To buyers, union workforce could mean lower bargaining power and more troublesome process go to though. Slowing process down and increasing the total cost of execution. Many financial buyers intend to sell off the invested companies few years down the road after purchase, a union workforce may lead to unnecessary issues during the transaction, therefore, is less favorable by the buyers.

Energetic and capable management

At the end of the day, it’s not just about the physical assets and the company name. The management teams and the employees are the key factors to the long-term success of the company. The capable team could steer a failing company to course, an incapable team could destroy a company overnight. People are what matters, therefore having a team that is energetic, passionate and capable is very important.

Seller willing to stay

Are you willing to stay for a period of time after the company sale? Or are you willing to stay for the long-term? As transition doesn’t happen overnight, it is important for the owners to hold part of the transition responsibility. Urge to leave may create doubt from the buyers.

No significant capital expenditure needs

Lastly, will the company require a large amount of capital investment in the short term to remain competitive? Large capital investment requirement does not mean the company is in bad shape but it’s a cost factor that buyers would take into consideration. At the same time, it is also an extra effort and risk for the buyer.

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Article by Daywey Chen, KYMC