Tips from an M&A professional on preparing a business for sale.
According to a recent Bloomberg Law article, “Analysis: Private Equity Gaining Share in U.S. Small and Mid M&A,” private-equity (PE) acquisitions of small to mid-sized businesses have continued, even during the pandemic. Although overall volumes were lower than in the previous quarter, PE firms saw less of a negative impact than other buyer classes.
We are also seeing renewed interest on the part of PE firms in the acquisition of companies in the printing, packaging, and related industries, where consolidation is continuing to occur. The dynamics are a bit different for dealer/distributor companies than commercial printing companies and can often be even more favorable. Because the greatest value in most dealers/distributors lies in the customer base and they typically do not have heavy investments in assets that affect the P&L, they tend to sell at higher multiples.
So how do you prepare your organization to be acquired, and what kind of planning timeframes are required?
It’s no secret that relationships are extremely important to the success of a dealer organization. There needs to be a way to transfer those relationships to a new owner. One way is for the selling owner to stay on board for some period of time to transition those relationships. This typically is in the range of one to three years, with payouts based on continued company performance. Sellers then must plan well in advance—often beginning as much as five to six years before the target sell date— in order to be able to pursue post-sale opportunities in a timely fashion, whether it is another business investment or simply heading to the beach or golf course.
The Importance of Succession Planning
Another approach, which can allow for a faster transition out of the business, is to develop a robust succession plan prior to placing the business on the market. In fact, every business should have an active succession plan in place. Life can be uncertain, and proper succession planning goes a long way toward ensuring a successful future for the business should unexpected events occur.
The succession plan may designate family members who will take over the operational aspects of the business, or it may spur the start of a search (internally and externally) for a new CEO to whom relationships can be transferred over time. In some cases, the owner may wish to work closely with a chief marketing officer or chief operating officer, who are already part of the company, to begin a seamless transfer of relationships, thus freeing the seller to exit the company more quickly post-sale.
It is also true that companies with good—and current—succession plans in place are more attractive to buyers, who can have more confidence that the business will carry on and continue to grow under new ownership.
Diversification as a Growth Strategy
Another way to increase the value of the company is through diversification. Are there parallel business opportunities that you can easily move into to give you a more robust product line? Are there products your customers are buying from others that they could be buying from you? Consult with your key customers to find out how you can best grow your business with them by adding new products or services.
One example of product diversification is to forge relationships with promotional product companies that produce anything with a logo. Joining the Advertising Specialty Institute is one way to begin forging those relationships and to offer your buyers products they are already buying, items that get used in the office or by employees to show pride in their company. The buyers you are already dealing with are likely the same buyers that procure these promotional products.
Another aspect of diversification is within your customer base. Customer concentration can be a problem, especially in uncertain times such as these, where it is not clear how long or to what extent the pandemic will continue to exert its influence. Ideally, your top 10 customers should be less than 25% to 30% of the business. If customer concentration is higher than that, some sort of protection needs to be put in place to protect against buyers in those customer organizations fleeing to a competitor.
Workforce development efforts are part of that first step—succession planning. This is where you assess your current employee base to determine who are the best candidates for advancement, and what training or coaching is needed to get them there. This serves two purposes: it fills positions with employees you already know and trust, and promoting from within is always good for overall employee morale and retention.
But equally important is recruiting fresh talent from outside, especially targeting younger talent that can bring a new perspective—and new skill set—to the business. If you are 65 years old and looking to head to the beach, you don’t want to transfer relationships to someone in their 60s. You want to bring in younger people that can nurture those relationships and make them better. You want to mentor those folks, teaching them how to develop those relationships and keep them intact. That’s just a good business practice.
Another aspect of increasing business valuation is to ensure you are using up-to-date technology. Especially now, during the pandemic, having an e-commerce storefront is probably one of the most important technology pieces. With many people working from home, an online storefront makes it easier for them to access needed materials and supplies. Plus, once you have established customized online stores, those customers are both locked in and more likely to give you more business. With a solid storefront solution, you can also easily establish and connect with a network of third-party suppliers and continue to diversify your product and service offerings, streamlining the order-to-fulfillment process and growing topline revenues.
For More Information
New Direction Partners is a group of nine M&A professionals that has been involved in over 300 mergers and acquisitions in the printing, packaging, and related industries since 1979. New Direction Partners was recently recognized as No. 5 in the Top 20 investment bankers in the lower middle market by Axial.
Visit www.newdirectionpartners. com/resources/ for information about buying a business, selling a business, business valuation, succession planning, and more, including an informative white paper on succession planning best practices.
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