Rock LaManna s Acquisition Criteria for Printing Companies

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1 Acquisition Criteria for Printing Companies

2 If you re looking to acquire a printing company, your Acquisition Criteria is one of the most important steps toward a successful transition. How important is this Acquisition Criteria? Consider the mistakes made by another investor, who we ll call Mr. Blue. Instead of developing an Acquisition Criteria and thinking very strategically about finding a printing company that would create a successful, synergistic relationship, Mr. Blue did what so many investors mistakenly do: He jumped at what he thought was a great opportunity. Yes, it was a great opportunity. But unfortunately, not for Mr. Blue. Mr. Blue hadn t taken the time to develop a documented plan and strategy. He didn t focus specifically on what he needed, and what he could afford. He had a plan in his head, but it was nowhere near as thorough as it needed to be. Within a year, Mr. Blue realized he had purchased the wrong company. By then, it was too late, and he was forced to endure a very rough ride. If you re an entrepreneur and you re looking to expand your portfolio, I urge you not to follow in Mr. Blue s footsteps, and instead follow the best practices of other investors in the printing realm. And it begins with developing your own Acquisition Criteria. What this Acquisition Criteria will help you do: My Acquisition Criteria, developed specifically for buying printing companies, will help you: 1. Keep focused on what s right for you. 2. Get organized and be able to act quickly when the opportunity arises. 3. Understand more about the printing industry, and what you ll need to succeed. I can t emphasize the last item enough. Printing companies are unlike any other acquisition. I ve spent my entire life in the printing business, and I understand just how rigorous it can be. Margins are tight, new technologies emerge every day, and your expertise is highly specialized. Those who understand the printing business can be extremely successful. But in today s economy, you need to be extremely strategic in your approach. This Acquisition Criteria is your first step. Rock LaManna 2

3 Timeline Your timeline specifies how quickly you are ready to act on an acquisition. For printing and graphics communications companies, acquisitions can range from four months to two years. This is the time span from the initial concept of the acquisition, all the way through the transition to new ownership. Setting a timeline immediately focuses your search: You should only consider a shorter timeline if you have a transaction team in place, ready to move with funds in-hand. You can do a deal in four months or less if you re well-prepared and your team can focus on a well-managed integration. Are you looking to make an acquisition in the near future, or is this a three- to five-year strategy? Is this a planned series of acquisitions? Do you have your experienced transaction team in place and ready to move? 3

4 Management Team Management Teams for both buyers and sellers are critical. For the buyer, you need to determine the quality of the combined talent. You want to understand who actually runs the business, and who you can rely upon. If this is a merger, these are the people that will integrate the two cultures, which is critical for the success of the transaction. The best practice is for both the buyer and the seller to appoint a manager that s focused on the execution of the transition. These individuals will work with the respective transition team throughout the process. What is the quality of talent on the acquisition s management team? Are they committed to the long haul? Can they execute swiftly with positive results? Are they trained and prepared for the planned growth? (Believe me, you don t want a rookie in this position.) What processes will ensure the transition is made successfully? Do their management information systems provide quick access to key metrics? Can the team react quickly to real-time reporting on financials, strategy? Is the team strong, capable and unified as a high performance group? 4

5 Process of Corporate Finance This is the methodology behind how your potential acquisition structures their budget and invests in assets. Make sure you fully understand how they allocate their resources. For example: If they recently purchased a wide-format digital press, make sure you re clear on how they logically justified and financed the asset. You ll also want to see how their processes integrate with yours. How are the financial plans planned, reviewed and executed? Who are the key shareholders and accountable managers in the aligned process? How does the accountable team respond to the finance variances (budget vs. actual)? Can they adapt and communicate the changes in the performance of the operation? What is the expected rate of equity per year? Have the shareholders communicated this to the management team? 5

6 Business Type You want to buy a printing company, but what kind of printing company? A digital printer? A litho printer? A Flexo printer? Screen printer? Commercial printer? This ties back to an earlier point: Make sure the type of acquisition you re pursuing is well defined. It will allow you to move quickly when the right opportunity presents itself. It also allows you to avoid a serious mistake. What type of company are you looking for? Is there a synergistic relationship with your company s capabilities? What is the seller s competitive advantage(s)? How will the advantages improve your returns? Analyze the sustainability of their niche, and evaluate the risk. Is it within your comfort zone? 6

7 Acquisition Value Acquisition Value is the purchase price of the business you are targeting, and how much you can truly afford. This is the gross number, and it can include all assets, real estate, tangible and intangible, such as good will or brand value. For a smaller print and graphics communications company or franchise, the Acquisition Value can be under a million dollars. For a larger printing company, it may be over $5 million EBITDA. What is both the minimum and maximum acquisition value that you consider worthwhile? What can you realistically manage? Do you clearly understand your net worth, your company s worth, your capacity to loan or borrow, and your risk tolerance? (For example, you may only be comfortable with an acquisition that s no more than 30% of your total net worth.) What do you want to emphasize with your company? Do you want to put more emphasis on particulars such as profitability or assets? What type of funds are available today, and what s your expectation for return on equity? What is your capacity to obtain funding and move quickly? And is it personal or private funding? What is your desired investment strategy in this expansion plan: Will you hold a majority or a minority investment position? 7

8 Transaction Structure/Transition Team The Transaction Structure is the structure of the overall deal. It includes the financing, tax strategy, and legal structure of the potential transaction. You need to assemble a transition team to shape the Transaction Structure. It should be experienced at handling issues like valuations, real estate options, and IP options. The team should consist of legal, financial, strategic transition, and real estate experts. Of equal or greater impact are the tax implications. Here you ll need to consult with very best tax attorney one that can provide very specific advice. Keep in mind that each transaction structure is highly customized, and will materialize as the deal takes shape. It should also be a structure to provide a win-win scenario for both you and the seller. Do you have a team experienced, skilled, and trusted with legal, financial, strategic transition, and real estate expertise? What are you willing to do to ensure and collaborate for a desired successful win-win situation? What type of financial arrangement are you comfortable with will it include personal, private investors, seller finance, institutional? Is this a stock sale versus asset sale? You must know the difference, as well as the tax and legal advantages. 8

9 Financial Strength The financial strength includes the combined strengths and weaknesses of both the buyer and the seller. Determining these areas will help you create a win-win situation for each party, which is the key to a successful transition. Integrity is crucial at this point: This is where two parties must establish trust and honest communication. Your due diligence procedures and techniques need to be extremely accurate, responsible, timely and systematic. From the job jackets, accounts, to the printing presses to the paper supplier s purchases, you need to make sure all aspects of the business operations are accounted for and validated. Dishonesty in any seller s representation will be a deal breaker! What are your combined financial advantages? What is the expected ROE in the deal? Are pro forma projections data defined? What are the acquisition s weaknesses that will be the buyer s improvements to ROE? Is the company profitable and well-managed? Does it deserve a premium price? If not, is that acceptable? In the case of start-up, what is the financial plan, competitive edge and ROE expectation for the business? Is there Professional Business Valuation information for both you and the seller? What valuation analysis methods will you use, and what are your metrics for expected investment success? 9

10 Development Status The Development Status of the company includes the products and services the sellers are developing, and what types of research and development are they conducting. This corresponds to the overall development stage of a firm: Are they a start-up company or a mature company? An example of a start-up firm in the printing industry might be an organization focusing on developing new technologies to lower printing costs. A more established company might feature a wider range of clients, but have a specific niche in an area such as short-run printing, digital printing, or wide-format printing. What products or services are in the pipeline? What types of innovations are you pursuing? What is the status of any intellectual property or patents? If you re a mature company, how do you plan on maintaining market share while staying current on emerging technologies? What advantage does the seller enjoy in the marketplace, and how will it improve when combined with my capability? 10

11 Market Penetration For Market Penetration for a printing and graphics communications company, you ll want to look closely at the seller s customers. Consider their base accounts, which should indicate their overall focus, and their key accounts, which include their top 5 accounts. Make sure these are long-term relationships, and that the percentage of sales is NOT dominated by any one client. For the print industry, no client should exceed percent of your annual revenues. What are their base accounts and key accounts? How long have the relationships been in place? What are the risks of transitioning the accounts? Do you need a sales representative or owner to maintain the accounts in the transitional stages? What percentage of overall sales do these clients represent? What are your overall sales and the size of your territories or regions? How do you measure the brand equity of the seller? (This is the goodwill value, or the brand, of a smaller company.) What is the impact and advantages in eliminating a competitor? 11

12 Geographic Location The Geographic Location is generally based on your plans for expansion in local, states or larger territories. You may want to consider small geographic areas, then as your investment reaches its growth objectives and gain market presence, expand into a series of acquisitions in adjacent states. The factors to consider include transportation costs; suppliers costs (i.e.: shipping substrates such as paper, inks, supplies, etc.), speed and availability; and supply chain management initiatives. What geographic location aligns with your objectives? Is the acquisition opportunity local, regional, domestic, and/or international? Can your transition team move swiftly and reduce costs of energies of resources of the addition? What are the supply chain management directives: To reduce costs or generate sales? 12

13 Synergy Synergy combines the strengths of the acquisition with your resources to make it a greater value for you and the seller. You need to determine how your respective operations can complement one another. Ultimately, your combined resources will reduce costs, and lead to more accounts and more sales while using the same processes. You ll reduce costs while employing more capacity of combined resources. Consider the following example of an actual synergistic acquisition in the print industry. Printer A (over $50MM, Midwest) acquires Printer B ($1MM, Southwest). The buyer was looking for an expansion of added in-house technology capability (Flexo printing). They wanted a printing company with profit margins higher than the industry averages. They were looking for a company in a distinctive niche with strong key accounts and a national customer base. The buyer was also interested in retaining a high level of talent the seller s employees. The seller was seeking a large, synergistic buyer motivated and capable to invest and appreciate the marketing opportunities for his company. It was important to find a strong financial partner with a national presence that was willing to commit to a long-term vision. The buyer wanted to continue to work with the company and help grow the organization, but at a pace that was less demanding in terms of hours and travel. Understanding the needs of the seller and the buyer helped create this synergistic transaction. Do you have a synergistic candidate for acquisition in mind? What competitors may be a suitable candidate? What technologies complement our growth strategy? What is the supply chain management strategic model? How can your combination of talent work together profitably? What is the seller s operations advantage over yours? What s the niche? Risk-benefits of investment? New market channels of distribution? 13

14 Real Estate Real estate is a critical component in the acquisition process. Depending on the size of the printing company, a significant percentage of assets are tied up in real estate. This represents a significant fixed cost for you, and you ll need to ensure you re ready to handle all the complexities associated with real estate. Real estate ownership can be manifested in many forms. Just like taxes, this is a very complicated area with a wide range of pitfall. Retaining an expert real estate professional can help you clearly establish ownership rights for a property. Get an expert for this Should we own, lease or sublease? What are real estate financial implications of each option? Have you selected an experienced, knowledgeable, credible real estate broker for comps, options and negotiations of all contracts? Have you also selected a real estate legal advisor for best tax-legal counsel? 14

15 Free Review of Your Acquisition Criteria As you use this form to build your criteria, I ll be happy to provide you with a free Acquisition Criteria review. I can offer up valuable hints and tips to help you more accurately define your criteria, and open the door for new opportunities. Phone: rock@rocklamanna.com Skype: rocklamanna Website: About Rock LaManna As an executive coach for owners in the printing industry, Rock helps executives grow their business; merge with or acquire a synergistic partner; or exit the business through succession planning. Rock provides business development strategies that can include successful mergers and acquisitions (M&A) with buyer-side and sellerside deals; and other growth and turnaround strategies. Rock also helps owners with succession planning (exit strategies) and career path coaching. Through the LaManna Alliance, Rock connects printing owners with a wide range of services, including certified business valuations, cobrokerage (business, real estate), due diligence, and investment banking. 15

16 by Rock J. LaManna. All rights reserved. 16