The best way to M&A
Published: 15 January 2018 | No comments yet
Roger Aust, managing director of Close Brothers’ Print Division: ‘look at inherent value’
Mergers and acquisitions can be a way of achieving step growth in company size and profits but the process can be fraught with pitfalls. Andy Knaggs spoke to print-focused lenders to see how they can help smooth the path.
Print company mergers and acquisitions can be messy and complicated scenarios, with many aspects that need to be handled correctly to ensure success – finance, technology, staffing and ensuring a good cultural fit being just a few.
There never was a one-size-fits-all solution to financing business acquisitions, and there remains a wide range of methods by which deals can be funded, including secured asset-based lending, invoice financing which draws on the debtor book, overdraft facilities, and commercial cashflow loans.
According to Mark Nelson of Compass Business Finance, there are often little nuances that can be drawn from other commercial sectors to give printers the deal that suits the situation best. Generally, however, in print there is ‘a lot of value in assets, and any equity gives you a good starting point,’ he says, adding: ‘You find that companies building themselves up for sale make sure they are unencumbered so that people can raise the finance and secure it against the assets.’
Mark Nelson, director at Compass Business Finance
With so much of the industry now using digital printing equipment, the view on financing deals has changed somewhat, because digital kit does not hold its value in the same way that traditional printing presses do. Where there is not that existing value in the equipment because the operation is digital, there is a different approach, says Roger Aust, managing director of Close Brothers’ Print Division.
‘You have to look at inherent value, and it’s how you unlock that value in the best way. There generally will be some kind of offer, and you have to work out if it is viable. That’s a good test for the business as well, because if we do our sums, and we cannot see a positive cash stream, then it’s probably a sign that the business should look at its structure. We are relatively hopeful and positive in our underwriting and we will always look to find a way of doing something.’
Not all lenders feel that digital changes things so fundamentally. Frazer Robson of Beechwood Finance considers it ‘identical to anything else we would do business in’, and adds, ‘We’re not really looking for anything specific apart from a trading history and profitability.’
There is another factor to bear in mind where digital equipment is involved, and that is whether the supplier of the equipment will continue to support it after a business changes ownership. ‘Many of the main suppliers are very wary of who they support,’ says Mr Aust. ‘You buy a business and the major supporter of the kit suddenly has a rethink about how they do the service contract. The only way to guard against that is to know what the service contracts are and to talk to the suppliers. We very often find that this happens, and it is something that is very specific to the digital market.’
A good fit
Getting to know people on both sides of the transaction is key for the financiers, in terms of understanding and managing expectations, and ensuring that the fit between parties makes sense. Sellers generally want all their money upfront, but rarely is this achievable. More likely, deals will be tied to ongoing revenues, with an earn-out further down the line. From a finance perspective, it seems that flexibility is key, and the market is currently better stocked with finance houses possessing a more liberated view than it used to be, says Frazer Robson. ‘We deal with a lot of new banks like Metro and Paragon, and they have more of an appetite than the main four banks. They are also prepared to take the time to go out and visit the client,’ he says.
Frazer Robson, director of Beechwood Finance
Both buying and selling businesses can be fraught with difficulty, and there are big differences involved between friendly mergers and acquisitions and distressed situations. The stronger a business is, however, with more cash reserves, orders and key accounts, then the better the business can be groomed for a strong sale.
Where buying a company is concerned, the absolute advice is not financial but common sensical: ‘Make sure that you know – I mean, really know – the company you are buying: the people, the business and the customers,’ warns Roger Aust. ‘The last thing you need is to pay a lot of money for a business which you then find is not what you thought, even after due diligence. Big players can put in teams of accountants and specialists, but if you’re a smaller player buying another small company, you cannot beat knowing that person’s business inside out.
‘A company that you’ve dealt with for many years is going to be much easier than one you have come to cold, unless you are buying in a distressed situation and you see an order book that you can take a pragmatic approach to.’
Getting too close to a target business has its own perils too however, according to Mark Nelson. Emotion can take over, overriding the fact that this is a business transaction. ‘Try to get to a position in your own mind of how much the business is worth before you ask them for a price,’ he advises. ‘If you have a figure in your mind before you get emotionally involved, that makes things a lot easier. Often the buyer does know the business before they go into this and that does make it personal. They need to step back from that.’
A lot of that does sound like common sense, but where large sums of money – actual or potential – are involved, not to mention perhaps a bit of an ego and a degree of appetite for a gamble that characterise many entrepreneurs, it’s important to do the homework and ask the important questions first, as that vastly increases the chances of getting the desired result.
Grafenia follows the signs
Peter Gunning, CEO of Grafenia: ‘clients only want one creative relationship’
Printing group Grafenia has been active in acquiring new print businesses of late, particularly in the sign sector. Chief executive officer Peter Gunning told Digital Printer about the company’s strategy, the key decisions involved and the approach to finance that has made the recent deals possible. He begins:
We’ve observed a convergence in the graphics world. Printers are selling signs. Designers are selling web[sites]. Sign makers are selling print. We believe this is partly client-led. They only want one creative relationship – someone to take care of their online and offline marketing. We find the signs sector interesting and have been acquiring sign businesses to complement our print offering.
What has been the thinking and processes behind identifying targets and then pursuing them?
We are offered many businesses for sale. With sign businesses, we typically see two types: one where the owner wants to retire and hasn’t got a succession plan; the second, where the owner might be second-generation, they’ve bought the business from the owner and are looking for ways to grow.
We look at both. And our aim is to take one of the first, one of the second, and combine the businesses together.
What key decisions or factors come into play in such activity?
First and foremost, culture is important. We have to make sure that anyone who is sticking around will fit with our way of working. Secondly, we need to make sure there’s an agreement in terms of valuation. Some people have wildly unrealistic expectations of what their business is worth. If we get two ticks, then we start the process.
How did Grafenia decide upon the best ways of financing the deals?
It depends on the size of the deal. We financed the first from cashflow. We refinanced some machinery to fund the second.
To what extent do you feel these options and the decisions taken are unique to Grafenia? Can they be related across the industry?
We’re a public company. While that has its downsides, one of the benefits is the flexibility we have for raising capital. We have an internal valuation model which we use to place a value on our shares. We use that to compare our current stock price and decide whether to issue shares or use cash. The recent deals have been paid wholly in cash.
What lessons have been learned in this process?
To be patient. Buying and selling businesses is like buying houses. There are many people involved and timetables aren’t always under complete control.
What advice would you give, in terms of the financial aspects, to any printers considering M&A activity? What pitfalls are there?
Do your due diligence. It’s worth paying for. If you’re merging with someone, make sure you actually like them. That sounds pretty basic, but if you’re bringing your businesses together, make sure you start with the end in mind. Write out your 100-day plan. Cover what you’ll do in the first 100 days of combining the businesses. And keep your eye on the goal. There will be plenty of moments along the way when you think you’ve had enough. Go into it knowing it’s going to be hard. The road will be long, and both parties need to acknowledge it’ll take determination to cross the finishing line. Then the real work starts.