Businesses in the print and graphics industry have been forced to make massive adjustments during the COVID-19 pandemic. Those with retail customers lived in uncertainty while waiting out shutdowns, and others that served the event vertical are still waiting for their businesses to return to normal. Many started manufacturing personal protective equipment and other products required to do business during the pandemic.
With all of this uncertainty, buyers still exist for quality print and graphics businesses. We have seen some very creative structures that allow sellers to create liquidity while avoiding selling their business at a “COVID discount.” For those business owners who have been planning an exit, this may be an excellent time for you to sell your business.
Buyers are much more stringent during diligence, given the noise in this industry and the economy as a whole. Investing time and effort in preparing your business for sale will simplify diligence, improve near-term operational efficiencies, and increase the probability of a successful close.
Below are some specific areas that buyers will focus on during diligence and that we recommend you prepare detailed information for in advance.
What is your core business?
Are you a traditional printer or a graphics business with complex service offerings? Clearly articulating who you are as a company and providing supporting data like sales by service offering is a simple way to minimize the diligence around the question of “what does the business do?”. Additionally, clearly articulating what your business provides as differentiators than your competitors shows a buyer why you “win” and why your business is a better long-term investment than others in your market.
Growth / Projections
What is your business growth plan for the near term, and what investments have you already made to execute it?
An investor is looking to acquire a platform for growth, and they are willing to pay a premium for a management team that has already done the work for them. Other areas for review are:
- What new lines of business are you planning to add?
- Are you planning to grow through acquisition? If so, do you have a few targets in mind?
- What does your sales organization look like, and how is it managed?
- What shifts did you make during the pandemic? Which of those changes will be permanent, and which won’t be when the world returns to normal?
- What CapEx spend will be required to execute your growth plan?
If the acquirer can get comfortable that the growth plan is defensible and realistic, you can drive toward a close with confidence.
What is the condition of your equipment? Do you have adequate capacity to take on new business, or will you have to invest significant CapEx in the next couple of years to grow?
As a buyer considers management’s growth plan in concert with the amount of debt used as part of the transaction structure, this becomes material. If the equipment you are using is leased, those assets cannot be used as collateral by the buyer. Buyers will pay a premium for a business that is truly ready to grow starting on day one.
It’s also valuable to have strong relationships with vendors that other competitors may not have. This can be anything from better pricing to longer payment terms. Some vendors have strict membership requirements for new customers, so having those connections can make it that much easier for a buyer to get comfortable with those relationships going forward.
Lines of Business
How consistent or recurring is your revenue? Do you have a history of predictability that is defensible?
Businesses that are viewed as project-based with little visibility to future revenue are usually discounted compared to those with higher degrees of predictability.
Do you have service lines that are more tech-enabled than others? Do you have any proprietary methods or software systems that you use as part of your service offerings? Typically, the more complex your service offerings, the higher the margin and barrier of entry to new competitors.
How much of your revenue comes from your top 3 – 5 customers? What is the tenure of those customers? Do those customers have close relationships with shareholders that may be moving on from the business in the future?
We have seen businesses evaporate overnight when a large customer cancels a contract in the middle of a transaction. You must spend time and resources to diversify your customer base before starting an M&A process.
Sometimes there is concentration simply due to the industry you operate in, or maybe revenue is choppy due to a reliance on events or large projects throughout the year. Contractual relationships with these customers can alleviate some of the perceived risks. Additionally, if you can show that you have multiple disparate purchasing agents within those customers, losing one of those divisions will not affect the entire customer relationship.
If we’ve learned anything from the COVID-19 pandemic, no business is perfect! Congratulations on surviving this tough market environment and on building your business into something of value.
We have strong experience in the prints, graphics, and event verticals and would love to add value where we can. A simple review of the company and situation may reveal some areas to improve and focus on as you prepare for an M&A process or liquidity event.
As a simple first step, we utilize CoreValue to help business owners identify key value drivers in their business and areas they should consider improving. You can visit CoreValue HERE for a free initial assessment. JD Merit uses the results of this assessment to take a deeper dive when the time is right.
To arrange a confidential call to discuss how JD Merit helps companies and their leaders prepare for and achieve exit velocity, please call:
Sean Ostrander, Senior Associate
or email Sean.Ostrander@JDMerit.com.