By Ed Avis
Are you looking to buy another repro firm? There are a lot of advantages to an acquisition – it can increase your marketshare, make better use of your existing equipment, open new technological fields, or increase your buying power. Whatever your reasons, however, you should proceed with caution.
Tom Cobery is a vice president at NAPL (reach Tom at firstname.lastname@example.org), and an advisor to commercial printers and label converters on mergers and acquisitions. Printers and label converters are not in the same market as reprographics firms, but many of the issues they face during an acquisition are the same. Below are seven issues Cobery suggests an acquiring firm ask of the potential target.
1) Tell me about your market. The first thing you want to know about potential acquisition targets is whether they have something you want, such as an existing customer base separate from your own, tech capabilities you don’t have, or enough business to increase your economies of scale.
“Sometimes it’s more economical to acquire a company in a business area you want to get into than to try to get into that area yourself,” Cobery says. “Especially if they have the trained people, technology, and customers already in place.”
One way to determine how well an acquisition target is really doing in its market is to survey its existing customers. Don’t just pick up the phone and start calling people – the acquisition target would not appreciate that approach. Instead, consider having the acquisition target do a formal survey of its customer base. NAPL offers a service called EKG Competitive Edge Profile, which surveys a firm’s customers to determine how well the firm serves them, etc. IRgA members may also access this service. Learn more here: http://napl.org/ekg/
2) Tell me about your sales. There are many aspects to this question. If your goal with the acquisition is to enter a new market, you may be more interested in the company’s sales to that area than its overall quantity of sales. Or, if you’re seeking an acquisition to soak up some excess production capacity at your firm (which is called “tucking in” the acquisition), sheer quantity might be your focus.
Margin is also an important consideration. Is the company selling a million dollars of printing a month and making a 1 percent net margin? Unless you can shave a lot of costs out of their production, that company is worth less than a company selling $500,000 a month and making a 4 percent net margin.
Cobery notes that the administrative costs of an acquisition, such as legal fees and due diligence costs, are very similar for a small acquisition as a large acquisition.
3) Tell me about your level of quality and customer service. “In most cases, the acquiring company views itself as a high quality printer/producer,” Cobery says. “And they’re looking for a company with a similar reputation that is going to solidify the acquirer’s reputation or even improve upon it.”
On the other hand, he says, you may think you can improve the quality and service of the firm you are acquiring, like buying a diamond in the rough. You might be able to acquire the firm for much less money in that case. The catch is that the customers of that company are probably paying less than they would if the quality and service were better, and they may not be willing to pay more.
4) Tell me about your pricing strategy. “You’re going to buy the sales of a company. Can you fit those sales on your equipment, and do it cost effectively?” Cobery asks. Again, an important issue here is margin – has the potential acquisition been charging enough for you to make money on those sales, considering your level of quality and customer service? Or will you have to increase prices, potentially hurting sales?
5) Tell me about your own plans after the sale. “In some cases the owners are entrepreneurs who are well known to their customers and want to keep working, in which case they’re valuable to the acquiring company,” Cobery says.
If the owners are valuable and want to stay around, the acquiring company should develop an attractive employment offer for them. The new owners also should understand that the former owner will probably have some adjustment issues – working for someone else after having created a successful company can be tough.
“There has to be some sensitivity on both sides,” Cobery says. “The person whose company is being acquired has to realize it’s no longer his or her company. On the other side, most acquiring companies recognize that it’s valuable to have that former owner around, so they’re less prone to micro manage that person because they know they’ll probably lose him.”
Whether the former owner stays around or not, the acquiring company needs to develop a non-compete agreement with him or her.
6) Tell me about your employees. If you see someone on the acquisition’s roster that you really need to keep, don’t assume that person will automatically stay under new ownership, Cobery warns. Even long-time employees may decide the change is a good time to jump ship, perhaps to a competitor. So discuss the situation with the former owner and make attractive offers to the employees you want to keep before the deal is closed.
7) Tell me how much money you want. While there are numerous ways to value a potential acquisition, by far the most common is a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), Cobery says.
The payment can be structured in various ways – all at once, spread out over time, or some combination. For example, one typical method is a large payment up front, and then other payments in subsequent years tied to the achievement of some sales goals. A related question is whether to structure the sale as an asset sale or a stock sale. There are liability-related and tax-related effects either way; professional advice is required here.
These questions are only the beginning of the process, of course, but at least they’ll help you narrow down the choice of acquisition targets.
Are you on the other side of this conversation, and seeking to sell your shop? Click here to read an article on preparing your shop for a sale.