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Breaking Down the 6 Potential Buyer Types for Your Screen Printing Business

IN “PREPARING TO SELL Your Business Part One,” I introduced some of the key factors to consider when you’re getting ready to sell your company. In Part Two, we’ll focus on the potential buyer types and the differences and considerations between them.

FAMILY MEMBER
SUCCESSION

This is by far the most common starting point for family-held businesses, having worked with dozens over the years where the founders may be two, three, or even four generations back. A family business brings many unique challenges.

The expectations for this type of sale may be very high. The next generation may be expected to take over years before they even start working at the company. Often, the training and knowledge has been handed down from generation-to-generation, but now it’s time for someone else to carry on with the legacy.

This is a classic example of what can happen when past performance doesn’t accurately predict future success. The company was founded long ago and has seen many changes over time, but this story isn’t done yet. The younger generations entering where their parents left off can be problematic. New innovations and advancing technologies are often so different as to not align with the past operating model that has organically evolved.

Think of the analog screen print shop that has failed to introduce, adopt, and advance digital imaging technology. This could be digital printing, web-to-print ecommerce, or fulfillment services.

It’s common to have multi-decade relationships with customers and owners. When either retires, the relationship retires, as well. This is why a long and measured transition is so important.

Being familiar with the business is of great benefit to a potential buyer. Additionally, the new buyer can usually rely on their family structure for support as time goes on. The challenges often come with the untimely passing of the current leader as the business may still be in full operational mode with incomplete succession planning.

There’s another challenge with this kind of sale. As the business passes through generations, there are more and more siblings who may have a vested interest in buying. Worse yet, is the possibility that the younger generation will not want to continue.

My own experience has been the younger generation telling the older “This was your dream, Mom, not mine” to the shock of the current owners.

If this type of sale is planned, it‘s necessary to do as much as possible to minimize transition disruption. This is the area of expertise for business succession planning and there are professionals who specialize in this aspect alone. The more family members who are involved, the more challenging and time consuming to arrive at a fair and equitable arrangement.

EMPLOYEES

Selling to employees is one way for a company to maintain its current course after the owner’s exit. The sale to employees works best for older, larger firms having a long history of employee retention and a strong connection to employee loyalty. This is a great way to reward long-time loyalty with the potential for equity ownership of the firm.

An Employee-Stock Ownership Plan (ESOP) gradually transfers ownership from the current company owner into retirement packages for your employees. Another type of leveraged ESOP is designed for the employees to purchase the company with debt.

ESOPs provide employees with valuable measures of input and control, but they also add administrative hurdles that can slow future development. This type of sale is complex from a legal and taxation standpoint. It will require the guidance of professional services familiar with the legal, accounting, and tax compliance requirements.

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Breaking Down the 6 Potential Buyer Types for Your Screen Printing Business

INDIVIDUAL

The individual buyer is often someone who wants to go out on their own. This kind of buyer is very common in the sub $1MM annual revenue size. They often have unique requirements that can’t be met by large corporations, like hands-on experience or knowledge about certain markets they operate within.

The structure of this kind of sale will depend on what their experience and motivation is. For smaller purchases, the complete transaction can be much faster than larger deals. This makes it easier to work with a single person than with an existing business.

Often an individual buyer will have years of experience in their field. They may have worked for a larger company in the same industry, gaining experience and perspective. On the flip side, industry sales data reveals 48 percent of small business buyers are also first-time buyers.

If selling to this kind of buyer, expect to maintain some kind of transition or training arrangement. This can be as short as six months and as long a one to two years. The transition period usually involves a consulting agreement and does not require the seller to be onsite full time.

COMPETITOR

It’s common for companies to purchase potential or direct competitors. This is one of the fastest and best ways to grow once a company has achieved $3MM to $5MM in revenue. I refer to the gap between $5MM and $10MM as the “killing zone” where a company is too big to be small and too small to be big. For businesses this size, margins are particularly tight. Liquidity and cash flow are often well below those smaller in size. The economic performance can degrade very quickly.

This type of sale is often an excellent opportunity for a business owner to sell and exit with minimal to no involvement after the sale. This kind of buyer will normally understand the market and the general operation, technology, and evolution of the business.

Be careful with this type of sale. It’s essential you keep the information as quiet as possible from everyone, including employees and the market. If the employees find out the business is for sale, it’s common to see a significant exodus as they head toward more stable situations. They often take customers with them, which also affects firm valuation.

It’s necessary to have a very clearly defined Non-Disclosure Agreement (NDA). This document defines what can be seen and how the information can be shared. It also defines the consequences if there should be a breach in the confidentiality of the information.

Finally, it’s essential to retain a competent and experienced business broker and attorney who are aware of the complexity and sensitive nature of this kind of sale. They can act as an intermediary to share information in an anonymous way to help minimize outside awareness of the sale.

Breaking Down the 6 Potential Buyer Types for Your Screen Printing Business

STRATEGIC BUYER

This type of buyer is looking to expand their current operations and for acquisitions that align with their business strategy. These buyers usually aren’t direct competitors. An example would be a contract customer who wants to expand beyond what you can provide. They may be such a large part of your business that it just makes sense to either start their own operation or buy their supplier. This happens often with contract textile accounts.

They’re interested in similar complementary businesses to what they currently offer. They’re often more willing than other groups that need greater financial backing. One disadvantage is they typically don’t have the need to retain a lot of the seller’s current personnel, so downsizing is common.

FINANCIAL

Financial buyers are interested in the return they can receive by investing in a business. You may want to consider this arrangement if you’re looking to maintain some involvement with your organization but do not have the capabilities, funds, or interests to continue serving as the business owner.

Financial buyers are looking for the best deal and for companies that can deliver high profit and cash flow. This is a typical deal of buying low so they can generate more cash flow for the business. They often do not share the same passion and purpose you do.

When dealing with financial buyers, you definitely want to work with an experienced business intermediary as they require a deeper knowledge of what this type of buyer is looking for.

Financial buyers will often structure the sale as a “workout sale.” This is where they put down 30 to 40 percent of the sale price with the balance due upon performance, over time. This is usually one to five years and requires the seller to remain with the company until completion. The final sales price will usually include a penalty and premium clause based on the actual performance.

My guidance would be to avoid this kind of arrangement at all costs. When you sell the company, you’re no longer in control of the decisions. If you recommend a course of action or practice and management does not implement, the results are out of your control, yet you’re being held accountable with the final sales price.

The degree with which you can negotiate this kind of agreement will depend on the condition of the company at the time of sale. If you have not properly prepared the company to run without you, the buyer will hold the dominant position.

SUMMARY
THOUGHTS

The more examples I run across, the more it becomes extremely apparent how important it is for you to prepare and do your homework. You have invested enormous amounts of capital, effort, sweat, and tears over the years and you deserve to be compensated fairly.

The stronger your profit and cash flow, the more desirable you will be to a buyer. This means you will be in a much stronger negotiating position. Take the time to find and engage competent, experienced, professional expertise.

It’s not just about the money. There are so many things that can go wrong if you don’t know what you’re doing or what you should be looking for. Knowledge is power.

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Mark A. Coudray is an industry pioneer with 47 years of technical expertise and leadership. He is a multiple Swormstedt Award winner in both technology and business, is a member of the Academy of Screen and Digital Printing Technology, and is a Certified StoryBrand Guide.

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