Selling a privately-held, middle-market company is an art, not a science. Despite the fact that middle-market companies (medium-sized businesses with a value in $2-250 million range) make up a significant portion of the screen-printing industry, you’ll find few sources of empirical data to use in pricing a transaction of this nature. If you plan to sell, and your shop falls in this category, you’ll find that information to gauge the company’s worth and establish a realistic value is usually sparse, superficial, and of limited use.
Selling a privately-held, middle-market company is an art, not a science. Despite the fact that middle-market companies (medium-sized businesses with a value in $2-250 million range) make up a significant portion of the screen-printing industry, you’ll find few sources of empirical data to use in pricing a transaction of this nature. If you plan to sell, and your shop falls in this category, you’ll find that information to gauge the company’s worth and establish a realistic value is usually sparse, superficial, and of limited use. You also face other challenges that are unique to middle-market deals, from understanding unfamiliar transaction procedures to selecting the best transaction structure. Due to the uniqueness and complexity of middle-market deals and the lack of meaningful information on the subject, you need to follow seven important rules to ensure a successful sale: 1. Define your expected transaction price before going to market. 2. Strive for an all-cash deal. 3. Demand minimal exposure to post-closing issues and liabilities. 4. Accept the fact that negotiations tend to be adversarial. 5. Be patient. 6. Divulge proprietary information only at the appropriate time. 7. Work with a competent acquisition-consulting or investment-banking firm. Define your expected transaction price before going to market Buyers basically want to steal your company–that is how capitalism works. Unfortunately, the buyer is usually a larger organization with greater resources and more knowledge about making acquisitions. But by educating yourself and working hard, you can level the playing field. Before to going to market, you should make sure all facets of your business have been comprehensively evaluated. To ensure that the evaluation is thorough, you may want to hire an advisory organization (such organizations are discussed in more detail toward the end of this article). Your company’s major future opportunities and risks also should be identified, evaluated, and quantified. When this process is complete, you should feel confident that your knowledge of the company’s future earnings potential is greater than the buyer’s. Although tangible assets are considered, the value of a company is largely determined by measuring its earnings before interest, taxes, depreciation, and amortization (EBITDA), as well as the risk it faces in achieving that EBITDA level. The final value will be influenced by both short-term future earnings potential and long-term growth factors. The stability of the business is then assessed in order to determine what factor the EBITDA value should be multiplied with to arrive at the selling price. Most prospective buyers will arrive at a different price but will be within 10-15% of the average market price for a comparable company. Be aggressive in your pricing expectations. Demand a realistic premium price. Remember, you only sell your company to one buyer; your objective is for that buyer to pay a premium price. Once your pricing expectations are set, be confident and firm in your position. Expect most potential buyers to try to convince you of the exorbitance of your pricing position, and resist temptations to lower it. Strive for an all-cash deal In an acquisition scenario, as in any business dealing, you are trying to maximize price and minimize risk. You’ll find no better way to accomplish the latter than by transacting a principally all-cash deal. When a buyer wants you to accept promissory notes, rather than cash, the buyer is usually motivated by one of two factors: 1. The buyer lacks bank or institutional financing, either because it is unavailable or offered at an interest rate higher than the buyer is willing to accept. 2. Notes can be an easy conduit through which a buyer can collect for representation and/or warranties you allegedly break. However, this could make it necessary for you to pursue litigation to collect on the notes. Avoid promissory notes and the risks they bring–settle only for cash. In a similar vein, never consider a deal that includes pricing contingencies, unless the contingent portion represents money in excess of the expected transaction price. In general, you will be unable to meet contingency goals without unreasonably restricting the buyer’s actions and options after the deal is complete. Demand minimal exposure to post-closing issues and liabilities Large buyers are used to shifting most deal risks to the seller. This is the norm, and it could be hazardous to your economic health. As an owner, you face no upside after your company is sold. Correspondingly, you should have no downside risk for situations beyond your knowledge or control that manifest after the deal closes. To assure a more equitable sharing of risk between you and the buyer, you should insist that the majority of your representations and warranties be limited to "seller’s knowledge." A few representations and warranties may require a higher standard of seller guarantee, but they will likely revolve around problematic issues you are already aware of prior to closing the deal. Most buyers will strongly contest your reluctance to absorb the majority of risk and liability. But do not relent unless the agreed selling price compensates for the added risk. Accept the fact that negotiations tend to be adversarial Negotiations are a test of wills in which both sides battle for control. Negotiation is a confrontational process by nature. Buyers may be used to deals being priced the way they want. Whenever a buyer is asked to pay a price in excess of what he or she considers acceptable, you likely face a few rounds of difficult and adversarial negotiations before you’ll be able to make the deal work. If negotiations go smoothly and amicably, it usually means the buyer is getting the price he or she wants. This price is rarely the premium the seller is hoping to receive. The point is that some degree of confrontation during negotiation is typical in transactions where the seller wants a good deal. Be patient You should demonstrate patience throughout the acquisition process if you wish to be successful. But don’t confuse patience with lethargy. As the seller, you have the most to gain from maintaining a slow pace in closing the deal, but only if you have a firm handle on all the issues that surround the transaction. If you have thoroughly evaluated all factors surrounding the sale, being patient should be easy. Patience reflects confidence in the validity of your position. Such patience is likely to produce anxiety in the buyer that only makes your position stronger–a patient seller is usually interpreted as one who has many attractive alternatives, which tends to make the buyer more flexible in negotiations. Divulge proprietary information only at the appropriate time As a general rule, try to avoid selling your business to customers, competitors, or suppliers who could use the information you divulge during sales negotiations against your business if the sale doesn’t go through. If unique or compelling circumstances mandate that such prospective buyers be pursued, you must approach them much more cautiously than you would a typical buyer. When working on a potential buyout from such a prospect, you should insist on a strong confidentiality agreement. In particular, this agreement should do the following: * limit the buyer’s right to solicit your employees and/or customers in the future * limit the financial and business details you will provide to the buyer during the initial stages of the selling process * require much more detailed financial and business information than is usually obtained from a buyer at the beginning of the process Regardless of who the buyer is, the best approach is always to refrain from divulging proprietary information until the latter stages of negotiations. Information that could be considered proprietary includes * information about sales levels or pricing specific to individual customers or products * purchase or production costs for specific products or customers * specific pricing strategies for particular products, volumes, or similar factors * specific future operating plans This information should not be divulged until you and the prospective buyer have signed a letter of intent regarding the purchase. At that time, you and the buyer would begin to negotiate a definitive purchase agreement, which details the structure of the transaction and the obligations of both parties. At the same time, the buyer would commence the due diligence process toward closing the deal. This is the point when sensitive in-formation must be revealed to the buyer so that you can obtain minimal exposure in the representation, warranty, and indemnification areas. In high-risk situations, after the letter of intent is signed, you may wish to expand the confidentiality agreement to prohibit the acquirer from hiring any of your key employees or soliciting key customers for a 12-18 month period if the deal does not close. Work with a competent acquisition-consulting or investment-banking firm Like many other middle-market companies in the screen-printing industry, your shop may be a business you launched or a family-owned enterprise that has been around for generations. If this is the case, you’re likely to have little, if any, experience in coordinating a sale of this magnitude. To ensure that you don’t overlook key elements of the transaction and can receive a fair price for your business, consider hiring an advisory firm to guide you through the process. An advisor can help you plan the sale of your business, establish its value, develop an enticing offering circular (a brief prospectus designed to explain your company and attract interest from prospective buyers), and find a synergistic buyer. A competent advisor will consider all aspects of your organization and the market(s) in which it operates. In short, the advisor’s review of your business should transcend a mere analysis of your financial statements. The advisor must thoroughly understand the economic implications of the legal issues that are likely to arise in negotiating the definitive purchase agreement. In a middle-market deal, it is usually preferable to use an advisor who has an entrepreneurial flair similar to your own. Such advisors will best understand the feelings and emotions you are likely to experience during the selling process. The advisor must also be a strong-willed, articulate, and persuasive in negotiating, because negotiations leading to the closing are the most critical phase of an acquisition. With a reputable advisor, your best interest is the only factor that dictates an acceptable deal. Your greatest achievement The sale of your screen-printing company may be the culmination of your own career or the result of efforts made by many generations of your family. By following the suggestions presented here, you can sell your company on the terms you want and provide a fitting legacy to the hard work that you, and those who came before you, put into the business. About the author George Spilka is president of George Spilka and Associates, a merger and acquisition consulting firm based in Allison Park, PA. Spilka specializes in transactions involving middle-market, closely-held corporations and has worked with clients in the printing industry and other sectors. He has also authored business articles for a variety of trade publications. Contact Spilka by e-mail at [email protected] or by phone at 412-486-8189. Visit his Website at www.georgespilka.com.
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