V is for Valuation
An old joke says that when you ask someone, “What’s your net worth?” you’ll know you’re talking to a fisherman if the answer is, “Everything!” Printers who are serious about preparing their businesses for sale need to be a bit more precise in the matter of valuation than this.
Even if selling isn’t a near-term objective, New Direction Partners urges owners of printing and packaging companies to have a valuation performed annually, or at least every two years, by analysts qualified to assess their businesses. Knowing — as opposed to guesstimating — what a company is worth gives an owner a reasonable expectation of what the market is prepared to pay for it. Done sufficiently in advance, a valuation also gives the owner an opportunity to improve the fundamentals and possibly increase the selling price should a decision be made to sell the business.
Generally speaking, a valuation is either EBITDA-based or asset-based. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and a multiple of this number is used to arrive at a selling price in a transaction based on EBITDA. Asset-based valuation, as the name implies, measures the value of the things that belong to the business: principally, its working capital, equipment, and book of business or client list.
There are exceptions, but for the most part, EBITDA-based valuation is for firms that are doing well, and asset-based valuation is for those that are either struggling or failing to achieve new growth. In recent years, the majority of valuations and transactions in which New Direction Partners was involved have been EBITDA-based. Packaging businesses are almost always presented for acquisition in this way.
Asset-based valuations have three components:
- Working capital after collecting receivables, remitting payables and selling inventory;
- Liquidation value of equipment (net of any debt owed on it);
- Value of the book of business to be acquired as a tuck-in (a transaction that compensates the seller in the form of a multi-year commission on retained sales).
In most cases, the tuck-in business will be the most valuable asset that a firm in difficult circumstances will have to offer. No matter how dire the situation, we always counsel against simply locking the doors and selling off the machinery — a thorough asset-based valuation is usually in the owner’s best interest at the end stage.
Because EBITDA-based valuation essentially is a measurement of cash flow, it is a good index of the financial soundness of a business. Factors influencing the size of the price-setting multiple of EBITDA include the scale of the business and the sector of the industry in which it operates. As a general rule, the larger a company is, the higher its multiple probably will be compared with smaller businesses of the same type. Packaging companies tend to command higher multiples than general commercial printing firms.
We prefer to be conservative when discussing EBITDA multiples, but currently, we’d set the ranges at 4 to 5.5 for commercial printing and 5.5 to 7 for packaging. The top ends of the ranges include the effects of business attributes that can add a half point to a point to the basic number: critical mass in segment, EBITDA over a certain percentage of sales, evidence of revenue growth.
Low account concentration, with no single customer representing more than 20% of revenue, is another example of a quantitative factor that warrants higher multiples. There are qualitative boosters too, such as having identifiable, defensible specialties to offer customers; a non-union workforce; an energetic and capable management team; and a seller who is willing to stay on for a period of time after closing to assure a smooth transition to new ownership.
As mentioned, the industry segment a business occupies colors its perceived value and its attractiveness to potential buyers. So do the applications it has capability in. Within the commercial segment, firms engaged in wide-format printing, retail POP, Web-to-print, customized direct marketing, data services and fulfillment are better positioned for solid valuation than those that aren’t. Flexible packaging is the star of the packaging segment, with food, beverage, and cosmetic labels, pharmaceutical packaging and folding cartons not far behind.
The vibrancy of the packaging market hasn’t gone unnoticed by private equity investors: cash-rich individuals and organizations looking for short-term opportunities as well as platforms they can build upon over the long haul. Private equity capital has financed a good deal of M&A activity throughout the industry over the last few years, and we can expect the participation of these savvy investors to continue in 2018 — especially in packaging. With good reason, they view the segment as less cyclical and more recession resistant than commercial printing.
This also explains why commercial printers think of breaking into packaging as a way to balance declines in their traditional areas of business. Adding packaging production isn’t easy, but for commercial printers that succeed at it, the effect on valuation can be gratifying. If a printing company that launches a packaging division this year is doing 50% of its business in packaging three to five years from now, its EBITDA multiple then is almost sure to be higher than what it is now.
However, as far as valuation is concerned, the distinction between printing and packaging isn’t as important as the one between the industry’s have and have-not firms. The latter are the ones just scraping by, neither growing nor making the kinds of forward-looking investments that stimulate growth. The haves, meanwhile, are setting up Web-to-print storefronts, installing digital presses, mapping out 1:1 marketing campaigns, and doing whatever else it will take to keep their customers “sticky” and their business momentum strong.
This brings us back to our advice about performing periodic valuations. It’s possible to maximize business value and increase EBITDA multiples, but only if the owner understands what these concepts mean and how they are reflected in the actual performance of the company. EBITDA, in particular, is subject to many misconceptions and is a frequent source of disappointment to sellers counting on valuations and prices that their underlying numbers can’t justify.
So, engage the expert help you need, give yourself ample lead time, and get an objective handle on what your business is worth. Focus on maintaining value over time and on correcting whatever is keeping it from being all that it could be. That way, when a value-seeking buyer casts a net in your direction, your company will be the prize catch of the day.
Frank D. Steenburgh, partner at New Direction Partners, brings over 45 years of industry experience, including the past 30 years in digital and is internationally recognized as an expert in digital printing and publishing. His experience includes corporate officer at Xerox and president of Indigo’s Americas operations. Frank’s value includes a wealth of global industry contacts, a proven track record in development and implementation of business strategies that drive revenue/profit growth and a deep understanding of horizontal and vertical markets. Contact him at (610) 230-0635, ext. 709.