The printing industry is undergoing rapid change. Online competition, advances in technologies and changing consumer behavior — to name just a few — are transforming the competitive landscape right in front of our eyes. Demographics of owners in the industry bring us to the start of an interesting crossroads — Baby Boomers are starting to retire. Roughly 50 percent of the business owners will transition ownership of their business over the next decade.
This massive turnover will have a significant impact on valuations in the industry. As more owners
contemplate the right time to sell their businesses, I wanted to share some insight on what you can do right now to start maximizing the value of your business and effectively monetize the value of your life's work.
1. Establish Proper Expectations
Sometimes we see buyers that have unrealistic expectations about what their business is really
worth. Business valuation is a complex animal, as various factors can come into play when determining value for any given company.
For companies with positive cash flows, a multiple of EBITDA is a very common measure of value. EBITDA is net earnings less interest, taxes, depreciation and amortization. For companies that have negative cash flows, you would likely see valuation based on a percent of the market value of the assets, less liabilities. This is called the liquidation value of the business.
You might hear the term "book value" while discussing business valuations. The current book value of a company is simply assets minus liabilities. When an investor pays more than book value for a company, they have "stepped up” the assets to reflect the future earnings potential of the company. This step-up is known as Good Will.
In most discussions people have about valuation, they often talk in terms of "multiples.” It is usually implied as a multiple of EBITDA, but can also be used as a multiple of revenue. It is imperative that you set realistic expectations for what you think a reasonable buyer would want from you after the sale. Are you willing to stay on board to assist in the transition? Will you tell the employees about the pending sale or not? As you can see, there are some important questions to consider before putting your business up for sale.
One of the most important expectations you can set for yourself is understanding what you will do after the sale, and if the sale will support the income stream you will need to fulfill those desires. Knowing exactly what you want the next chapter of your life to look like is a key component to a successful sale.
2. Manage Your Business with Value in Mind
If you can remember any key takeaway from this article, make it this: The stronger the business can defend future earnings potential, the stronger the case for a high valuation. The answer on how to get there lies in a specific Valuation Improvement Program that would maximize the company’s value through the eyes of a potential acquirer. To properly implement a Value Improvement Program, the company needs to have a detailed system. Here are some easy steps to get the process going:
I. State of the company. This first step looks at the overall health of the company and would include a narrative on the company’s expertise, production capabilities, geographic reach, management team, cost structures, margins, equipment and marketing strategy.
II. State of competition. It is extremely important to understand as much as possible about the company’s competitors. Having a firm grasp on their strengths and weaknesses can have major implications on potential value drivers going forward. Take your top three competitors and undergo a similar exercise as we discussed in the "State of the Company" section above.
III. Benchmark results. Every company needs to analyze their strengths and weaknesses by comparing results to specific standards. These benchmarks will measure results in the areas of financial, operations and service. In this exercise, benchmark the company against three common criteria: past performance of the company, comparing that performance to the main competitors and comparing them to industry averages.
IV. Rank issues. Companies that get higher valuations tend to exhibit much stronger averages in key metrics than the industry as a whole. Pick the areas that are most important, and create a framework to discuss all possibilities for improvement. This list should contain three to five major actions.
V. Execute. For each item on the list, the company would create a separate spreadsheet to track progress on items such as timelines, costs and accountabilities.
3. Build Your Team Right Now
It is never too early to create a team of professionals who can help you plan your exit. It all starts with an honest and experienced M&A professional. These folks can help you implement the proper process, and they are well-connected to strong buyer networks.
Next, you want a CPA firm that has experience in transactions such as yours. They can offer invaluable guidance and support when it comes to tax strategies for the sale. Finally, you want a transactional attorney. This is not the time to stick with your old golfing buddy who helped you set up the business many years ago. A good deal attorney is a critical component to your team. Combined, they can all help you sell your business to your ideal buyer.
Kevin L. Ramsier is managing partner and CEO of Vesticor Advisors, a national mergers and acquisition advisory firm that helps business owners prepare their businesses for maximum value.