Surprise! The Company has Been Sold

One universal truth I have seen over 25 years as an attorney and M&A consultant is that employees are rarely surprised by the news that the company has been sold. Employees understand that, absent qualified children in the business, as owners reach retirement age, they need to transition the business to new owners. Despite their concern over their own future, employees get it.

Nonetheless, employee communications are one of toughest challenges in navigating through the M&A process. Owners are fearful of leaks in advance of closing, concerned that employees will bolt out the door. While that rarely happens, the concern is legitimate and especially so when it comes to sales representatives who feel their future threatened.

In cases where there is financial distress, the perceived stigma or shame of selling the business under duress affects decisions on the M&A deal. In any event, the process of selling your company does not have to be overly stressful. If you are thinking about a sale, merger, or acquisition, we'll include employee communications in our planning together, including the who, how and when to notify your various stakeholders (these same concerns arise when we consider suppliers and customers).

Books - The Comeback of the Century

Mark Hahn and Mitch Evans, my partners at Graphic Arts Advisors, LLC, continue to see M&A opportunities for growth-minded firms to expand within the printing and graphic communications industry landscape. Eyebrows may be raised when we mention book printing in this conversation, but daily operational pressures (shorter run lengths, demanding turnaround times, and increasingly complex finishing and logistics issues) add up to making owners more receptive to joining forces with a compatible partner or with a larger, stronger organization. The underlying viability of book printing supports the view that this segment remains ripe for strategic M&A. Book printing has shown surprising resiliency. An article in NY Times (May 27, 2019) examines valid reasons why printed books aren’t becoming extinct; ironically, the article is worthwhile reading whether in printed or digital form.

Restructuring - Art and Science

“Restructuring is the art and science of exchanging one obligation for another,” I explained to a business owner who faced a critical crossroads that had nothing to do with financial distress. “Restructuring requires broad judgment from an experienced practitioner rather than fluency in technical jargon of insolvency or bankruptcy.”

If you are navigating complicated business challenges that do not easily fall into black-white categories, I invite your confidential communication to explore whether and how my expertise in Restructuring can help you make better decisions, faster and with less risk.

EFI Goes Shopping

This week’s announcement about the sale of graphics communication trade vendor EFI raised eyebrows across the printing industry landscape. Owners may have noted the fine print referring to a “Go Shop” provision, thinking, “I could never sell my business that way.” Privately-owned companies typically traffic through an “undisclosed” stealth M&A sale process, managed by experts such as my partners at Graphic Arts Advisors, LLC.

The primary exception requiring infrequent application of an announced M&A sale process for privately-owned companies stems from bankruptcy cases. The “stalking horse” provisions in bankruptcy stand as the distressed M&A sister to “Go Shop” provision used in the context of public companies such as EFI. From my vantage point as an M&A Advisor, I caution owners to not avoid the obvious buyers out of concern for secrecy. The visible need for a succession plan offers legitimacy for carefully managed exploratory talks that fall short of full-blown “disclosed” sale process.

For more on bankruptcy and M&A transactions in the printing industry, check out the latest edition of The Target Report.

Hard Shut Downs - Not So "WOW" for Stakeholders

WOW Air's immediate shutdown on March 28th illustrates the pain inflicted on customers with an "abrupt ending" of business operations rather than "gradual winding down of assets and liabilities.” The company's extreme financial distress underscored the need for creative options to avoid the checkmate scenario when new financing failed to materialize. The WOW Air case involving “forced liquidation” is a stark reminder for business owners in troubled situations that “orderly liquidation” tends to achieve fairer outcomes for all stakeholders including the bank, customers, employees, and trade creditors.

Caution Speed Bumps Ahead

Current economic news suggests that “healthy” companies should be on the alert for acquisition opportunities to gain new customers. This also serves as caution to struggling companies that the time to map out a transition from ownership may be nearing.

The intersection of long-term changing fundamentals within some segments of the graphic communications industries and short-term economic erosion of revenues and profits is where the next shake-out will take place. The only questions are “when” and “how” to navigate the climate to maximize gain or minimize loss.

Experience from the carnage of 2008, 2002, and 1990 suggests that the fork in the road between “healthy” and “unhealthy” will widen in the next downturn, as leading companies will again grow by gaining market share via distressed M&A and the treading-water companies will transition from ownership via sale of “book of business” and customer assets, non-bankruptcy managed liquidation, and orderly wind-down of assets and liabilities.

First Quarter Decisions

With the strong economy seemingly back on track, there have been fewer new distressed M&A opportunities in the printing and graphic communications industries. Historically, the first quarter has been a peak time because family business owners of companies that are financially “treading water” come back from holidays with spousal/sibling support for “doing something.” As the year-end financial reports are wrapped up, and with family encouragement fresh in mind, owners of challenged companies evaluate strategic options such as putting the business up for sale, or finally accepting the lunch date from the competitor down the street. 

Not sure if the current quiet environment for acquiring challenged competitors is an aberration from long term trend, or the lull before the storm if the economy begins to wobble.

Treading Water

Companies in the printing and graphics communications industry that are “treading water” should take note that the most difficult/critical question directly correlated to success or failure of transition from ownership is WHEN to pull the trigger. More than 50 percent of clients emerging from distressed M&A and orderly wind-down cases over the past 25 years acknowledge “waiting too long.”

Use Caution with Alternative "Instant" Lenders

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Advice to business owners of struggling companies in the printing and graphic communications industry: start now to wean off loans tied directly to your business checking account. The daily cash grind inherent to distressed businesses will be more lethal. These loans now have strings-attached, but in bad times, the strings will feel more like rope for the unprepared. The likes of Kabbage, On Deck, and a myriad of other alternative lenders did not exist in the last economic downturn. They will pose an existential threat when the next credit crunch arrives, as the very nature of the debtor-creditor relationship is altered by the prevalence of daily or weekly payment and auto-debit tied to these loans.

Aligning Price & Structure

The sale of Aldine Printing to GSB Digital (announced December 2018) exemplifies what my printing industry clients like to call “strategic fit,” the foundational basis for the M&A transaction. Aldine saw a path forward to achieve succession and graceful transition from family ownership. GSB Digital saw a growth opportunity from customer relationships and new capabilities. Mutual interest grounded in the “strategic fit” paved the way for creative deal-making where traditional M&A wouldn’t have worked. The case is a reminder for printing and graphics communications companies to seek expert advice on putting the M&A deal together IF and WHEN there is “strategic fit” and no easy answers on valuing synergies, allocating risk of future performance, or resolving financial impediments.

Earn-outs in Distressed M&A

As industry-specific M&A Advisors, my partners (Mark Hahn, Mitch Evans) and I carefully align “price” and “transaction structure” to achieve optimal financial outcomes, regardless of the condition of seller’s balance sheet. That’s why I am proud of what was in today’s mail: earn-out checks received from buyers in 3 separate M&A transactions which represent seller's value for customer relationships that continue to bear fruit more than a year after Closing. While some of these funds still pay old debts out of the orderly wind-down plan under my care, most cases were resolved amicably among creditors within the first year post-Closing. This means that owners may be able to legally and ethically take some money home from the payments. They serve to validate what was a tough decision back when it was made: to trust the buyer and to enter into an unconventional M&A transaction where a traditional sale of business could not have succeeded. It’s nice to see these checks today, giving me pause to reflect on events from the previous few years. I know the clients will be happy to enjoy the moment as well.

Undisclosed and Unknown

Here is an Alert on Successor Liability to My Clients and Professional Contacts: M&A was not a factor in the recent Fox Bindery financial disaster brought on by the Dept of Labor (Cautionary Tale: Fox Group is Defrauded by Temp Agency) but the case illustrates what you’ve heard me call “undisclosed, unknown” Seller liabilities. In theory, the staffing agency mess which rolled into Fox Bindery could have become Buyer’s problem EVEN IF Buyer followed standard legal advice to avoid buying seller’s stock and performed ordinary due diligence. It’s a cautionary reminder for Buyers to identify Successor Liability risks as early as possible and navigate protectionary measures into your M&A Offer even prior to formal legal documentation and accountant’s due diligence. I am closing this Alert by stating that the Fox Bindery case is used here solely for educational purposes, and my comments should not infer anything negative about this company.