Friday, June 4, 2021

Five M&A Takeaways from the Pandemic Front Lines


The one-year anniversary of the outbreak of Covid-19 has passed and the much-anticipated tidal wave of failed businesses never happened. The expected deluge of cash-strapped owners seeking immediate relief in the form of distressed company M&A did not materialize. Rather, the marketplace has been defined by owners accelerating plans for an orderly transition from ownership (sellers) and more aggressive, but reasonable, pursuit of M&A by healthy companies seeking new growth opportunities to make up for lost revenues (buyers). With the backdrop of a debtor-friendly creditor climate and strong cash positions on many balance sheets, the environment is ripe for active deal-making in all sectors of the printing, packaging, graphics, and mailing industries.

Here are five takeaways from the frontlines of M&A in our industry:

PPP loans have extended the life of companies that were already treading water

There is little doubt that the massive influx of money from the United States Small Business Administration (“SBA”) under the Paycheck Protection Program (“PPP”) extended the lifespan of many companies that otherwise would have shut the doors. One can debate the political, social, and economic issues related to the PPP initiative, but without dispute is the practical reality that the PPP money was a welcome shot in the arm for shoring up P&L deficits over the past 15 months. Skeptics would argue the money simply deferred the inevitable demise of treading-water companies, but only time will answer the question more fully.

The single most frequent issue surrounding M&A over the past year has been how to advise clients on PPP debt implications

Many professionals would say that the simplest answer is to treat the PPP debt as just another loan on the balance sheet of the seller. In traditional M&A where the seller, at the time of closing, has sufficient assets to fully satisfy all liabilities, the PPP loans become a topic for planning among the accountants and lawyers. But in the context of unwinding the balance sheet of an acquired company that has more debt than asset values, professional advice surrounding the PPP funds has tended to be especially cloudy, leaving principals with uncomfortable uncertainty.

PPP Loans add complexity to the art and science of structuring non-traditional M&A transactions

The range of PPP loan issues that land on the desk of a restructuring expert includes:

ü  the likelihood of formal SBA forgiveness of PPP debt based on the moving target of guidelines and regulations;

ü  the relative priority status of UCC-1 security interests filed by the bank issuing the PPP loan;

ü  misreading of the implications of “no personal guarantee” that had been eye-catching on the front-end borrowing;

ü  the role and competence of the issuing bank which introduces another variable to the situation;

ü  the timing of M&A transaction closing and formal SBA forgiveness approval; and

ü  the requirement imposed by SBA regulations to escrow funds at the time of M&A transaction closing.

Banks have not lit the proverbial match (yet?)

The Covid-19 climate has not negatively affected the delicate relationship between banks and commercial borrowers. This could change in the months ahead, especially as PPP funds run dry, however in our industry we have not seen a surge in demand letters, requirements to provide 13-week cash budgets, collateral audits, onerous renewal terms, forbearance agreements, or other hallmarks of conflict between banks and business owners. Any change in the banking climate could easily have a cascading effect, given the number of companies that are skating on thin ice due to Covid-19 revenue gaps. Interestingly, the creditor group that has had the biggest impact on Covid-19 has not been the banks, but the leasing companies. In our experience, leasing company creditors got the ball rolling in a favorable way when the pandemic broke out in early 2020. The general willingness to defer payments on equipment debt gave owners a financial cushion as well as a much-needed emotional boost at exactly the right time.

Lower creditor settlements have helped offset the decline in M&A value

Numerous experts have weighed in on the impact of Covid-19 on business valuations; however, very few commentators have explored the relationship between M&A value and creditor settlements in the Covid-19 era, especially in the printing, packaging, graphics, and mailing industries. Distressed companies are faring better in workout negotiations than at any time in recent memory. This is partially due to the sheer volume of problem debts that have exposed shortcomings at institutions who lack seasoned personnel to work on restructuring cases that require focus, expertise, and rapid decision-making. Another factor has been the recognition that the pandemic was beyond the control of the debtor with a resultant more empathic creditor response. The net effect is that overall creditor settlements are lower than they were in 2019 or 2018. During the past 15 months, creditor’s understanding and flexibility has helped some distressed company owners to offset the decline in M&A value.

Sunday, January 17, 2021

Are Losses Draining Your Energy and Finances?



Muddy Waters
  • Cash is always tight, scrambling to meet payroll and pay suppliers.
  • Hard work does not seem to be helping; you’re going nowhere fast.
  • Relationships with close family, favorite trade suppliers, and good employees are strained and near the breaking point.
  • Company resources are going down the drain and there is no way to plug the flow.
  • Every effort to plug the continued losses has failed and it is time to face the reality that your company may not be able to stay in business.
The finality of it all stands in stark contrast to the “better days ahead” optimism that was the coping mechanism for yesterday’s challenges. Realizing that the dream of continuing to operate as an independent company is rapidly slipping away, thoughts turn to shutting the doors, filing for bankruptcy, or selling everything to get out from under.

Time is Not Your Friend; Act Sooner Than Later

It is counter-intuitive, but the great majority of owners who eventually get through the painful process of winding up their company come out the other side healthier, happier, and with renewed vigor. For these individuals, the transition from business ownership while under duress serves as a life changing experience. Frequent remarks are:
  • “I should have done this sooner.”
  • “I didn’t realize what it would be like to get my life back.”
  • “I was sadly misinformed, not realizing that there were more graceful alternatives than filing bankruptcy or walking away.”
No one ever chooses to be in this situation; regardless of whether the underlying cause of business demise was Covid-19, the credit crunch of the Great Recession or the tragedy of the 911 attacks. The universal truth from many cases is that there can be light at the end of the tunnel, and that light is not an oncoming train!

The starting point out from the tunnel of darkness has nothing to do with financial statements or traditional advice from accountants or lawyers. It has to do with self-assessment of your emotional mind-set.

Do any of the following four comments resonate with you?
  • “I am done. It is time to get out from under and do what is right for me. I want to take care of my employees and customers. I want creditors to be treated fairly. But it’s time to move on.”
  • “I have no time for thoughtful planning; I am too busy chasing money and keeping the wolves at bay.”
  • “My lawyer and accountant tell me I am nuts to keep throwing money at it, but I’m not 100% convinced.”
  • “I am not giving up, if there is a way to preserve what I have, I will find it. But if it is not realistic, I can be at peace knowing I did everything I could, and I transitioned from ownership in an ethical, legal, and compassionate way.”
When an owner acknowledges to himself/herself that staying in business is no longer an option, there is often a sense of relief in knowing that the focus has shifted from “whether to stay in business” to “what are my options, when do I make the move, and how do I go about this?”

The Survival Clock is Ticking

Once an owner acknowledges the inevitable, “what are my options” should not be the very next question. Think of this as an emergency room scenario. The patient checks in and is in distress. If the distress is acute and death is imminent, extreme immediate measures may be warranted. It’s open heart surgery time. Long term options such as a change of diet and an exercise regimen won’t solve the problem. It may be too late for planned elective surgery as a safer alternative. Time remaining on the proverbial clock defines the universe of options. Does the patient have years? months? weeks? days? hours? I call this the “survival clock” – this drives the subsequent decisions.

The most common answer is “a few months” and, using the medical metaphor, the owner can plan elective surgery to save significant elements of value with a softer landing for shareholders, employees, creditors, and customers. Indicative conditions would include:
  • Available credit is maxed out and/or the company’s lender has cut the line of credit to avoid more exposure.
  • Accounts receivable collections exceed new billings to customers over an extended time period.
  • Suppliers are tightening up their credit terms.
  • The company keeps losing more customers than it gains new customers.
  • Good employees are leaving or planning to depart.
If more than three of the following six warning signs of extreme danger are present, the survival clock is probably measured in a few weeks, maybe a month or two (but not many months), and rapid progress is advised to avoid a total loss of value and a hard landing for constituents:
  1. Bounced checks are becoming normal.
  2. The company is unable to pay complete payroll and is only funding net payroll, deferring IRS payroll taxes and other trust deductions in an effort to preserve cash.
  3. Utility bills are not paid in full each month and there is an expanding accrual of 30 days or longer on electric, gas, phone, and internet.
  4. Premature invoices are issued to create receivables for presentation purposes to lender or other stakeholders.
  5. Financial problems are regularly affecting customers and key employees; they are losing patience.
  6. Critical suppliers of paper, ink, toner, and maintenance have cut off new orders or have imposed onerous requirements to continue conducting business with the company.
Time to Pull the Plug?

A word of caution about owners doing their own self-assessment of time frame. Owners often misread how much time is left on the survival clock. Just like water going down the drain, the rate of business deterioration goes faster near the end. It appears slow at first, almost imperceptible. Let some time elapse and what happens? At some point, the losses are clearly visible, the water is circling. Finally, the last bit of water disappears in an accelerating spin that cannot be stopped.

Wednesday, April 22, 2020

PPP and the Law of Unintended Consequences


SBA Paycheck Protection Program (“PPP”) Loans carry strings attached that should not be ignored. Although there is little doubt that this funding program can be an enterprise-saving measure for seriously cash strapped businesses, owners of printing, packaging, and graphic communications companies who are treading water financially should consider implications for M&A and debt restructuring that extend beyond the immediate cash relief. Here are two examples:

The Remaining Balance of the PPP Loan is Due in Full Upon a Change in Ownership

The PPP Loans have an impact on the balance sheet regardless of whether they can be forgiven or not. The default provisions of the Promissory Note used by the SBA (and adopted by issuing banks) capture a wide range of shareholder actions. They read in relevant part: “Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Interestingly, the default provisions fail to expressly include the “sale of all or substantially all of the assets.” Nonetheless, the words and meaning strongly reflect an intention to apply the provisions broadly. Owners ignoring this clause by relying on legal hair-splitting are taking a big risk. The borrower may wish to believe the risk can be lowered by seeking the Lender’s prior written consent. In theory, this makes sense, in practice this should not be viewed as an iron-clad solution. It remains to be seen how the banks, who are charged with the monumental task of administering the PPP Loans, will carry out this procedure. Historical precedent is not favorable, given that the SBA, in my nearly 30 years as a consultant and attorney, has earned a poor reputation for responding to requests from business borrowers. Modifications, forbearance agreements, settlement offers, restructuring proposals, etc. are frequently delayed due to red-tape, a walked-to-slow-death, or outright rejected even where they make sense.

The PPP Loans are General Unsecured Obligations

For companies considering bankruptcy or shutting the doors, it would be a serious miscalculation to regard the PPP Loan as corporate welfare that is easily walked away from. The debt is not going to magically disappear simply because the company tried but failed to survive. It was the public sector that effectively lent the money, but it appears, in my opinion, that it will be the private sector, not the government, that collects the debt. In all likelihood, it probably won’t even be the banks that will ultimately end up acting as debt collectors for unpaid PPP Loans. This is exactly what happened in the 1990’s when large private pools of capital purchased defaulted loans from the banks. The lawsuits, workout negotiations, settlement proposals, and the related administration were handled by investors who profited from buying the defaulted loan at bargain prices and converted the debt into cash from settlements, judgements, etc. It’s worth pointing out that the standard form of SBA Promissory Note contains much of the legal ammunition favored by bank’s special assets departments and similar collection organizations. And the document itself clearly states the phrase “Lender includes its successors and assigns.” It is likely to be left to the private investor-speculators to consider and use hard-ball tactics involving “accidental personal guarantee” and potential personal liability for owners and officers of companies who borrowed but did not pay back the PPP loans (see, The Hyde Opinion, Beware the Accidental Personal Guarantee).

Friday, April 10, 2020

Beware the Accidental Personal Guarantee


The SBA Paycheck Protection Program (“PPP”) is today’s rage among business owners fighting for survival in the Covid-19 environment. While the overall features and benefits of the program are excellent, a common misperception is making the rounds: business owners are not personally responsible for the SBA PPP debt.

As an advisor to financially challenged companies, I fully appreciate the popular appeal of this catch phrase. The danger, however, is that owners hear these words and fail to fully understand the broader context and the risks that could result in being on the hook to the federal government. While the legal documents are clear about “no personal guarantee,” they contain other provisions which could serve as a backdoor to personal liability.

Among possible triggers that could create an “accidental personal guarantee” and potential personal liability for the PPP debt:

Unauthorized Use of Funds: The guidelines published by the US Treasury include the statement, “If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability, such as charges for fraud.” They continue: “If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.” Unauthorized purposes are broadly characterized as any expenses other than what is permitted such as payroll, rent, utilities, and certain interest.

Business Determination of Necessity: The application for the PPP funds require the borrower to certify that “current economic uncertainty makes the loan request necessary to support the ongoing operation of the applicant” (italics added). While there is a big gray zone on whether the funds are “necessary,” the question of necessity paves the way for personal liability for those borrowers that flagrantly violate the spirit of the program.

Individual Certification Requirement: The US Treasury has set up the SBA to play hardball down the road by requiring the person signing the application to certify that it is true and accurate in all material respects, stating that “I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law.” The guidelines require applicant’s signoff on understanding that the bank can share tax information with the SBA Office of Inspector General for the purpose of compliance with the SBA Loan Program Requirements. These provisions give the SBA flexibility and authority to pursue personal liability cases without actual personal guarantees.

Business owners of companies that were financially “treading water” before the outbreak of Covid-19 should understand that there does not have to be a signed personal guarantee to become personally liable for a debt. There are often additional landmines where a misstep can result in accidental personal liability.

Thursday, April 2, 2020

Customer Relationships are Like Fruit: Sweet & Tasty Until They’re Not


The current climate caused by the Covid-19 pandemic carries unique challenges. Experiences gained from the financial meltdown of 2008, the shock of the 911 attacks, the bursting of the dot-com bubble in 2000, and a wide range of lesser-known calamities, can be distilled into valuable insights, perspectives, and context for navigating today’s crisis. As promised to readers of The Hyde Opinion one week ago, I will be posting “knowledge nuggets” gained during the past three decades in which I have worked side-by-side with business owners in difficult situations. 

Advice: Treat Customer Relationships as Perishables

Customer relationships are like fruits and vegetables in a grocery store. They are valuable only if the store has lights, air conditioning, heating, and workers to maintain their appearance. Their value can evaporate very quickly if the business fails to maintain the necessary conditions. It is of paramount importance to guard customers from the financial problems affecting the business. The protective seal around customer relationships is the trust and confidence they place in a supplier. That seal is often less resilient than many owners believe (one reason for not hitting revenue projections). Once that seal of trust and confidence is broken with one or two major customers, the proverbial “rotten apple” has begun to spoil the whole bunch and the damage can be hard to contain.

This is relevant because deterioration of customer relationships reduces the value of the business based on the premise that customer relationships are what drives value beyond the underlying hard assets such as a building and manufacturing equipment.

Once the mental construct takes hold to treat customer relationships as perishables, it makes it easier to accept the need for faster and more decisive action to preserve their value regardless of how unpleasant it may be to do so.

Thursday, March 26, 2020

John Hyde Responds to Covid-19 Pandemic


The Covid-19 pandemic has created a sudden and dramatic shift in the landscape for M&A transactions in the printing, mailing, packaging and graphic communications industries. At Graphic Arts Advisors, we hope for the best in the coming months, however we realize that many owners in the printing and related industries will be facing new challenges created by the near total shut down of many sectors of our economy. For those owners who need assistance, please know that GAA is open, operating on all cylinders and here to help owners navigate the potentially rough water ahead, assisting both buyers and sellers.

While Graphic Arts Advisors is well known for our core business serving profitable, well-capitalized companies, GAA has also built a niche practice unique in the industry assisting companies that require specialized restructuring and turnaround skills. We leverage our printing industry-specific legal and financial expertise to advise owners and structure creative M&A transactions in cases where the seller has too much debt and the buyer’s M&A offer, by itself, is insufficient to get the seller out from under. We offer proven, non-bankruptcy procedures for resolving debts while treating creditors fairly.

As the Covid-19 crisis unfolds, we expect consolidation to pick up across most, if not all, of the industry segments we serve. If prior experience is a guide, some owners will see opportunity to gain market share through strategic acquisition, and others will seek to gracefully transition from ownership under the backdrop of M&A and non-bankruptcy orderly wind-down.


Over the next several weeks, I’ll be posting knowledge nuggets gained during the past three decades assisting owners in difficult situations.

Sunday, March 15, 2020

Customer Relationships - Corporate Asset?


Ownership of customer relationships is one of the most challenging issues in financial restructuring and distressed M&A for a service business. The inherent tension between maximizing the value of corporate intangible assets and individuals monetizing their personal goodwill is magnified under the microscope of a critical pending transaction. It’s common for the corporate debtor to seek value for these assets while the key people (who may or may not be owners) may run for the exits or put a toe in the water to be swept away to a competitor.

The company’s lenders and creditors have a voice in this debate when a company is insolvent, generally seeking to realize the value of all corporate assets, including if possible, monetizing the intangible assets. It’s logical because if the customer relationships belong to the corporate debtor, they are subject to bank liens and creditor claims. If the customer relationships are an asset that is untethered to the corporate entity, they are capable of walking out the door freely.

Rapid fire negotiating decisions require well-reasoned tactical judgment from the M&A advisor to navigate the mine field of issues related to retention of customer assets.