The respected owner of a Bridgeport, Connecticut, manufacturing business sat back in his office chair. He was finally relaxing after a day in which he and the young man who was his restructuring advisor fielded calls from angry unpaid suppliers. The strain of financial challenges facing his high-profile company had been emotionally draining on the owner and his family. He was worn out from the grind, and in his late 60s he was no longer the resilient entrepreneur who built the business from the ground up. The tone was somber, the owner became reflective: “For years now, people have knocked on the door here, asking for advice on how to get in business,” he said, looking up from a notepad, “but no one ever comes here to ask how to get out of business.”
The relevance of that conversation has endured the passage of time, and it finds new meaning in the current environment facing business owners in the printing and graphic communication industry. As Covid-relief funds begin to dry up, many owners are once again asking: “Is it worth going forward or is this the time to get out of business?”
The potential of a lucrative M&A sale of business is achievable for some, but not all privately held establishments that dot the landscape of the printing, graphics, packaging, finishing, mailing, and related industries. This pathway for maximizing business value may go through private equity buyers or strategic acquirers, and is well documented in The Target Report, published by my colleague, Mark Hahn of Graphic Arts Advisors, LLC. For others within our industry that do not fit the criteria for a “healthy company M&A transaction,” the options are narrower but the overall need for business transition solutions is far greater, considering the constant struggle to survive that has taken a toll on countless owners.
Owners of companies who had been treading water prior to Covid-19 may turn to unconventional options for business transition. “I never thought I’d be in a position like this,” said the third-generation owner of a printing company while preparing for an upcoming equipment auction; his company already having ceased operations without any M&A transaction. “I always thought I’d ride this thing out and eventually get the prize of a buyer paying me real money for the business. I worked so hard to make this company successful, but I don’t have the same energy at 60 as I did at 40. The time has come to move on.”
|Common Forms of Business Transition in the Printing and Graphic Communication Industry|
|1. M&A Sale of Business as Going Concern to Strategic Acquirer|
|2. M&A Sale of Intangibles and/or Equipment, followed by Orderly Wind-down of Corporate Entity|
|3. Transfer of Ownership Interest to Next Generation by Succession Sale of Business|
|4. Orderly Wind-down of Assets and Liabilities (with or without monetizing intangibles value)|
|5. Divest Printing Industry-related Assets and Convert to Real Estate Holding Company|
For those owners who have struggled in recent years, here are five questions for consideration in thinking about business transition:
Question 1: What is the time frame based on the life cycle stage and relative health of the business?
Caution: Companies who have been treading water sometimes deteriorate at a more rapid pace than the owner had expected as the end approaches, causing turmoil and pressure to “get out from under” while there’s still something to preserve.
Advice: One tool to assess survivability is to track the ratio of cash receipts to new billings. This means if the business is taking in more cash than it is replacing with new receivables, the liquidation has essentially started before the owner realizes it.
Question 2: Who is making the decision on “whether”, “when” and “how” to get out of business?
Caution: If the company is not paying its bills on time or has more debt than assets, then these critical decisions really belong to the company’s creditors, not the shareholders or partners or members. The concept of maximizing value for creditors comes from the arcane world of bankruptcy and non-bankruptcy debt restructuring, but there does not have to be a bankruptcy case for the legal construct to be applicable.
Advice: If the company is behind in its bills, check whether the company is paying out more in “good faith payments” or partial payments on account or other debt reduction than it is making in profit from new jobs going out the door. If so, the decision on getting out of business has already been made.
Question 3: Where do you stand on the ethical issue of doing right by your customers and employees?
Caution: Beware of unexpected costs of winding down the business such as final employee obligations and customer liabilities. Remember the snowy evening where the night shift operator came to the company despite the blizzard, just so a big job could get out the next morning? You may not, but he/she probably does and will likely remind you about it on the way out the door if the business transition is not implemented with care and compassion. Accounting and planning for wind-down are not the same thing.
Advice: Develop a list of orderly wind-down expenses that go beyond the usual accruals that show up on the company’s balance sheet.
Question 4: Who legally owns the assets and liabilities of the “treading water” company?
Caution: The details on how assets are titled and who is responsible for liabilities is based on careful review of documents are essential inputs in creating the road map for going out of business.
Advice: The press operator would not even think about taking home the press, so why are salespersons and some owners thinking that they can just take the customers with them when they leave the company? Except in cases with specific facts, customer relationships and data files/estimates/job tickets etc. are corporate intangible assets and belong to the equity holder and/or the creditors.
Question 5: Why is non-bankruptcy orderly wind-down usually more attractive than bankruptcy?
Caution: The primary reason why very few companies in the printing and graphic communication industry file for bankruptcy is that the process negatively affects customer relationships. Rather than preserving business value, bankruptcy itself diminishes the value of the intangible assets.
Advice: Bankruptcy is the legal backdrop against which restructuring and non-bankruptcy cases are designed; however, the filing of bankruptcy would require all creditors in certain buckets to be treated equally. In non-bankruptcy, creditors must be treated fairly but not equally. That is a huge difference in making the non-bankruptcy orderly wind-down process more palatable to owners who want to achieve a graceful transition. There is a built-in way to be sure that the local die cutter or free-lance designer is taken care of. That does not mean the owner can arbitrarily pick favorites or pay their friends at the expense of other creditors. There must be a business purpose to the architecture of the plan, rather than random one-off payments.
An earlier version of this article were first published by the Graphic Communications Advisors Group.