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.
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).
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 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.
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.
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.
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.
