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.