Mark Hahn 14 Keys to Value
Editor's Note: The 2019 APDSP Convention in Dallas focused on how members can increase the value of their firms and prepare for a transition. Click here to read the previous article about the convention presentations, including the presentations by Mikel Monsen on Monsen Engineering and Joseph Szobody of ReproConnect.
Mark Hahn, managing director of M&A firm Graphic Arts Advisors, helped convention attendees understand how graphics arts firms are valued, and how to increase that value. Hahn presented “14 Keys that Drive Value.” The first three were financial in nature:
1) A stable or increasing EBITDA (earnings before interest, taxes, depreciation and amortization). However, he noted that in some cases, acquisitions occur even if a firm does not have a positive EBITDA. This can occur if the buyer has a strategic need to acquire, such as to scoop up marketshare, or if the buyer knows he can “tuck in” the company into his existing firm and eliminate enough costs to make the acquisition worthwhile.
2) Stable or increasing revenue.
3) Gross margins or profits at or above industry standards. However, Hahn did not know what typical margins are for reprographics firms, and nobody in the audience offered that information when asked.
The next three were strategic factors:
4) Industry segment. An acquisition is more likely if the potential target does business in a segment that the buyer is interested in entering or expanding into. A buyer seeking to enter the fabric printing market, for example, may be interested in a firm in that area even if it is not currently profitable.
5) Strategic benefit. If the potential acquisition fits well with the acquirer’s strategic plan, it may offer more money.
6) Strategic plan that is executed and measured. This means that the potential target previously developed and executed a strategic plan, and can show the potential buyer how that plan worked out. This is evidence that management knows how to plan and succeed with a plan.
The next five items dealt with the customers the acquiring firm serves:
7) Market segment served. An acquirer may pay more for a graphics firm that serves a lucrative, growing market segment, such as healthcare or banking.
8) Diverse customer base. If the potential target relies heavily on a small number of customers, this gives buyers pause. It’s not always a deal killer, but it will likely reduce the offer price, because the buyer senses a greater risk of losing significant business if one or more key customers departs after the sale. Similarly, buyers get nervous if one salesperson controls too much of a company’s revenue – if that salesperson bolts after the sale, the buyer could lose those customers.
9) Documented and recurring revenue stream.
10) Specialized services to niche markets or other barriers to entry. Hahn explained that if a
Mark Hahn
Mark Hahn
graphics firm has developed some kind of specialty that other firms would find difficult to duplicate, its value to a buyer may increase. He gave the example of a printing company that bought a refrigerator to store perishable goods that accompanied printed cardboard displays for grocery stores. Once they succeeded with one customer in that area, they installed more refrigerated capacity and marketed the fact that they could offer that niche service, which no other printer in the area offered.
Another example Hahn offered was a printer who measured all of the storefront windows in the community, and then promoted that fact to consumer products companies who ordered window cling signage promoting their products. Since this printer could guarantee that the signs would perfectly fit whatever windows the retailers had – rather than printing generic one-size-fits-all signage – they gained marketshare.
11) Upside potential with new customers.
The remaining keys to value dealt with management issues:
12) Management depth and retention. Hahn explained that a company with leadership beyond the immediate owner has a greater value to a buyer, because the buyer may feel confident that if the owner leaves after the sale, other managers will be able to pick up the slack.
13) Excellent and consistent financial records. Clean, honest records build trust in an buyer’s mind, Hahn explained.
14) Perception of industry leadership and integrity. Hahn told the story of a seller who did not want to offer his business to a nearby competitor, even though Hahn believed that competitor would be a natural buyer. The seller changed his mind after meeting the son of the other company’s owner at an industry event, and becoming comfortable with the young man’s integrity and leadership within the industry. “He’s not such a bad guy after all,” this owner told Hahn, who then closed the deal with that competitor.
Hahn’s presentation also included discussion of other items that can affect the value of a firm. These included the quality of the accounts receivable, software compatibility, and age and efficiency of equipment.
For example, Hahn noted that a buyer will probably pay less for a company that is operating out-of-date equipment, since it may need to soon replace that equipment.
To reach Hahn directly, email mark@graphicartsadvisors.com