Editor's note: Joel Salus is a veteran reprographics executive who has been involved in numerous sales, mergers and acquisitions. He gave a presentation at the 2019 APDSP Convention on the topic of selling a reprographics company, and I asked him to put his presentation into an article. This is the second of two parts of that article.
Click here to read the first half of this article.
Rule 4:
When you provide data/information to a prospective buyer(s), understand that you should not disclose confidential/proprietary data/information until the due diligence round.
Here, I’m speaking about your company’s customer list, customer names and detailed pricing information. (Regardless of the fact that the buyer may have signed a confidentiality agreement [or NDA], there is no valid reason to furnish this data/information before the buyer and you have agreed to preliminary terms and conditions.)
Here’s a list of the data you should be prepared to provide for Round 1 (Data / information other than financial statements and what I’ve listed above that you should be prepared to provide during Round 1):
- Your business segments: (i.e., reprographics services, MPS/OSS/FM services, Sales/Lease of Equipment, Supply Sales, 3D Printing Services, Document Management Services, Scanning/Archiving Services, etc.) and a %age breakdown of your sales by business segment.
- Sales Data (Total Sales), (at least) year over year, for at least four years. (buyers may want more than just that). If your company operates more than one location, most buyers will want sales data by location (branch).
- Sales Data by “Reprographics DEPARTMENT Category” (small format, large-format, color, b/w, etc.)
- Sales Concentration Data - Disclose sales data by customer for at least the top 25 customer accounts. (No customer names at this point!). Buyer(s) will want to know sales concentration data. Show the % to sales that each of these top accounts has been generating. Also, disclose to the buyer if any of these top accounts are companies owned by your relatives. Remember to consider your company’s cash sales. (Sales concentration data is part of the buyer’s risk assessment.)
Rule 5:
Annually, prepare a schedule that shows what owner compensation was, including “perq’s” the owner(s) has benefitted from. A buyer will want to know this information. Collectively, these are referred to as add-back items; they will increase your company’s net income and EBITDA.
For example:
- Does your travel expense line item include trips you and your family took to Europe, China?
- Does your “promotion and entertainment expense” line item include your family’s weekly dinners out?
- Does your “promotion and entertainment expense” line item include the season tickets you and your family members use to attend sports events?
- Does your auto expense line item include the expenses you paid for family members’ cars?
- Does your insurance expense line item include insurance for your home, auto, etc?
- Etc, etc. – list out any personal expenses that were “run through” the business.
TIMELINE
Establish a timeline for the process you are going to undertake. That will help you keep the process organized and moving forward.
FINDING PROSPECTIVE BUYERS:
This subject is worthy of an article on its own. The main points being that prospective buyers may be a) in the reprographics business, or b) in the reprographics industry (but not in the reprographics business, yet), c) connected, in some way shape or form, to the A/E/C customer base reprographers serve, or d) financial buyers.
TERMS AND CONDITIONS OF THE DEAL:
This, of course, includes price, and the price and other terms and conditions of the deal are highly dependent on the type of transaction you and the buyer have discussed.
In an “Asset Purchase” deal, the buyer is not going to buy your stock in the company, the buyer is going to offer to buy assets (some, but, more often than not, not all) and the buyer’s offer may also provide for the buyer to assume certain liabilities. EVERY Asset Purchase DEAL I’VE SEEN HAS BEEN DIFFERENT… in terms of what’s included and what’s not included.
In a “Commission on Forward Sales” deal, the buyer is going to offer to pay you a percentage of “forward” sales to your company’s customers.
In a “Stock Purchase” deal the buyer is going to offer to buy your stock in the company. Unless something is specifically excluded, the buyer is going to end up with all of the assets your company owns and is going to end up with all of the liabilities your company owes.
In a “Merger” deal, the buying entity issues you its stock in trade for the stock you own in your company. (Stock deals are not always 100% stock deals; some of the payment to the buyer may be in the form of notes and/or cash.)
UNDERSTAND WHAT YOUR ARE GOING TO END UP GETTING FROM THE TRANSACTION:
In “Stock Purchase” and “Merger” deals, it is easier to determine what, exactly, you’re going to end up with. But, in an “Asset Purchase” deal (or a “Commissions on Forward Sales” deal) exactly what you are going to end up with is going to require a calculation…….one that takes into consideration what the buyer is going to pay you (cash, notes, continuing employment, consulting agreement, payment for your covenant not to compete, etc.), and what you are going to keep (the assets that are not included in the transaction will remain yours), and the liabilities/debts that you are going to have to pay-off out of the proceeds of the deal (e.g., current liabilities and/or long-term liabilities, those that the buyer is not going to assume.)
In other words, take the time to determine what you’re going to “walk away with.” Income tax is a consideration, and I do recommend that you talk to your accountant about this issue.
DON’T ASK ME HOW MUCH YOUR BUSINESS IS WORTH OR WHAT IT IS GOING TO SELL FOR:
Every company is different, and, ultimately, the price one gets for his/her business is going to be purely based on what a “ready, willing and able buyer” is willing to pay. You might think that your company is worth $2mil, $3mil, $5mil (whatever), but if you can’t find a buyer willing to pay that price, then a deal isn’t going to happen. Be realistic in your expectations!
Like the printing industry, the reprographics industry has been negatively affected by the digitization of documents. Our primary customers (firms in the A/E/C Industry) do not print to hard-copy as much as they used to. Customers are using digital tools to avoid having to print to hard-copy as much as they used to print to hard-copy. IMHO, it is far more difficult to grow a reprographics company today versus what was the case 15 or 20 years ago. Knowledgeable prospective buyers know that. Uniformed prospective buyers may not know that.
Prior to the onset of the Great Recession, ARC’s Sales were around $700 million, ARC was valued (market capitalization) at around $1.7 Billion (at ARC’s peak stock price). More recently, ARC’s Sales were around $400 Million, and, last time I checked, ARC was valued (market capitalization) at around $55 Million.
FAIRLY RECENT CASE STUDIES:
I’d now like to take just a couple of minutes to share four recent stories with you. These stories pertain to transactions that either did or did not happen.
Story #1 – Long-time reprographics company, small in sales volume, set an unrealistic price for the sale of its business. Deal did not get done. In addition, seller’s financial statements were an absolute mess. Took the owner months to furnish first round financial statement data. Substantial list of follow-up questions. Information furnished over a period of many months. Back and forth information submittals, discussions and negotiations went on for over one year. If you really want to sell, this is a good example of what not to do! (I was not a consultant/advisor to the Seller.)
Story #2 – Long-time reprographics company involved in repro and equipment sales/service. Company also has a side-line business (unrelated to reprographics) which is mixed into the company’s operations and financial statements. Significant “off-the-books” transactions, which provoked the need to ask a considerable number of follow-up questions. Unrealistic price expectation. A perfect example of not doing what one must do if one really expects to get a deal done. (I was not a consultant/advisor to the Seller.)
Story #3 – Long-time reprographics company – pure reprographics business. Not in a major market area. No business profile prepared. Supporting schedules did not tie-into financial statements, provoking considerable back and forth follow-up questions. Unrealistic price expectation. Back-and-forth discussions going on 8 months so far. Only time will tell if this company actually sells. (I am not a consultant/advisor to the Seller.)
Story #4 – Long-time reprographics company – pure reprographics business. In a great market. Owner retiring. I was engaged as a consultant/advisor to the Owner. Confidentiality agreement prepared. Confidential information memorandum prepared. Financial statements and supporting schedules well prepared and everything tied-in. Transaction time-line established. Short-list of prospective (reprographics industry) buyers quickly identified and contacted. From start to finish, this deal was completed in less than three months. A perfect example of how to get a deal done.
Conclusion: if you are not properly prepared to go through the sale process, you will have a difficult time getting a deal done. If your price expectation is unrealistic, you won’t get a deal done. If you are properly prepared to go through the sale process, have a realistic view of price and other considerations, then the likelihood of getting your deal done will be very high.
DO YOU NEED A CONSULTANT/ADVISOR OR A BUSINESS BROKER OR A MERGERS/ACQUISITION COMPANY TO ASSIST YOU WITH THE PROCESS OF SELLING YOUR COMPANY?
Whether you do or don’t depends totally on what you believe you can get done on your own. That said, some owners may find it quite helpful to hire a consultant/advisor, a business broker or an acquisition/mergers firm. Business brokers mostly handle smaller deals and will know virtually nothing about the reprographics business or industry. I am not aware of any acquisitions/mergers firms who’ve had experience with sales of reprographics companies, but I am aware of acquisitions/mergers firms who have had experience with sales of printing companies. (Mark Hahn, Managing Director of Graphic Arts Advisors, is one of the latter. Mark gave a separate presentation at the APDSP Convention.) Depending on your company’s situation, I might be available to serve as your consultant/advisor or as a consultant/advisor to the acquisitions/merger firm you hire.
ADVERTISEMENT:
I am working with a client interested in acquiring reprographics companies located in CA, OR and WA.
Joel Salus
Corona del Mar, CA and Boston, MA
Cell: 917-822-4164
Email: joel.salus@mac.com
Joel’s background in the Reprographics Business and Industry:
- Silver Spring Blueprint / Allied Reproduction Service / Hot Off The Press / Rowley-Scher Reprographics (1970 – 1988) (final position was Chairman & CEO). Acquired or merged into the above entities 10 different companies. Sold one company.
- Took Rowley-Scher public in 1985 (traded on NASDAQ National Market System
- Sold Rowley-Scher to an Investor group led by Citi-Corp Venture Capital in 1988
- Brokered (the sale of two of Rowley-Scher’s divisions in 1989
- ReproCAD (now ReproMAX); one of the five core founders of this industry group (first Treasurer and a Board Member until I retired from Rowley-Scher)
- EC Technologies (dba Express Color), National Director of Business Development (July 1995 – December 1996)
- T-Square, COO (Jan 1997 - Oct 1997)
- National Graphic Imaging (NGI), Senior Vice President (Oct 1997 - Dec 2007) (we sold NGI to ARC)
- Consultant in the Reprographics Industry (June 2008 – present); general reprographics consulting - mostly business development and strategic planning work - multi-year consulting engagements with Copy General Europe (six countries in Eastern/Central Europe) and with ARC Document Solutions and with other companies.
- Buy/Sell consultant/advisor - consultant/advisor to Owners (both buyers and sellers)
- Blogger: “Reprographics 101” (blog is currently inactive due to technical issues)
- Managing Director of the IRgA (for just under one year)
- Graduate of The University of Maryland (B.S. Accounting/Finance)
- CPA certification earned in 1975 (State of Maryland)