Exploring the Land of Mergers and Acquisitions

When Brian Burlace and Jon Brothers first met on the lacrosse field at the University of Maryland, they never expected their friendship to influence their business game. But that all changed when the former teammates went on to head two different companies with similar product and service offerings. As president of the Glen Burnie, Maryland-based distributorship Tray Inc., Burlace cultivated an expertise in print communications, with an emphasis on commercial printing, web-to-print and direct mail. Brothers, who worked on the promotional side, founded JB Creative Services, a full-service graphic communications firm located in Bethesda, Md.

Over the years, the close friends joked about the possibility of an acquisition, though nothing ever came of it. Talks turned serious in April, however, when Brothers approached Burlace about exploring new possibilities. “Once we met, the entire process was completed in a couple of months, and we are looking forward to working together to grow our foothold in the market,” Burlace said.

Both Tray Inc. and JB Creative Services boast highly recognized brands in their client portfolios (most notably, perhaps, Under Armour). The acquisition, which was touted in a press release as having formed one of the largest privately held print distributorships in the nation, has been a smooth one. Brothers has stepped into the role of vice president of sales, and works with the team to continue to improve client relationships and business development. “Tray offers our sales reps unlimited income potential and a tremendous amount of support to achieve their goals,” Burlace said. “The reps who came over from JB [Creative Services] are thriving with the additional internal support they are now receiving from Tray.”

Not all companies get a fairytale ending. Want proof? Look no further than the height of the recession. During that time, industry revenues softened, forcing many firms to merge with other businesses or to close their doors for good. “The mergers and acquisitions (M&A) environment is much stronger today,” observed Paul V. Reilly, partner in New Direction Partners (NDP), a Valley Forge, Pennsylvania-based M&A advisory firm that serves the printing and packaging industries. “From 2009 to 2012, over 50 percent of the transactions involved at least one party that was distressed. Today, the companies being sold are mostly all financially strong and growing. In addition, today’s buyers are different and have more cash. Banks are again lending, and private equity firms have returned to the market. This has increased demand for good companies, resulting in higher multiples today than [during] 2009 to 2012.”

According to R. Scott Sutton, vice president of both Safeguard Business Systems and Safeguard Acquisitions, Dallas, product diversification, as it relates to the economy, the market and valuation, is a 
major influencer right now in the M&A landscape. “There is a significant amount of focus on this shift of businesses away from printed forms or printed products, for example, and into more technology-related areas and services,” Sutton said. “When we look at businesses, we know that, on the M&A side, not every dollar is created equal. So, if you’ve got a business that is focused on generating sales exclusively by selling checks, those sales dollars generally aren’t viewed as attractive or as valuable as a company that has decided to diversify and generate sales through business or technology services, or brand marketing and representation-type services, like promotional products and apparel.”

Take the JB Creative Services acquisition, for example. Burlace couldn’t ignore the company’s footprint in the promotional products market. “In acquiring JB Creative Services, we have instantly added growth and experience to our promotional product division, which has been rapidly expanding since it was launched in 1994,” Burlace commented. “The experience and expertise Tray can offer JB clients in the commercial printing, web-to-print and direct mail markets has already lead to increased sales and opportunities within those clients. Having many of the resources, such as a graphics and web development team, available to them has given the JB sales team more tools to help with all of their clients’ print and communication needs.”

With any acquisition, it is important that the involved parties share a similar vision. The JB Creative Services deal may have marked the first for Tray Inc., but it wasn’t for lack of trying. “We have been looking for other opportunities for quite some time, but in most cases the numbers didn’t add up or the cultures were vastly different, which could be an easy path to failure,” Burlace remarked. “... It was important to respect how and what the JB team built in terms of customer relationships and keep that intact while working to implement some of the Tray procedures. We can learn from both companies’ successes and failures to provide the best service possible to our clients.”

This approach also has worked well for Safeguard’s Business of Mergers and Acquisitions (BAM) program. The BAM team, which has completed deals for both Safeguard and its parent company Deluxe, prides itself on what Sutton calls an “anti-establishment” mindset. “What I mean by that is when you look at the typical finance-oriented, acquisition-type team—whether it’s a private equity group or an investment bank, for example—a lot of times they’re very metric-, numbers- and finance-driven, and that’s OK,” he explained. “That’s an approach that’s worked for a lot of firms and a lot of professionals in the space for a very long time.

“Our orientation is different,” Sutton continued. “We’re extremely focused on discipline and culture, and it’s very anti-establishment. So, for us, we’ve learned over time that when we can find a business that is metric-driven and has a culture that meshes well with the Safeguard culture, those types of factors are the ones that have led to the deals outperforming the thesis that we developed going into the transactions.”

That discipline extends to planning and forecasting business activity. Safeguard believes in keeping an open dialogue between its sales team and their customers in order to gain a better understanding of the verticals those clients serve. “We’ve got a discipline of very frequently connecting with distributors and with business owners and salespeople, and understanding, ‘Hey, how’s the month shaping up? What are your customers telling you? How are you feeling about the markets? Is there softness? Are there impacts in the verticals that you’re serving? If you’re in the petroleum services vertical—how’s that vertical? How’s it shaping up this quarter? And this year? And this month?’” Sutton said.

ALL IN DUE TIME
We’ve learned what can lead to the most successful deals, but how are these decisions made in the first place? The motivation of buyers is clear. “Either they are looking to augment sales and mitigate the difficulty of growing in mature markets, or they are looking to gain expertise in new products or new markets,” noted Peter J. Schaefer, partner at NDP.

The sell side is where things get a little more complicated. “In the family-owned sector, where NDP concentrates, the strongest motivation is the need to diversify and retire,” Schaefer said. “Significant wealth, sometimes multigenerational wealth, resides in family-owned printing and packaging firms and drives a sale. Sometimes, poor performance drives the need to sell. Selling a firm is always better than just closing. A printing or packaging firm’s customer base has great value and always justifies selling a firm versus shutting down.”

Sutton agreed, and mentioned one additional seller persona: the business owner with the short-term exit strategy. “We’ve met, and completed transactions, with owners who operate businesses almost like a private equity group might operate a business,” he shared. “They either start or acquire a business, and operate it for five or 10 years, knowing, ‘Hey, five or 10 years from now I’m going to sell it, so I’m going to build this business and operate it in a way that maximizes my value five years from now.’ They’ve got an exit vision and are motivated to execute that vision in the near term.”

No matter which bucket sellers belong to, it is important to be planful. Sutton encouraged companies to make sure their financials, business records, employee records and any contracts are compiled, up-to-date and ready to be shared with the prospective purchaser when the time is right. He likened it to selling a house. “What do you do before you sell your home?” he asked. “You paint the walls. You pressure wash the concrete. You do the things that you need to do to put that home on the market, looking as presentable as possible.

“The second thing I think is a mistake that a lot of sellers make is not having an understanding of the realistic view of the landscape,” Sutton said. “Your home is worth more to you than maybe someone else from the outside might view its value. So, one of the things you do when you’re selling your home is you meet with a realtor, you have market comps pulled and you gain guidance on what the market is saying that your home is worth. ... That kind of guidance will set some realistic expectations and lessen the likelihood that a seller is going to turn off or turn away a prospective buyer, especially the first ones. If you believe that your home is worth $1 million, and the market says it’s worth $500,000, well the first two buyers that come into the market and offer you $600,000, you’re going to send them packing, but in reality, that was probably a good price.”

Sellers with unrealistic expectations have been a point of frustration for the partners of NDP. “Printing and packaging firms have value, more value than six years ago, but not as much value as 15 years ago,” Reilly said. “The best way to increase the value of your firm is to increase sales, increase profits and decrease debt. As an owner, you must do all three. Don’t expect a buyer to pay you for their efforts to achieve if you were unable or unwilling to do so.”

To help with the planning process, NDP asks potential sellers a handful of thought-provoking questions from the get-go. “First, what do you want to do after you sell the firm?” Schaefer posed. “Second, after the sale, do you have sufficient time and money to do what you want to do after you sell the firm? If there is not a satisfactory response to these questions, the seller is not ready.”

This type of due diligence applies to buyers, as well. “You’re going to hear this over and over from folks like me and companies that are out there that have been active acquisitively as buyers, they’ll tell you you’ve got to do your diligence—you can’t shortchange it,” Sutton stressed. “If you don’t know what diligence is, a lot of the big firms and small firms out there have what are called transaction services departments. Those are departments that the big firms, like Ernst & Young and KPMG, [have] that do diligence for you. It’s expensive, but you’ve got to do your diligence. You have to investigate these organizations to make sure you know what you’re getting and what you’re getting into.”

Companies also have to put in the time. “Most family-owned firms are unable to handle the time required to run a sales process that maximizes value,” Reilly said. “In fact, even when you have a banker, like NDP, running the sales process, the ability to continue to run a business and support a sales process is two full-time jobs.”

So, how long does it take to complete a transaction? The short answer is, it varies. One of the metrics Sutton looks at is letter of intent (LOI) to close. In layman’s terms, after the initial investigations and negotiations occur, an LOI is executed. Sutton and his team then track the time spent between signing the LOI and officially closing the transaction. “In 2015, we averaged 55 days [from LOI to close],” he said. “This year, it’s 49 days, so the transactions have gone almost a week faster.”

To provide some perspective, Sutton referenced Safeguard’s recent acquisition of Santa Rosa, California-based National Document Solutions. The BAM team held its initial meeting with the company’s seller and owner in February 2016, Sutton recalled, executed an LOI in late April and closed toward the end of June. “That one happened very quickly,” Sutton said. “[Other times,] we’ve talked to companies for two years before we’ve gotten to a place where we’re ready to execute an LOI, so that’s why we measure LOI to close.”

Schaefer had his own opinion. “The sales process takes nine to 12 months to do correctly,” he said. “After you sell, you may be required to work for the owner to teach them your business for up to two years, rarely less than six months. If you plan on spending time on the proverbial beach in the next several years, start the process now.”

In terms of numbers and transactions, M&As in the printing and packaging industries have been on the rise, and several pundits expect this trend to continue. Only time will tell how those predictions play out and what they mean for this corner of the business world. Perhaps Burlace summed it up best: “At the end of the day, our clients are the true judge of the success of the acquisition when they hopefully will decide to continue our relationships and embrace the new capabilities available to them.”