Let's Make a Deal
When the deal-making environment is good, it's quite good. According to J.P. Morgan, a growing number of transformational deals of $10 billion-plus in value and an increase in cross-border transactions drove a 27 percent year-over-year increase in global mergers and acquisitions (M&A) activity last year. So far, that momentum has carried over into 2015—and into our industry.
If you're considering a merger or acquisition—whether as a buyer or a seller—have you asked yourself "Why?" Maybe you want to expand your economic footprint like Edward Martin, president and managing member of Proforma Media & Print Solutions. Or maybe you're like Jeff Scott, former CEO of DocuSource by Safeguard, and need a transitional plan for when you retire. Whatever the case may be, you need to have a clear understanding of the process and the possibilities it may bring.
To help you get on the right track, Print+Promo asked several industry leaders to share their experiences—the good, the bad and the ugly. Here are their stories.
M&A Company: Proforma Media & Print Solutions, New Braunfels, Texas
M&As have been the most efficient way for Proforma Media & Print Solutions to expand. "We are continually growing and looking to expand to other parts of the country," said Edward Martin, president and managing member. "We started in central Texas, but because of M&A, we have been able to open an office in South Texas, another that covers West Texas and Southern New Mexico, and are looking into Northern New Mexico now."
Martin has acquired six businesses over the years: Lone Star Printing, Seguin, Texas; Ewing & Sons Printing, San Antonio; Print and Copy LLC, San Antonio; Advertising Concepts, Longview, Texas; Expressions Printing, San Antonio; and Business Forms Inc., El Paso, Texas. No transaction is created equal, but Martin said the Advertising Concepts acquisition particularly stands out. Interestingly enough, Advertising Concepts' sales were approximately 20 percent more than Proforma Media & Print Solutions' sales when the deal was completed, positioning the latter company for exponential growth. "With the revenue they brought in, we were able to add the necessary personnel and infrastructure needed so I could focus on growing the company and not get bogged down in the everyday order processing," Martin recalled. "Subsequent deals wouldn't have happened without that one."
Every merger or acquisition needs an explanation of how the deal is going to enhance the company's core strategy. Martin has several objectives to meet, starting with the procurement of customer lists. "We want more contacts to call on," he said. "It is a numbers game." He also scopes out new industries and geographical areas for Proforma Media & Print Solutions.
One of the most important attributes, however, is the potential target's ability to grow. "We are an advertising agency, so we can do anything a customer may want from print and promo to technology-based solutions and rebranding," Martin noted. "If we can find a print shop that is only doing commercial print, then we can fairly easily double their sales with promo products. If it is a promo distributor, we can do the same thing, but with print. When we increase sales that means more profits for the seller."
He went on to say that long-term success ultimately hinges on compatibility between buyer and seller. For Martin, that means being able to get sales off relationships. "The key to any of these deals is to leverage the relationships the seller has with their customers," Martin stressed. "We spend a lot of time (years, if necessary) getting to know the seller and making sure they can trust us. If they can tell a customer who trusts them that we will take care of them, then it is a pretty easy transition.
"Once you have that vouch of confidence, the vast majority of customers will buy in," he continued. "If the seller is just filling out bids online where the cheapest bidder gets the work, then there is nothing to buy. Essentially, you are buying relationships."
Challenges are inevitable throughout the M&A process. Martin approaches each deal with certain terms in mind, but always leaves room for negotiation. Despite these precautions, he finds that many sellers want a large down payment, or even a payment in full-both of which are deal breakers for Martin. "In one instance, we initially had to walk away from the deal because the seller wanted too much of a down payment," Martin shared. "Knowing that our offer was fair and they would not receive a better one, we let them explore other options."
Martin and his prospect parted ways on the condition that the seller would call back in three months if he or she couldn't find a better deal. Martin heard back one month later. He teamed up with one of his vendors, a local trade-only printer, to get the necessary capital for the down payment, and the deal was made. "[Our vendor] purchased their equipment while we purchased their customer list," Martin said. "We ran the work through that printer and split the profits."
WORDS OF WISDOM
Anyone undertaking an acquisition must have patience. As Martin reminded, these deals can take a significant amount of time to complete. "If a seller is being cautious about you, don't take offense to that," he said. "It means they care about their customers." Being able to convince the seller that you can pick up where he or she left off will help the process along, he added.
Martin also advised sellers to be realistic. "As a business owner, I understand the emotional attachment you form with the business. You have to be able to set that aside, though," he remarked. "The chances of you getting hundreds of thousands of dollars in cash upfront for your business is unlikely."
M&A Company: Proforma Irvine Group, Smyrna, Ga.
Dissatisfied with the cold-calling process, Bruce Irvine, president of Proforma Irvine Group, has made M&As a central part of his growth strategy. He has acquired seven companies over the last four years, including: Star Athletics, Atlanta; Ted's Promotions, Baldwin, Ga.; Livingston Business Forms, Gulf Breeze, Fla.; and several Proforma franchises.
Irvine approaches each transaction with a specific goal in mind: to obtain the seller's current book of business and build it in areas where the seller fell short. This requires open communication between both parties. "In some cases, I'm taking over a relationship that has lasted 20 years between the previous supplier and their customers, so understanding the current business that the distributor has with the client as well as the potential of that client is critical," Irvine explained.
Honesty is also important to Irvine-especially during preliminary discussions. "It is important to know exactly what type of sales volumes, margins and collections issues there are with the seller's client base," Irvine said. "The seller needs to know exactly how he or she is going to be compensated for the purchase of his or her business, and have an understanding of my strategy to grow his or her existing accounts. Setting accurate expectations early is very important."
The Star Athletics acquisition presented Irvine with several new opportunities, including a unique business model. "Star Athletics works solely with high schools throughout the U.S. to help them find local sponsors for their sports programs," Irvine said. "It is a business model that I had previously not been involved in, but offers a lot of potential."
There were challenges, as well. For example, Irvine inherited two employees from Star Athletics. "Acquiring employees can always be a challenge, especially if they are not familiar with selling the full suite of products that Proforma offers," he mentioned. "Many promotional products distributors do not aggressively sell a variety of printed materials, but with Proforma, we have a source for all things printed." In this case, the new employees welcomed the chance to expand their product offerings to their clients and prospects.
WORDS OF WISDOM
"If you're thinking about selling, it's best to sell when you still have a thriving business," Irvine recommended. "Many times we have seen distributors that slowly lose interest and, thus, lose clients. As the business deteriorates, the sales dry up and the value of the business drops significantly." On the flip side, know what your business is worth and work with a prospective buyer to see if you can come to an agreeable figure, he added.
Even if you don't have immediate plans to sell, you should still have an exit strategy in place. "If you are going to work the business forever, that's great," Irvine said. "If not, begin reaching out to people you know and trust and begin discussions about how your business would be sold and how the process works."
M&A Company: Gill Studios Inc., Lenexa, Kan.
Paul Lage, president and CEO of Gill Studios Inc., believes in growing organically. That's not to say he isn't open to acquisitions if the targeted company fits in with Gill's core business and is something Gill cannot develop on its own. Such an opportunity presented itself in June last year when Barton Nelson, a Kansas City, Missouri-based manufacturer of adhesive notes, scratch pads and non-adhesive cubes, abruptly closed its doors after 53 years of operations.
Two weeks later, after much speculation, it was announced that employees of Barton Nelson had yet to receive back-paychecks and were unable to access their retirement accounts. According to Lage, the courts and creditor were in possession of the distressed company. Furthermore, employees were displaced and customers had to fend for themselves. Fortunately, Gill Studios was ultimately able to find and rehire most of the staff.
On Sept. 4, 2014, the new company, Gill Bebco LLC (marketed as Bebco Line), reopened. So, why go through all of that trouble? "We took all this risk because we had a product line that fit into our many requirements for an acquisition," Lage explained. "We wanted a product line that was in alignment with our own expertise and since it involved adhesives and printing similar substrates, we felt that this acquisition was worth the risk."
Prior to completing the acquisition, Lage wondered how well the two cultures would mix. "In a distressed acquisition, it is important to identify why a company was not succeeding," he said. "Many times it is a result of a few people, not the entire organization. Other times, it is that there wasn't enough critical mass for them to succeed and their overhead requirements could not be sustained because of their sales.
"Either of these situations would be good candidates for acquisition," Lage continued. "Other situations like the market changed or their processes and technologies were no longer relevant, then those candidates would not be something that we would look to buy."
With the Barton Nelson acquisition, it was important for Lage to form a focused team to work through the details and stay on schedule. Lage also pushed for open and honest communication to avoid the potential fallout from miscommunication. "I always find it best to be very transparent with everyone involved to express your intentions of the future," he said. "Everyone in the process—from government to the associate—has to make decisions."
WORDS OF WISDOM
"It is natural for a company to force the company they are buying to fit into their company and adapt to their culture. They tend to replace the management team and seek out just the financial synergies," Lage observed. "When you do this you often time lose the benefits of the acquisition." Instead, he recommended learning where the company excelled and preserving that legacy. Then, determine where they struggled and fill in the gaps accordingly.
Lage offered one final piece of advice: Don't rush to meld the companies. "You need time to evaluate your new asset and to preserve the talent in your organization," he said.
M&A Company: Safeguard, Dallas
Safeguard is no stranger to the M&A process. Since 2008, the company's BAM (Business of Mergers and Acquisitions) program has completed 95 transactions. Two of those transactions, in particular, stand out to Scott Sutton, director and vice president of Safeguard Acquisitions Inc.: the first completed transaction (Prestige Business Systems, Farmington, Utah) and the most recent transaction (Fontis Solutions, Irvine, Calif.).
"If you look at the sizes of those two businesses and the complexity of the transactions, you quickly note how much our BAM program has evolved and how committed our entire organization has been to growing through the BAM strategy," Sutton said. "It's fun to look at the more than 50 transactions completed for the benefit of our distributors."
The first attribute Safeguard looks for in a potential target is a shared vision. "It's really important for us because the one thing we have learned is you have to have companies, and people within those companies, that align with your vision and your culture if you want to achieve the best outcome," Sutton commented.
Safeguard also scopes out talent because as Sutton put it, this is a "people business." "I think more than anything else, long-term success is, first and foremost, defined by the people in the organization you're looking to acquire; the people associated with these organizations we are acquiring," Sutton said. "[...] We are looking for strong leaders, successful business people, and a staff focused to provide answers and solutions to customer needs and challenges."
When those two objectives are met, Safeguard then shifts focus toward customer growth. "[Now that] we've achieved the other objectives, we know that the customers being added are being served well and we have a bigger opportunity to bring even more products and solutions to each," Sutton noted. The May acquisition of Fontis Solutions is a great example. In addition to providing manufacturing, supply-chain and logistics expertise, Safeguard announced in a statement its intention to broaden the company's product and service offerings, including those in critical areas such as technology and marketing services.
While Safeguard has completed an impressive 95 transactions, Sutton said the biggest challenge he's encountered is simple and consistent: No two businesses are alike. "Companies that have the same revenue and same offerings don't necessarily have the same processes, operations or philosophies," Sutton explained. "Companies that look alike and act alike may operate very differently. We have to look at every business independent of others, which is our first challenge."
Integration is another challenge. "When you think about integrating these businesses into our system, there are aspects that are easy and aspects that are hard, and those vary from deal to deal," Sutton remarked. To mitigate any risk, Safeguard works hard to approach each transaction with a full understanding of the unique aspects that every company brings, Sutton said.
WORDS OF WISDOM
Still trying to determine the fate of your company? Sutton urged business owners to think about their overall strategy, culture and what they're trying to accomplish for their stakeholders and customers.
Then, there's the issue of relevancy. "Being acquired might be the smartest decision to remain relevant and have the resources available to continue to grow and supply customers with solutions and employees with opportunities," Sutton said.
If you're considering buying, Sutton believes the decision should be part of a holistic approach in order to be more compelling to customers. "A lot of companies think that the company looks really good on paper, but that's only one piece of the puzzle," he concluded.
M&A Company: DocuSource by Safeguard, Portland
What do you do when your company has a healthy balance sheet, but your two business partners are nearing retirement age? That was the situation for Jeff Scott, former CEO of DocuSource by Safeguard.
Established in 1969, DocuSource by Safeguard is a full service print and brand management provider, with locations in Portland, Ore., Boise, Idaho and Seattle. When reviewing transitional options, Scott wanted to find a large brand that could help DocuSource continue to serve its customers-including many large regional accounts-to the right degree. He and his partners also needed a company that could invest capital into their business and associates as they were setting up exit plans, Scott said.
"Obviously, our staff had invested a lot of time and energy into the success of our organization and we wanted to take care of them," Scott mentioned. "Additionally, we wanted to find a deal that contractually allowed me and my two partners to exit at different times because of our varying ages. While the two partners have already left, I have stayed on, as I'm not quite ready to retire."
Safeguard, a fully diversified business solutions enterprise owned by Deluxe Corporation, was the perfect fit. "Deluxe and Safeguard's stability is impressive-they have successful pasts and are ingrained in the industry," Scott pointed out. "An important piece of the puzzle was that the acquisition was a cash transaction, in addition to the deal structure that would allow each partner to exit the business at different times."
Scott, who continues to provide consulting services to Safeguard, is happy with his decision. "Safeguard brought a significant infusion of capital to improve our offices, warehouse, technology and our desktops," Scott said. "The amount that they invested to upgrade, update and improve our facilities and technology was a huge benefit-something the three of us owners would not have been able to do at that magnitude."