Options for the future: Part 1

The label and packaging business is comprised largely of entrepreneurs. Successful companies are built upon their founders’ blood, sweat and tears. It only goes to figure that the two become virtually synonymous – and that separating an entity from its owner would mean sure demise for both of them. But alas, that thinking would be wrong. Our great industry offers numerous continuation and exit options.

As a consultant to label and packaging companies, The Open Approach works with many entrepreneurs in this quandary. We find ourselves often meeting with owners channeling The Clash as they wonder, ‘Should I Stay or Should I Go?’. The answer doesn’t have to be so bifurcated. In fact, one of the greatest benefits of creating a great company is that you also create multiple succession options. As long as your company is on solid ground, you’re in the driver’s seat. This, of course, may make it harder to relinquish. But your most lucrative options occur in growth mode. So even while it may seem counterintuitive, the best time to exit your business is while you’re on top.

As you start thinking about the future, it’s good to have a plan. To this end, this and my next few articles will help you understand your options and what you can expect from these trajectories.

There are seven options for continuation or exit:

• Do nothing
• 100 percent sale to a strategic
• 100 percent sale to private equity
• Majority sale
• Minority sale
• 50/50 sale
• Recapitalization

Each path has its own consideration factors, including control, value realization, risk, participation in future growth, owner(s)’ objectives, maximizing buyer interest, impact on employees, and timing. When examining these seven options, it’s critical to understand how these factors tie in.

Let’s look at your first two options:

Do nothing

If you’re enjoying running your enterprise and can’t imagine life without it, perhaps staying at the helm is wise – at least for the time being. But make sure to examine the consideration factors.

Control. In a ‘hold’ option, your people hold all the keys to the future. This means it’s critical that you have a strong management team with the ability to execute on your vision and navigate new challenges. These individuals must be adaptable, technology-focused, and cognizant of arising customer and product trends. They should be able to ensure your company’s profitable growth for at least the next 24 months.

Value realization. There’s no value realization here since you aren’t selling. Any opportunity of the current market, financing climate, and segment interest may vanish.

Future growth and participation. Your business’s future and your financial participation are entirely in your control. You bear the benefits or consequences of all activity. You also remain in charge of all financial investments (CAPEX) needed.

Owner(s)’ objectives. Label and packaging companies can be run by a sole proprietor or through a partnership. If you’re flying solo, you can set your own timing. If you have a partnership or limited owners, the control over timing may change if one person decides to exit before you do. It’s important to revisit your team’s commitment every six months or so, to ensure you stay on track.

Maximizing buyer interest. Since you aren’t going to market, this does not come into play. However, it’s good to keep your company in “fighting shape” in case an event speeds up your timing. Keep your technologies prime, watch your debt, focus on customer retention, and pursue your most lucrative markets.

Risk. In this scenario, you are 100 percent invested. Applicable risk is whatever is occurring in your business and segments.

Impact on employees. With no change in ownership structure, your staff stays intact. As long as you have a rewarding employee culture, you should be able to keep your people happy and working for your success. Timing. Today’s financial markets and relevant pros and cons do not apply. Still, consider how these issues would affect your succession. Is there any great influence going on today that may not be available to you in a few years?

100 percent sale to a strategic

The push to ‘enhance shareholder value’ continues to accelerate strategic acquisitions – with progressive small enterprises scooped up quickly. Be careful. It’s important not to venture into such a sale on your own. The Strategics have experts who focus on driving the absolute best deal for their company – not for you. You need advisors who will champion your cause.

Control: When you sell your business to a strategic, its future is no longer in your hands. You cannot control the brand name, vision, market position, approach to customers, or direction of your employees.

Value realization: What may sound like a good deal may not be. Companies are valued on numerous factors, including assets, profitability, segments, market trends, customer security, and more. Your advisors can help you understand what to expect through comparable sales or EBITDA multiple factors. If they are industry-specific, they can also provide insights to increase your value.

Future growth and participation. With a 100 percent sale, you have no stake in your business’s future. This can be an advantage or a disadvantage. Exit options in ensuing articles will discuss potential rewards for staying vested.

Owner(s)’ objectives. As a sole proprietor, your perfect offer is the one that best meets your goals. If multiple owners are involved, you may need to compromise. Articulate each party’s objectives, and craft a deal that is best for all.

Maximizing buyer interest. Going out to the entire market may have a commoditizing effect. This is because it gets everybody judging, forming opinions (and rumors), and watching your every move. It may also make for nervous employees. Still, there are ways to orchestrate your offering quietly to top buyers. The Open Approach has an exclusive network that ensures maximum buyer interest, while protecting your confidentiality.

Risk. Selling to a Strategic indeed has certain advantages. If a 100 percent sale, your risk is essentially gone. Make sure your contract states no future obligation.

Impact on employees. No matter what the buyer says during the deal, you have zero control over what happens to staff going forward. Remuneration, professional growth, culture, expectations – consider these forever changed. Plus, the reality is that your team will be ‘integrated’ into the buyer’s workforce, which may mean cuts. Make provisions in your contract to help protect key personnel.

Timing: Timing is everything. When you begin the sell process, be confident that current financial and industry impacts make for your most attractive timing.

As you start planning for your future, it’s imperative to know all your options. You’ve spent your life building a great business. And you’ll (likely) sell it only once. I’ll cover the remaining five types of exits in future articles. These will then give you a road map for what option best fits your objectives.

This article featured in L&L issue 6, 2016, which can be read here