Options for the future: Part 2

The last two years set records in mergers and acquisitions. In labels and packaging, thousands of lucrative deals were made – underscoring investors’ continued interest (and premium offers) in our space. With 2017 shaping up in much the same way, label and packaging entrepreneurs need to stay on top of the market and cognizant of their potential exit possibilities. The most important thing to know is that there are multiple opportunities for your future.

In part 1, we introduced the 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

In this installment, we continue our review, applying the key consideration factors. Let’s take a look at your next two options:

100 percent sale to private equity

Often thought of as the money to put the deal together, private equity can allow entrepreneurs to remain at their businesses without the risk and with an upside for future growth. But you do give up certain freedoms, which will depend on the goals of the new owner.

Control: As the header states, a 100 percent change in control is a 100 percent change in how the business is run. Even if your private equity buyer lets you keep your executive title, the ultimate control is with the new owner. Since the new owner assumes the growth potential and risk, they are the one who makes the next decisions.

Value realization: With a 100 percent sale, you can maximize the financial reward for what you’ve built. You know the full offer, and you can make a determination if it fits the bill. Regardless of whether you stay on board, this is your opportunity to ‘cash out’. A good advisor is key to ensure you get what you deserve.

Future growth and participation: Private equity can buy your property as a ‘foundation’ or as an ‘add-on’. While in some cases you can stay onboard, in others you cannot. Make sure to work with your advisor on the model you perceive so that you aren’t disappointed.

Owner(s)’ objectives: While many label and packaging companies are owned by individuals or families, some include other small investors. If you have minority investors who do not concur with a sale, the deal will not happen. You may not succeed in your objective because of your ownership structure and rights. Make sure you understand the rules and obligations of your ownership agreement before pursuing a sale.

Maximizing buyer interest: Before you go to market, make sure you are well positioned in growth segments with the capabilities that make you attractive. Also, while many private equity groups are active in our space, each firm targets differently. A labels and packaging-focused advisor can bring connections to your top-paying buyers.

Risk: With a 100 percent sale, the risk passes on to the new owner. That said, for any issue that previously occurred or occurs between letter of intent and sale, you’re on the hook. Resolve all legal issues ahead of time. And ensure your contract specifically states you have no future obligation or responsibility.

Impact on employees: If you are of substantial size, the acquirer will likely retain your leadership team. The strategic growth trajectory may change, but your team should stay intact. On smaller transactions, employees may be at risk. It will depend on what human resources are already in place and what is needed to execute on the buyer’s strategic plan.

Timing: Private equity is paying high multiples in labels. If you’ve built a great company – and are positioned in growing segments – now is the time to sell. Never has the market been viewed by investors and lenders more favorably than it is today.

Majority sale

A majority sale can be a great solution if you want to retain part of the ownership but not all the operations and risk. Theoretically, this will make it easier for you to achieve your vision or overcome pressing obstacles. Taking a majority partner can be a way to transition your company into new areas of growth. For example, a majority partner with a unique specialization may get you into a high-value segment you have been unable to tap.

Control: Control of the new entity will vary widely based on the parameters of the Purchase Agreement. The agreement may give you day-to-day operational direction or a say-so in capital expenses, but the final decisions will rest with the acquirer. Remember that even if you own 49 percent, the majority partner will be steering the ship. To ease your transition, select a majority partner who shares your vision and values.

Value realization: Since you’re not selling your full stake, you obviously won’t be getting your full value. That said, if you have a strong company, you can achieve maximum value on the portion sold.

Future growth and participation: With a majority sale, you have a smaller position in your business’s future and your resulting reward. The impact of decisions going forward will indeed affect you, but to a much lesser extent. Still, this option gives you an avenue to stay involved – through the good and bad.

Owner(s)’ objectives: This type of exit is typically made when an entrepreneur wants to protect what he/she has earned while hoping to generate an ongoing return. Alternatively, the company has a vision that cannot be achieved without an additional partner or capital infusion.

Maximizing buyer interest: Finding the right partner for this option is key. You can ensure maximum interest from those whose goals align best with yours. The opportunity for majority control will increase buyer interest, since they will gain command of future direction.

Risk: Your level of risk will now be equal to whatever percentage you remain holding. If you are comfortable with higher risk and involvement, you can structure your deal for up to 49 percent. If you want little risk, aim for single digits. The percentage you wish to sell may affect your pool of buyers, as some may not want too large a stake.

Impact on employees: If your agreement is executed wisely, your valued employees will be the same as before. You are still part of running the business. The effect on top performers should be minimal.

Timing: If you’re looking to sell, you can’t ask for a better time. There are three price drivers that are in your favor: 1. Market (labels have never been more sought-after than now), 2. Availability (there are far more buyers than sellers), and 3. Cheap and numerous funding sources (banks believe in our space and are offering interest rates and covenants that reflect their optimism). As the Fed raises its rates, these may change.

Hopefully I have clarified these next two options. The next article will cover the balance. Through it all, my goal is to help you become fully informed about the potential steps you could pursue. As always, make sure you have great advisors who can help you scrutinize your opportunities.

If either of these exit options has piqued your interest – or you have questions on them or the previous two discussed – give me a call. Your key to a lucrative deal is knowledge. Stay apprised, stay informed, and stay nimble. Your prime exit opportunity could be right around the corner.

This article featured in L&L issue 1, 2017, which can be read here