Building the ideal company

If you’re considering an acquisition, there are plenty of great deals out there, writes L&L columnist Bob Cronin, managing director of The Open Approach

You may already be talking to a struggling neighbor or considering a transaction that has been pitched by a colleague or consulting firm. But a 'great deal' doesn’t necessarily translate into great business. I can readily think of a dozen companies that have jumped at the chance to scoop up cheap buys, only to end up with a Frankenstein sort of enterprise no better than the original.

Now, more than ever, any move must be weighed with extra caution. It’s not simply about scrutinizing a candidate’s balance sheet and client lineup. It’s not about using the opportunity to acquire new equipment at a fraction of what your manufacturer’s rep wants to charge you. And it’s certainly not about scoring a property at a price ludicrously lower than its market value. 

The motive behind M&A now should be to create the ideal company for our current and, more important, anticipated market place. Surely we cannot know exactly where it will be in five years – or two for that matter. Things change too quickly. But we can make some intelligent predictions based on the market’s patterns and trajectory.

When you look to the future, some issues never change. Your core concerns are likely: How can I grow my business? What capabilities do I need now and in the long term? What would be the one addition that would help me sign my top prospect – on contract? How am I communicating my position (value) to the marketplace? How is my company perceived?

You may have noticed, all these issues revolve around the customer. The ever-changing, ever-challenging, ever-unnerving, ever-negotiating… yet ever-important customer. Truly, their concerns must be your concerns.

But even as our industry continues to change, and demand drivers appear to fluctuate daily, customers’ key issues remain the same. They are just more difficult to see in today’s madness. What customers want – and need – are: service, quality, capabilities, flexibility, and of course, competitive pricing. Let’s take at look at these five and consider assembling an enterprise to answer the call.

1. Service

Take a look at your competitors’ websites. Every single one of them will tell you they offer service your clients have only dreamed about. Customers’ 80-dollar, 50-piece digital job will be turned around in hours, handled with kid gloves, and be delivered to their doorstep… by George Clooney.

Now look at your own site. You are likely promising the same thing (with or without Clooney). Clearly, we know that service trumps all. Price contentions aside, most people decide whom to buy from based on service. Do you deliver as expected? On time? In tact? Do you provide for the peace of mind that they will get exactly what they need when they need it? Moreover, how do you address mistakes or discrepancies? Clients may not like when something goes wrong, but more clients are lost in the aftermath of a mistake than the actual event itself.

Despite its undeniable value, service is more difficult to evaluate than a company’s financial statements. During the review process, most companies or M&A firms restrict a potential acquirer from contacting customers, suppliers, or prospects. Yet acquiring a company with poor service levels can be disastrous to your current company.

As you consider candidates for acquisition, check out length of customer relationships. Then check out size of client and vertical markets. Larger companies tend to have more purchasing leverage and can hold their suppliers to higher standards. Vertical presence will tell you about what pressures they face. Does the potential acquisition work with large, demanding organizations or mom-and-pop shops? Do they handle time-sensitive business – for example, date-stamped fresh food packaging – or labels on paint cans? It’s nice to bring additional vertical markets into the fold, but make sure the style of the marketplace synchs up with the service levels you provide (or are striving to). You should also check online reviews and social media sites for customer feedback and interaction. You’d be surprised how many acquirers neglect this goldmine of information.

2. Quality

Does anybody say they offer anything other than 'high quality' work? Again, the key here in considering a transaction is aligning quality levels with what your customers expect and where you need to be in the future. Will the acquisition help elevate your status? Will their equipment and intellectual resources help you produce higher quality materials that will be better received by your clients? Will it put you in position to compete for more profitable customers and work?

There are many commodity shops out there – most of which are highly profitable. But if their quality levels are a mismatch, take a pass. In no instance does it make sense to acquire a company with quality levels inferior to yours. Customer perceptions will drop regardless of whether the work done at your current shop is still on par. We know most customers demand quality, or everybody wouldn’t be promising it. Choose an acquisition that can take you to a higher level, not one that will drag you down.

3. Capabilities

Label companies must be focused on depth, diversity, and duration. Your biggest boost will come from a partner that doesn’t simply fill in gaps, but extends your products and services into larger, more lucrative territories.

Don’t buy a company simply because it gives you more equipment. More equipment means more overhead and more capacity you have to fill. In today’s market, focus on enabling technologies, Internet savvy, intellectual resources, patents, and other attractive features that give you more depth in crafting solutions or help you capture better business for the long term.

If you add a digital press, great. Your customers may throw you a short-run project or two. But if it’s not backed up with depth (in-house finishing, conversion, etc.), it won’t make a dent in your revenue goals. Your customers not only want to know you are making the necessary investments to build your organization, they want you to be making them to build theirs. As you evaluate an acquisition’s abilities to extend your service line, realize that future needs hinge on late-breaking technologies. But be judicious. An estimated 75 percent of novel developments in the graphic arts industry fall flat. Think of high-fidelity color or stochastic screening. Did either of these truly address a true client need?

Your clients want solutions for their pain – better project management, product tracking, ROI measurement, monitoring, and delivery mechanisms, for example. What you provide for them shows how well you are listening to their needs and goals.

More robust capabilities should always be a decision factor behind an M&A move. But be careful not to lay your stakes on a promise of the next great industry transformation. Client needs can change quickly. Which brings us to our next consideration.

4. Flexibility

The label industry is very similar to the animal kingdom; you must adapt to survive. Think wildebeest amongst a herd of gazelles. Is your current organization able to change?

Many large companies fail to understand how much flexibility (or lack thereof) really affects their business. If you have legacy systems, a half-retired 'veteran' sales force (you know what I mean), or stodgy CSR pool, you are locking yourself out of tomorrow’s opportunities.

Companies in this predicament can drastically change their position and perception with fresh new blood, ideas, and possibilities. The label industry at large struggles with change, perhaps because it’s more ingrained in our psyche than our graphic arts cousins. There will always be a need for pressure-sensitive, cut-and-stack, and other types of labels. Businesses will be buying these products for many years to come.

But for most of us, the ability to stay nimble is the key to longevity. Quit following the herd. Adapt. Change. Get better with service. Improve your quality. Verifiably grow your in-demand capabilities. And do it now to prepare for the future.

We have to be nimble in today’s dynamic marketplace. A favorable impression is hard to create, but a negative one can be solidified quickly. Nothing speaks more about a company than its willingness to grow, add, adapt, and change – as long as it does so around the customer’s needs.

5. Competitive Pricing

Alas, the inescapable discussion about pricing. People are negotiating today not simply because they need to save costs. It’s just the thing to do. Everybody is asking for discounts at every given turn. In light of this, you must be competitive, but do not cave. It simply doesn’t make sense to bring projects in that you do at cost or lower. Let your competitors take these on and put themselves out of business. Believe me, at the current pace of things, they will.

Labels have the advantage of being more valuable – and more valued – than other products in the graphic arts. While price will continue to be an issue in 2012, it is just a placemarker on which opportunities ride. Seeing pricing from the consulting side, I have the distinct advantage on knowing what companies are doing and why. If you add another entity that will enable you to provide a high-volume, in-demand service more cost-effectively and profitably than the competition, by all means do it. But doing projects simply off a price point won’t work to your building the ideal company.

About the author

Bob Cronin is managing partner of The Open Approach, an investment banking/M&A firm focused exclusively on the world of print. The firm’s proven results have made it the exclusive member-recommended firm of PIA/GATF and IPW. For more information, visit www.theopenapproach.net, email Bob Cronin at bobcronin@aol.com, or call + 1 630 313 9700.

This article was published in L&L issue 6, 2011.