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Top considerations in business valuations

There are many factors that can make your business more or less attractive, writes Bob Cronin

It’s a great time for M&A in labels and packaging. You’ve likely seen the recent 5 to 12 times EBITDA multiples being paid for acquisitions by the public giants. You’ve probably also heard from colleagues how much they sold their companies for and what they think you should get for yours.

But the reality can be very different when you’re the one pursuing a sale. Your business is worth only what a buyer will pay for it – and only at that very specific point in time. There are many factors entering into today’s valuations. And not every company has the elements that make for the highest multiple. There are many factors that can make you more or less attractive to those making offers. Let’s take a look at the overall drivers.

Market dynamics 
Much like the stock market, the market for corporate M&A fluctuates with buyer trends and inclinations. Transfer price is just a scoreboard of what occurs. What happens on Wednesday can be drastically different from what transpired on Monday. In fact, sometimes everything can seemingly change in an instant. Certainly, it’s understandable how stock prices change, considering the wits and whimsies of investors. But a good business rests on years of hard work. A progressive company is far different from a passive representation of one. Why would its value be so fleeting? It all comes down to the buyer.

Getting the greatest valuation for your label and packaging business takes a solid plan that resonates with the buyer. It must also have features that get you recognized quickly. Have you ever heard that the first offer to purchase your home may also be the best? This is also true for businesses. One of the reasons behind this is market time. Even if you have a superb property, the longer it’s on the market, the more leverage you lose. That’s not to recommend being hasty. Just a reminder that you need to be strategic in your approach and disciplined in your marketing. A good advisor doesn’t simply list and ditch. They carve out a spot of influence for you. They make sure your entity is aligned with acquirer demand. This way, regardless of offer, there are ways to negotiate it for maximum value. This is where we have always excelled. 

Top nine consideration factors 
As you position your company for sale, you need to accent the strengths and capabilities acquirers are looking for. They target organizations that aren’t only performing well now, but also have the impetus to grow for the future. They’ll value your business based on a number of considerations. Here are the top nine.

1. Product/market mix. The biggest question in an acquirer’s mind is what your future looks like, on your current trajectory. 

Are you in cut-and-stack, pressure-sensitive, shrink-sleeve, stretch-sleeve, flexible packaging, or other? More importantly, how are you balancing your mix to align with changing customer demand? An acquirer will also want to know which verticals you serve. To maximize your sell price, you need to have a strong position in growth markets — for example, consumer goods, healthcare/pharmaceuticals, or food and beverage (especially private labels). If you’re chasing sales in declining markets, your value will be reduced.

We always suggest that sellers start planning their sell/exit strategy in advance. Many companies function day-to-day, emphasizing current orders over future expansion. A 24-month time period can be integral in positioning your company with the product/market mix you need for greater sell value – not to mention increasing your profitability along the way.

2. Operational platform. Buyers will assess how well your investments have kept up with requirements of today and the future. What are your immediate needs in capital expenditure? They’ll also want to see what differentiating capabilities you have that give you a competitive edge. Do you have any press configurations that enable you to create products that others cannot? Do you have any special systems? Can these function as the nucleus for a new enterprise, or are they better suited as a complement to existing structure? The strength and depth of your operational platform are key in expanding your prospects. And competition among acquirers will drive your price.

3. Customer base. Your customers are a huge consideration. Loyalty, year-over-year volume, number/strength of connection points and profit margins will all be examined by prospective buyers. Your sales data should have specific evidence of customer growth, and your marketing strategy should show a defined retention program. 

Other customer considerations are sales concentration and industries served. Does a large portion of your sales come from just a handful of customers? Or worse, a single one? Also, are your customers in industries with growing label usage or declining needs? Issues such as this may pose risk and thus affect your valuation. While the 90/10 rule (90 percent of business coming from top 10 percent) can often apply, it will affect considerations a lot less if your top customers are long-term, profitable, and growing.

4. Market approach (direct, distributor, trade). Direct sales are attractive to virtually all buyers, as they won’t have to drastically change the sales model. And they can always augment efforts with additional touch points. Yet, selling through distributors or other means is not necessarily a negative. For strategics, it may indeed be simpler to integrate operations, since their sales reps can assume your customers located in their territories. Your M&A advisor can ensure you seek out the appropriate buyer partners to help avoid any unnecessary disturbances in your sales channels.

5. Management team. In every acquisition, an entity’s management team is vetted just as much as its financials. With a strategic play, M&A teams have specific strategies to review and evaluate top brass. Because strategics already have strong leaders in place, they have some luxury in keeping the less-than-perfect for now, if it helps the deal go through. But, longer term, the weak ones are always weeded out. 

For private equity (PE), a solid management team is essential. PE buyers aren’t looking to involve themselves in the everyday needs of the business. Their role is to provide executive and financial support to proven leadership – and trust that these people can capitalize on the company’s opportunities. 

Review your team honestly, and make any adjustments before going to market. It’s better that this be done on your terms. In addition to increasing attractiveness, you may also be able to enhance EBITDA through salary reductions. 

6. Geographic location. The physical location of your plant(s) is important in that it can either augment business in a prime territory or help gain entry into new markets. Understand all the advantages of your geographies, and be prepared to discuss them. Does your position provide proximity to a major label and packaging market? Are you close to main transport hubs that save you shipping times and costs? Do you have space to physically expand facilities? What about talented labor? Specifics of your location – and how it can be utilized – can be incentives or hurdles in a transaction. 

7. Historic performance. If you’re strong in all other areas, your performance will follow suit. Buyers will review your financials for the last three years, wanting to see upward trajectory in both revenues and profits. They’ll also want to make sure you aren’t carrying – or increasing– heavy debt loads. Smaller businesses can get into bad habits in how they categorize spending, record debt, or otherwise manage financials, since they may not have a stern authority keeping them on track. Consult with experts to help put these in order in advance. They may provide signals of other issues you need to take care of before going out for sale.

8. Financial forecast. Of all acquirer considerations, this is likely the most important. Your future forecast should show realistic expectations for growth values and areas, and you should have very specific methodologies to take you there. Stating anticipated earnings and EBITDA isn’t enough. You should have the means, equipment, strategies, customers and people to get there. The better your offering memorandum or investment prospectus lays this out, the more options you’ll have. Look to your M&A advisor for support. This is an area where The Open Approach always excels. 

9. Ownership structure. Finally, how your company is owned matters. An entity that is 100 percent owned by a single (or a few) individuals will be easier to sell, rather than trying to carve out a deal that 18 different people with varying ownership percentages and end goals have to approve. Multiple-layer structure may reduce your appeal to potential buyers to begin with. 

Thinking through the nine considerations and planning around them – in advance – will ensure that you maximize your business valuation. Certainly, it will require time and energy to set your company up as a prime acquisition candidate. Your M&A advisor can be key in making the most of this process. Make sure to leverage their expertise. You’ve worked hard to build a great business. Now it’s time to build your great reward.

ABOUT THE AUTHOR

Bob Cronin is a regular columnist in Labels & Labeling, writing about M&A activity in the industry.

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