Planning for retirement

Consolidation, mergers and acquisitions continue to be commonplace within the printing industry. Owners keen to exit, growing competition and the digital era are helping fuel the rise in businesses up for sale or merger, supported by a steady supply of individuals or companies keen to buy.

However, given the numbers of businesses getting into difficulties, or even going into Administration, often so soon after the process has completed, does one have to raise some questions as to how the deal was struck in the first place.

Certainly, the biggest killer is not being able to service debt 12 months down the line, and this is what we're seeing happening across all types of industries. Money lenders will often look at best case scenarios, rather than worst case scenarios and this can lead to over-generous finance packages being made available, particularly where lenders are prepared to back a business 100%. At least when people are required to put in something themselves - often a minimum of 10 percent, it encourages a more thought out and considered approach.

In some cases, it may be argued that the rise in asset based lending, is making bad decisions easier to make! What I mean here, is the ability of a buyer to raise funds on two sets of business assets - his own, and those of the business being acquired. In practice therefore, a printing firm with say £500,000 of assets could raise £300,000 to £400,000. Couple this, with the same amount raised on the assets of the business being acquired, could therefore potentially double the pot available.

With a healthy sum in their purses, many acquirers could end up over-paying - maybe for a business that they really want to buy, or because a business has been overpriced in the first place. For owner-managers, the most effective exit strategies take time, and preparation in order to realise the best possible outcome for the seller. So, businesses are being stripped down to the bare bones, with owners running as tight a ship as possible for a significant period of time, to demonstrate as much profit as possible and so realise the best price.

Taking heed of professional financial advice is vital to help secure the best outcome. If your advisor queries a high value on a company, take notice. Advisors know the tricks and are not easily taken in by anything short of hard evidence, relying much more on historical trading figures and position than the more mystical futures type scenario.

As for the finance options available, the most popular method is a combination of finance upfront and deferment. For instance, for a business valued at £1 million, a sensible acquisition strategy may be to pay half up front, with the remainder payable over a two-three year period, pending certain targets being met. This is certainly less risky for both the acquirer and the lender.
Cash buyers still exist, and can be a powerful force at the negotiating table, securing a good deal for both themselves and the vendor.

Once the company has been bought, a new growth strategy needs to be implemented immediately, and particularly in an MBO or MBI situation, cultural changes may need to be made swiftly, particularly in cash management. For instance, whereas Company A may have had a relaxed cash management outlook due to minimum financial obligations, this will need to change upon acquisition, as the extra debt position on the company means that cashflow issues may put pressures on the business not experienced before.

And this is without taking into account any unanticipated changes in circumstances - for instance, changes in the economy overall can hit printers hard, and harder for those where an increased debt position makes them even more vulnerable.

In the short term, acquisitions and mergers will continue to increase in the print industry. This will consolidate the industry and make it stronger going forward.

What is important to remember, is that an acquisition is only worth considering or pursuing if the terms and the structure of the deal are manageable and realistic. Assuming the best case scenario and stretching your finances to the limit, can be a recipe for a failure. Potential bidders for business should always consider the downside as much as the upside.