Depending on a long list of factors — including sales growth, preparation and accuracy of financial records, and blending of cultures and technologies — M&A deals in the print and marketing services industry have been triumphs, disasters and everything in between. When a deal works for both sides, the signed dotted line is an empowering launching point, a starting place for print businesses to go after new markets, blend forward-thinking teams and serve more customers.
Buying, merging or selling a company isn’t simple, M&A and business valuation experts say, but the topic is ever-present (a deal will happen eventually to every company) and extremely important (it affects families and futures).
“Every company’s ownership must change hands at some time. It may be due to death, illness, poor financial performance, divorce or sheer boredom. Some company principals will be more prepared for this event than others,” says Jim Anderson, president of Corporate Development Associates, a Phoenix-based consulting firm that focuses on M&A in the print industry. “The most successful deals typically involve owners who have done a significant amount of self-analysis. They know what they want, and they know why a potential deal makes sense.”
Anderson says if you’re contemplating an a merger or acquisition, whether as a buyer or seller, the first thing to nail down is answering the question, "Why?" That sense of clarity drives decisions long before an actual deal takes shape.
Valuation is about strengthening your company today, reducing avoidable risks and increasing the confidence of lenders, partners and future buyers. Even for owners years away from an exit, building value is one of the most important forms of long-term planning.
Based on insight from M&A and business valuation experts, here are nine best practices to increase the value of your business:
1. Diversify your revenue and profits.
Maintain multiple profit centers and keep a diversified product/service base. A concentration of revenue in a single product or service is much less attractive to potential M&A partners. The same goes for customers. If losing one or two key clients dramatically impacts the company’s revenue and earnings capacity, this may substantially decrease the company’s value. As a general rule, you don’t want “all your eggs in one basket.”
2. Reduce or eliminate shareholder loans.
If you must infuse your own capital into the business, do it the right way: Document the transaction and have terms that resemble market rates. The terms spelled out in the agreement must be enforced to equate to a bona fide business transaction. If you have loaned money to the company and don’t anticipate a repayment in the near future, document the infusion as contributed capital. Also, avoid borrowing money from the business at all costs.
3. Pay close attention to your financial ratios.
Conduct a routine financial health exam of your company monthly, quarterly and annually:
· Monitor target profit margins for the company versus the company’s anticipated profits
· Watch the rate and health of net cash flow and ROI, and compare these to industry benchmarks.
· Monitor productivity per employee and profits per employee.
· Classify accounts according to standard industry reporting so that profit margins and financial ratio performance is as accurate as possible.
· Maintain a sufficient ratio of sales to working capital. Sufficient working capital implies effective operations management and an adequate turnover of receivables and inventory.
4. Don’t rely on tax returns as a measure of financial performance.
Use a compliance firm to have annually reviewed statements with accompanying notes. The message you send to others in the business lending community is “this company is the real deal.” Typically, an owner takes advantage of all allowable tax deductions and credits, thereby minimizing the company’s profits and tax burden. But when analyzing financial performance, recordkeeping should be changed to illustrate the company’s maximum potential.
5. Pay yourself a fair market value of compensation.
Pay yourself a reasonable compensation with benefits. If you can’t afford this now, work toward this goal. If you work for “free” or below the minimal market rate, that decreases your company’s value from a buyer’s perspective. A business’ value is based more on ROL — return on labor — than ROI. A buyer will often look at the owner’s salary plus pre-tax profits and non-cash charges as a starting point for a purchase price.
6. Update your business plan.
Always have a business plan, and keep it current. Even if you’re not thinking about exiting the business anytime soon, have a plan for, “What’s my next move toward continued success?” The further you plan ahead, the more time remains to enhance the value of the business.
7. Empower your team.
Eliminate key-person dependence and develop an experienced management team. Conduct and maintain formal processes for employee training to grow their skills. One or two people should not possess all the technical knowledge, licenses, certifications or industry-specific skills necessary to run the business. As owner, if you are the single key person at the company, your business’ value is likely to reflect that risk.
8. Grow your intangible assets.
Increase the “it” factor in your business with intangibles such as client lists, contracts, leases, patents, recognizable name or logo, reputation, vendor relationships and proprietary processes. All of those can make a company’s value increase.
9. Stay away from litigation.
EPA citations, workers’ compensation claims, bonding troubles, fines and penalties can all lower a company’s value, especially if incidents reoccur. Effective management can minimize these incidents, as well as control and reduce insurance costs.
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Taking these steps today ensures your company is healthier, more resilient and better positioned for whatever opportunities tomorrow brings.
