When It’s Time to Sell. . .

Selling a company, or merging with another entity, is a high-stakes proposition. It requires a high level of expertise in multiple, specialized disciplines including legal, accounting, finance, and taxation. Many times, small business owners or entrepreneurs have put their whole life’s work into the business or, in some cases, several generations of a family name are being put on the block. If this is not enough to ponder, then look no further than the company’s employees and customers.

Any successful business owner understands the multitude of issues that must be handled when running a company in today’s highly competitive, complex business environment. What makes a company’s sale so critical is that all these factors come to a head in a relatively short period of time, with a certain finality being at stake, and also the goal in most cases.

It’s no wonder that obtaining objective expertise is a virtual requirement for any business owner who is considering the sale of a company. It’s a complex endeavor and packagePRINTING posed a number of questions to mergers and acquisitions (M&A) experts who have knowledge of the printing and packaging industry.

pP: What factors should a business owner consider to determine if the timing is right for the company to merge or be sold?

Bill Hornell, managing director, Mesirow Financial Corporate Investment Banking Group—The most important factor for a business owner to consider regarding timing is his or her personal objectives. For an entrepreneur, the sale of a business is a life-changing event. The owner needs to be sure he or she is ready to turn over the reins to another party.

Other important factors include the growth prospects for the business, its earnings performance, the strength of its management team, general economic conditions, and the quality of the potential buyers.

Andrew M. Apfelberg, Esq., Rutter Hobbs & Davidoff Incorporated—There are internal and external factors to be considered. Internal factors include the age and health of the principals, whether they have strong successors in place to assume the helm of the company, and whether the company’s performance is at a high or a low point given its recent history. External factors include the condition of the industry in general, ease of obtaining capital to finance growth, and the consolidation of various competitors or vendors.

Elisha Tropper, president and CEO, T3 Associates LLC—Timing is a critical factor for a business owner deciding whether or not to sell or merge his or her company. There are a great many factors that go into gauging when the time is right, beginning with the personal and financial position of the business owner and the motivations for selling. These can include retirement, financial distress, life events or lifestyle changes, the competitive landscape of the business, or a perceived “ceiling” on the growth and performance of the company under current ownership.

Once a business owner is certain of his or her desire to sell or merge the company, factors to consider relative to timing include the business health of the company, the stability of the account base, pricing of recent similarly sized transactions, interest rates (lower rates reduce the cost of borrowing for potential buyers), currency exchange rates and valuations (for international deals), and the levels and trends of M&A activity within the competitive segment.

In addition, certain companies will be aware of strategic acquirers that are uniquely interested in acquiring them. In such a case, the sellers would be wise to take into account all of the factors that impact not only their selling situation, but that impact the interest and timing of that interest from the potential acquirers perspective.

pP: How should an owner prepare/position the company for a merger or acquisition? How do you communicate to the industry the company’s interest in such a transaction?

Hornell—For any business, it is very important that a capable and experienced management team be developed prior to a sale. Most buyers do not have management resources that can be placed into an acquired company. Having a complete team in place lowers the risk profile to the buyer and allows the value to be maximized.

The best way to communicate an interest in a potential transaction is through a confidential discussion with the CEO of the potential acquirer. An investment banker with experience in the packaging industry will have access to these important CEOs and can facilitate a confidential review of the opportunity.

Apfelberg—The best preparation is to assemble a team of professionals experienced in this area to advise on changes to the operations of the company to enhance its ultimate valuation; to clean up corporate records and key contracts along with protecting intellectual property; increase revenues with long term sustainable sources; and to reduce expenses by trimming redundancies or streamlining operations.

Communication to the industry is tricky and requires careful planning. Often, unless there is a competitor that has approached a company, it will retain an investment banker to confidentially shop the company to the industry. This helps get the best price through an auction and also keeps the industry’s perception of the selling party intact because of the confidential nature of the investment banker inquiry.

Tropper—In most cases, an owner would be well-advised to begin preparing for sale as much as 18 months to two years prior to actually taking the business to market. Preparation for selling a business entails considerably more than providing financial statements and tax returns. In this context, we urge our clients to think of selling their businesses like selling a house—everything should be in excellent condition, or as best as possible. This takes time. We typically conduct a Divestiture Audit, where we review every single element in a business, from the account breakdowns to the balance sheet, from the condition of the equipment to the condition of the carpeting in the reception area. An owner who conducts such an audit and makes the appropriate investments will find his company considerably better positioned to sell at a higher price.

Once everything is in place and the company is ready to be taken to the market, the business owner must consider the impact of publicly marketing the business. For many companies, particularly smaller businesses, the dangers of publicly marketing the business and the uncertainty it produces include a loss of customers and employees, reduced productivity, and the inability to effectively negotiate with vendors. So for most companies, effectively marketing the company while keeping the matter quiet requires experience and extreme discretion. This is just one reason why utilizing an M&A advisor or business broker—even for mid-sized and large companies—is an essential element to successfully selling a business.

A good M&A specialist, particularly one who is familiar with the industry, can develop and quietly and confidentially pursue a target list of acquirers. Even for those rare companies that have no downside to the publicity of seeking a sale or merger, an M&A specialist can provide the expertise, objectivity, and experience while allowing the business owner to focus on keeping the business running at maximum efficiency and productivity.

pP: What can a business owner do—leading up to a merger/sale—that would maximize the benefit of the transaction? What measuring criteria can be used to judge that the transaction is a fair/good value?

Hornell—A key to maximizing value is having attractive growth opportunities available for both the short and long term. It is important to remember that buyers are not monolithic corporations. There is always a deal champion within the acquiring organization that is putting his or her reputation on the line. That person wants the deal to work out well for the buyer, and having attractive growth opportunities will help the buyer feel confident about the decision.

An investment banker can help a business owner develop a realistic set of expectations regarding value. There is usually a healthy database of transaction valuation information that can be analyzed and adjusted to fit the specifics of the situation.

Apfelberg—The answer above relative to preparation equally applies here. The criteria for measuring whether it is a good deal is whether it is comparable to recent sales in the industry for similarly situated companies. This is one analysis that an investment banker can help with. Soliciting numerous potential buyers so that there is a range of bids and a potential overbid situation also helps establish how the market views the value of the target company.

Tropper—A business owner should always focus on improving the financial and operational performance of the business, especially as a sale or merger looms. In many deals, the price will be adjusted at closing to reflect the current assets (including the accounts receivable). Regardless, the sellers have a responsibility to turn over to the buyers the company in as best condition as possible.

Prior to the transaction, a business owner should fully understand the tax implications of the transaction so that the deal can be structured in a way that maximizes the net proceeds from the sale. This includes estate issues, as well as payment of outstanding debts. A frequent misconception is that buyers and sellers cannot both benefit from the same deal structure. In many cases, a deal can be structured to enable a lower purchase price good for the buyer, while yielding a higher net for the seller. What is critical is a thorough understanding of the issues and options, and for this reason, involving an experienced accountant or tax lawyer early in the process is essential.

The value of a business is the highest price a buyer is willing to pay for the company. In other words, a transaction is a good deal/value if both parties are satisfied. Owners who are seeking to sell at outrageous prices will generally be disappointed, as will buyers seeking to acquire at bargain-basement prices. The M&A marketplace is fairly sophisticated with a degree of transparency, and the keys to successful M&A activity are realistic valuations, deal structural flexibility, and concentrating on the net proceeds.

pP: What is due diligence and what does it look like on either side of the table?

Hornell—Due diligence is the process whereby the buyer completes its assessment of the business. It is usually conducted after a letter of intent has been signed. The key components of due diligence include accounting, legal, environmental, general business, and employee benefits.

With proper planning and management, the due diligence process need not be disruptive. Much of the work can be done off-site, and confidentiality can be maintained.

Apfelberg—Due diligence is an exhaustive set of questions posed to the seller that allows the buyer to learn about the most critical information and determine whether there are any major issues that could hinder the deal. Categories of items that are requested include corporate records, customer lists, margins/pricing, employee data, tax records, and industry studies. The seller will compile documents that are responsive to the request and provide it to the buyer and its attorneys. Unless the seller is receiving stock in the buyer as consideration for the deal, they typically do little due diligence on the buyer.

Tropper—When a company presents itself for sale, it provides certain financial, operational, and management information to the prospective acquirer. Due diligence is the process through which the acquirer confirms the accuracy and validity of the provided information, usually after the contract is signed, but prior to the deal closing.

For the seller, due diligence means providing as much disclosure and access to information as is necessary, which can be an unnerving experience. For the buyer, due diligence means taking nothing at face value, and doing as comprehensive a job of auditing the seller to validate their representations around which the deal was constructed.

Once again, this is an area for both sides where experience is critical, and using third parties to assist and manage the process can be of great value to both buyer and seller.

pP: How should the transaction be structured to limit/eliminate any future issues/liabilities?

Hornell—Most transactions are structured as stock sales. This structure allows for the liabilities of the corporation to stay within the corporate entity, effectively passing to the new owner. In certain circumstances, the transaction can be structured as a stock sale for liability transfer purposes and an asset sale for tax purposes. The buyer can receive significant tax advantages through an asset purchase and thus, value can be created for both parties.

Effective legal counsel is also required to address contractual issues such as appropriate representations and warranties for both parties, general and specific indemnification terms, and indemnification limits.

Apfelberg—The seller almost always wants a stock purchase structure for tax reasons and also because the buyer steps into his/her shoes, accepting responsibility for all liabilities as of the closing. For similar reasons, the buyer always wants an asset purchase, which affords them a step up in basis in the acquired assets and also a limit to the amount of liabilities being assumed and exposure to successor liability issues.

Tropper—There are typically two types of structures: a stock sale and an asset sale. Sellers generally prefer stock sales as the corporation (including its entire history) is actually sold, severely limiting any potential liability for the seller. For this reason, buyers tend to prefer asset sales, where only the assets of the company are transferred, but the corporation remains with the seller. However, there are a great many ways under each structure to address potential future liabilities, and these often can be points of contentious negotiation, depending on the particulars of the buyer and seller and their businesses. Generally, a deal should be structured to be fair to both buyer and seller, with liability dealt with openly and as part of the consideration of any deal.

pP: What outside support should an owner seek and what should an owner look for in making a selection?

Hornell—It should be clear from the answers above that any serious seller should retain experienced investment banking, accounting, and legal advisors to provide guidance during the process. An experienced advisor will not only help avoid mistakes during the sales process, but help in maximizing value.

I also believe that industry experience within your advisor team can add value to the process. Benefits can be derived from familiarity with industry participants, understanding the strategic and competitive landscape, knowledge of the personalities involved, and having access to key decision makers.

Apfelberg—Resources needed would include an investment banker, experienced M&A attorney, and tax accountant. An owner will want to know that such professionals regularly work on these types of transactions and with companies in this industry. That greatly enhances the chances of favorable structuring of the deal, more effective negotiations, and increased chances of getting to a closing.

Tropper—For companies without M&A experience or without an M&A team, outsourcing the process to a specialist is usually the best way to go. The right M&A advisor will provide expertise, experience, objectivity, and industry expertise, as well as a Rolodex of contacts to assist in the process. An owner should select an advisor that he or she feels comfortable with, has confidence in, and one who can provide the most competent leadership through the process.

In addition, sellers will need an experienced M&A attorney and accountant to assist them in properly structuring the transaction. A good M&A advisor works well with the attorneys and accountants on both sides, and can shepherd the process along, ensuring it is as efficient possible.

Company/author profiles

Mesirow Financial is a diversified financial services firm headquartered in Chicago. It has more than 1,100 employees throughout its six service divisions: investment management, investment services, insurance services, investment banking, consulting, and real estate.

Bill Hornell is the managing director, Investment Banking with an area of focus on M&A advisory. He has extensive experience in the paper and packaging industries, completing more than 100 transactions with clients such as International Paper, Amcor, Rock-Tenn, Ampac, and Exopack. Hornell has a B.S. degree from Indiana University and an MBA from Harvard University.

Rutter Hobbs & Davidoff Inc. is a legal firm based in Los Angeles, Calif. that provides clients with resolution of legal issues in a broad range of practice areas. These include corporate and securities law, partnership law, employment law, real estate transactions and finance, intellectual property and technology law, family law, business and real estate litigation, alternative dispute resolution, bankruptcy, environmental law, entertainment law, aircraft finance, estate planning for individuals, and business planning for closely held businesses.

Andrew M. Apfelberg, Esq., is a corporate attorney specializing in mergers and acquisitions. He has a business and finance background gained from working for investment and commercial banks prior to attending law school. Apfelberg has a Bachelor of Science Degree in Business and Finance from the University of Southern California and earned his Juris Doctorate from Boston College Law School.

T3 Associates LLC, based in Harrison, N.Y., is a management consulting firm that enhances the long-term success of its clients through the strategy-based pursuit of profitable growth and enhanced enterprise value. It specializes in strategic management consulting, merger and acquisition advisory services, capital advisory services, global sourcing and outsourcing services, and organizational structure and management.

Company President and CEO Elisha Tropper has an extensive background that combines management and financial expertise with successful hands-on business experience. Prior to founding T3, he was president of Prestige Label Company Inc., a high-definition printer and converter of packaging products.

Tropper has a Bachelors Degree from Yeshiva University and received an MBA in Finance with sub-concentrations in Venture Capital and Entrepreneurial Management from Columbia Business School. pP