Why Investing in Technology is Key to Selling a Packaging Business

With PRINTING United set to open its doors soon, the industry’s attention naturally turns to acquiring new technology. Owners of packaging and printing businesses have a double interest: first, in the capabilities the technology will bring, and second, in the positive effect the investment can have on the valuation of the business when the time comes to sell.

As it operates today, capital expenditure investment isn’t a maybe-yes, maybe-no proposition — it’s a strategic necessity. Companies without sufficient investments in current technology are significantly disadvantaged in the M&A marketplace. One of the first things a buyer will spot in a preliminary review is any gap in the seller’s ability to produce what it needs to stay competitive. That will have a negative impact on the terms the seller is offered — if terms are offered at all.

Buyers are especially keen to see what investments have been made in digital printing and finishing. Although digital came to the packaging segment later than it did to the commercial segment, nearly all digital OEMs now have solutions for paperboard, corrugated, and label manufacturing. This equipment opens new markets for packaging producers and lets them offer a broader range of services to the ones they already serve.

Think, for example, of the microbrewing industry — a collection of mostly small producers with a corresponding need for packaging and labels in short runs. Microbrewers, along with the multitudes of other small businesses that bring their products to market in limited batches, are natural customers for digitally printed and finished packaging.

Turnover and Timing

Digital isn’t the only technology packaging companies need to invest in; long-run producers also have strengths to maintain in offset lithography and flexography. Investments in conventional equipment, however, have longer life cycles than digital investments, which tend to be more sensitive to timing as it relates to valuation for sale.

This is because digital technology changes so rapidly that a device installed three to five years ago probably has reached the point where it is ready to be replaced with a more capable upgrade. In most cases, the right move for a packaging company’s selling owner will be to have the upgrade in place when the company is placed on the market.

That will appeal to potential buyers while enhancing the business’s competitiveness — a recipe for earning a premium multiple of EBITDA toward the selling price once negotiations are underway.

Given digital devices’ relatively brief installed lifetimes, leasing is usually a better option for acquiring them than purchasing them. Lease terms can include provisions for consumables, service, training, and software upgrades, simplifying the equipment ownership experience. Another plus is that leasing costs are not recorded as long-term debt on the balance sheet.

Desirability of Debt

This isn’t to suggest that taking on debt to finance investments that will make the company stronger and more productive is wrong. All successful businesses rely on long-term debt to sustain growth, a strategy buyers understand and respect.

They fully expect to see a track record of capital expenditures for new equipment and technology to boost productivity and earnings. Private equity buyers, in particular, are not put off by debt on the balance sheet if they believe the debt has helped the selling company develop capabilities it wouldn’t have been able to finance on its own.

On the other hand, a debt-free company that has declined to invest will pay a price for its hesitation when the buyer’s offer is reduced by whatever amount the buyer will have to spend to acquire technology the business should have but doesn’t. Strategic investment is critical — and the present year is one of the best that owners of printing and packaging companies have had for making these decisions in a long time.

Momentous Events

This fortunate timing is primarily because trade shows have finally regained their rightful places in the industry after the disruptions of COVID-19 earlier in the decade. Eagerly awaited after an absence of eight years is drupa. At the event’s 2024 edition, held from May 28 to June 7, 1,427 exhibitors from 50 countries filled 18 show halls at the Messe Düsseldorf fairgrounds in Düsseldorf, Germany. Visitors saw new and on-the-horizon printing and packaging technologies in one place.

An opportunity closer to home for owners of North American-based businesses is to travel to Las Vegas, Nevada, for PRINTING United Expo 2024. North America’s premier graphic technologies and products event runs from Sept. 10 to 12, and the comprehensive show is unique in bringing together all forms of graphic imaging and reproduction, with a heavy emphasis on the digital solutions that have become so essential for success in packaging.

Watch Packaging Impressions for event coverage, and plan to invest accordingly. Part of the ROI will come when the equipment goes to work; the rest will be reflected in the favorable terms enjoyed when selling the business to a new owner.