Editor's note: Joel Salus is a veteran reprographics executive who has been involved in numerous sales, mergers and acquisitions. He gave a presentation at the 2019 APDSP Convention on the topic of selling a reprographics company, and I asked him to put his presentation into an article. This is the first of two parts of that article.
I’m now old enough to say that I’ve had three different “careers” in the reprographics industry.
My first “career” was with a reprographics enterprise based on the Washington, DC market area. During my time with that enterprise, we completed several acquisitions and mergers (over ten different transactions) and we sold two companies. After we sold our core company in early 1988 (to an investor group led by Citi-Corp Venture Capital), I worked for about one year with a boutique mergers and acquisitions firm, during which time we assisted my former company with the sale of two of its divisions. (I also worked on sale/acquisition projects outside of the reprographics industry as well.)
My second “career” was with a reprographics enterprise based in Florida. During my time with that enterprise, we completed one acquisition, and, in December 2007, just as the Great Recession was starting (who knew!), we sold our company to ARC Document Solutions.
My third “career” is still on-going! Since mid-2008, I’ve been a consultant in the reprographics industry. While the primary thrust of my consulting work is geared towards business development and strategic planning issues, I’ve also been involved, as a consultant/advisor, in several different buy/sell transactions.
So, one might reasonably conclude that I’ve had a good deal of exposure to the process of buying, merging and selling companies in the reprographics industry. That does not mean that I’m a “know-it-all”; it just means that I’ve had significant exposure to the buy/sell process, and, in particular, to the problems that can happen if an owner isn’t properly prepared to sell her/his company.
Before I go further, I’d now like to point you to an article – about exit strategy - that I posted on my blog (Reprographics 101) in June 2011. Please read this article before you continue on (click on the link below to read that article.)
Have you given any thought to your “exit strategy”?
Okay, let’s now continue.
Based on my own personal experience, it is my observation that some owners who want to sell (or are considering whether or not to sell) are not properly prepared to undertake the process of selling. And, that some owners don’t understand the process that’s generally involved in getting “a deal” from beginning to end. I think that’s understandable…..because most of you have never purchased a company and most of you have never sold a company. One way to better understand the process is to ask friends who’ve previously sold their companies to explain to you what the process was like and what they had to do to get their deals done. Another way to better understand the process is to hire a consultant/advisor, one with experience in our industry, to walk you through the process, to assist you with the process, and to help you get your deal done.
I’d now like to share with you the outline of the presentation I gave at the most recent APDSP Convention. (Note: what you’ll read below is an expanded version of the brief presentation I gave at the Convention.) This outline was prepared for prospective sellers. But, to the opposite, this outline should also be helpful to prospective acquirers.
The Deal; Preparing to Sell or Merge, the Process That is Generally Involved.
Deals happen in one of two ways:
- You make the decision that it is time to look for a buyer (or for a merger opportunity).
- You are approached by a buyer (or a buyer’s broker or a buyer’s financial consultant) who expresses an interest in buying your company (or merging your company with the buyer’s company).
Confidentiality:
- From the US Navy, WW2, “Loose lips sink ships.” Only those who need to know need to know.
- Prepare and use a “Confidentiality Agreement” (may also be referred to as a “Non-Disclosure Agreement.”)
Confidential Information Memorandum (aka, Business Profile):
- If you are not going to sell your company to a relative, to an (or more than one) employee or to your next-door neighbor, it is important to compile a “Confidential Information Memorandum” (also referred to as a “Business Profile”); this document explains what your business is all about, the types of customers you sell to, the equipment you have, how your company has been performing (P&Ls), and what the company’s current financial condition is (Balance Sheet), etc., etc.
Deal Stages (what generally takes place after the Business Profile is ready to go):
- Prepare a Confidentiality Agreement for use with prospective buyers.
- Prepare a Confidential Information Memorandum (also referred to as a Business Profile).
- Find a buyer(s) or be approached by a buyer(s).
- Prospective buyer(s) executes the Confidentiality Agreement.
- Furnish the Confidential Information Memorandum to prospective buyer(s).
- Respond to follow-up questions from prospective buyer(s).
- Prospective buyer(s) issues Letter of Intent (preliminary terms and conditions).
- Prospective buyer’s “due diligence” period (buyer’s additional questions and review of data/info).
- Agree on deal price and deal structure; what’s included, what’s not included, etc.
- Execute Definitive Agreement (Asset Purchase, Stock Purchase, Merger Agreement).
- Close the transaction (and implement the deal).
Expect to go through at least two rounds on your way to getting a deal done.
- First round – initial submittal of data/information to the buyer (the more complete this data is, the less likely that there will be a second round of “initial data submittal”).
- Second round – after a buyer has submitted a Letter of Intent and you and the buyer have negotiated a deal that’s acceptable to you, expect the buyer to want further data/information about your company (Due Diligence Process/Period).
Don’t be surprised if the buyer, after receiving and reviewing the data/information you provided, has further questions and/or wants to renegotiate the deal.
Comments regarding the Confidential Information Memorandum (Business Profile) you put together to market your company for sale:
- Do not disclose your customer list or the names of your customers.
- Do not disclose your price list or your pricing to customers.
- Furnish your financial statements and any schedules that support line items on your financial statements.
- When furnishing A/R information, black out the customer names.
Financial Statements:
- Income Statement – this is a report card, how your business performed, P or L wise, for the period being reported. Make sure that the terms you use for the line items (revenue/income and expenses) are clear/understandable. Prospective buyers should not have to guess at what your income statement reports. Be prepared to furnish at least two (preferably three) years of income statements. If you are well into a year, be prepared to furnish an interim income statement as well.
- Balance Sheet – this is a snapshot, at a fixed point in time, of the assets, liabilities and owner’s equity of your company. Make sure that your balance sheet is up to date! Same comment I made about income statements, prospective buyers should not have to guess at what your balance sheet reports. Be prepared to furnish two years of balance sheets. If you are well into a year, be prepared to furnish an interim balance sheet as well.
Rule 1:
Make sure that your financial statements are always up-to-date, accurate and organized.
If they are, then, you will be “ready to go” / “ready and able to respond” to the buyer’s request for data about your company. This should be a matter of standard financial housekeeping. Your financial statements should never be out-of-date, disorganized or inaccurate!
Rule 2:
Be prepared to move very quickly.
You do not want negotiations to drag out, you do not want due diligence to drag out. Once the process has begun, it must go quickly and smoothly. Time is of the essence.
I (and my partners) made the decision to take our company (my first reprographics company) public in the summer of 1985. I met for the first time with the underwriter we chose to go with in early August 1985. On November 15th, we went public. It all happened very, very quickly because our financial statements were totally up to date.
At my second company, our primary shareholder had decided ten years before we sold the company (so, in Oct 1997) that she wanted to sell in ten years. In mid-late September 2007, we were approached by a prospective buyer. We also reached out to a couple of other prospective buyers. The buyer we chose to negotiate a deal with began the first round, and, within two weeks, we had an offer (the one we chose to go with). We closed the transaction to sell our company on December 17th, 2007. As with my first company, the deal went very, very quickly because our financial statements were totally up to date.
Since retiring from “active duty” in the reprographics business, I have worked on a variety of different acquisition projects. Enough to tell you that some owners have not concerned themselves with keeping their financial statements accurate or up-to-date. Because of that, data/information is incomplete to the point where getting what you need (in order to evaluate whether you want to buy or not buy and to determine what you’re willing to pay) is not altogether different from pulling teeth. Very time consuming, quite aggravating, totally slows things down to a snail’s pace, drags discussions out over a period of many months. Not good!
Rule 3:
Make sure that schedules supporting line items on your financial statements are accurate and that they agree (tie-in) to the line items on your financial statements.
Examples:
A/R:
Your balance sheet will show the accounts receivable balance as of the date of the balance sheet. You should be prepared to provide an “aged A/R report” that a) ties into the number that’s on the balance sheet, and b) that shows the aging of your A/R (current, 30 days past due, 60 days past due, 90 days past due, 120+ days past due). The A/R balance is supposed to reflect your total outstanding A/R. It is not out of the ordinary that 100 percent will not be collectible. Show your estimate of “uncollectible” A/R as an offset to the A/R balance and show the offset as an expense on your income statement (Allowance for Doubtful Accounts – Bad Debt Allowance).
INVENTORY:
If Inventory is a significant item on your balance sheet, you should be prepared to provide a schedule of your Inventory. NOTE THAT MOST BUYERS WON’T WANT OR NEED THIS WHEN YOU SUBMIT “FIRST-ROUND” INFORMATION.
-Item
-Unit Cost
-Unit of Measure
-Quantity on hand (as of the date of the balance sheet)
-$ Value
EQUIPMENT ASSETS:
-List brands/models of the equipment your company is using
-Indicate “owned outright,” “financed (note payable),” “leased”
-Approximate age (years/months)
-Present operating condition
DELIVERY VEHICLES:
-List makes/models of the delivery vehicles your company is using
-Indicate “owned outright,” “financed (note payable),” “leased”
-Approximate age (years/months)
-Present mileage
-Operating condition
MISCELLANEOUS ASSETS on your Balance Sheet
-Provide sufficient information for the buyer to determine if he/she wants any of these assets (for example, if you have a loan to a relative on your books, the buyer won’t want that asset)
LOAN Debt:
If your company has loan debt on the balance sheet, prepare a schedule that shows a breakdown of the loan debt:
-Loan (state for what)
-Remaining payments (as of the balance sheet date) (# of payments remaining, monthly payment, remaining balance.)
LEASE Debt:
If your company has lease debt on the balance sheet, prepare a schedule that shows a breakdown of the lease debt:
-Lease (state for what)
-Remaining payments (as of the balance sheet date) (# of payments remaining, monthly payment, remaining balance.)
-Option to purchase at end of lease term (e.g. $1.00 buyout, 10 percent buyout, FMV buyout.)
Click here to read the second half of this article.