Several of your buddies from the label industry have sold their companies since Covid…but not you. You have had many conversations with private equity firms along with some of their portfolio holdings and nothing has happened. Well, what’s up?

The number one reason a company (label or other) might not be attractive to a buyer is poor financial performance – that is a given. Most acquirers of label companies are looking for a minimum of 10% adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization), and they would prefer 15% or even higher. We have one label company buyer as a client (PE-owned) that is spoiled because their platform acquisition had an adjusted EBITDA in excess of 30%! Yes, you read that correctly.

But poor financial performance is not what this month’s column is about. Here are just 10 of the non-financial reasons your company might be unsalable:

1. You – Yes, I said you! The seller of a business should have focused on making him/herself less important to not only your employees but your customers, as well. Are you still the quasi-plant or sales manager for your firm? Do you have a strong #2 in your company? If you dissappeared tomorrow, would the company continue to run the same as when you were there? Would it survive?

2. Family – Do you have any immediate family members (wife/husband/son/daughter/brother/sister) involved in the business? Most acquirers do not like there being close family members of the seller in the business. If they do not work out (for the buyer), it will be on their watch that the person might have to be terminated. When our firm runs across a company with either a son or daughter in the business, we always point this out to the seller. It has been problematic for us over the years.

3. Facility – This means your physical facility – the plant and/or office. Just like your garage at home, you may have gotten used to the place not being as neat as it could be. All those old presses out in the back of the warehouse that you are “saving for parts” are hardly noticed by you or your plant employees anymore. But a buyer will take notice. Even the yard with grass that needs mowing or all the dead plants at the entrance will be noticed.  

4. Dogs – Yours truly is a dog lover (I have five), but not everyone is. If you or any of your employees have gotten into the habit of bringing Fido in every day so he is not home alone, tell him he will have to stay home just for the day because you have important guests visiting the plant. If he questions this, tell him that if the visit goes well, you will be able to spend more time with him!

5. Minority Status – If your company is designated as a minority (MBE) or women-owned (WBENC) business, this will present problems for a buyer who does not have that same designation currently. While it is possible that you are not getting business simply because of that designation, a buyer will be wary that once you are acquired some business will be lost.

6. Customer Concentration – If you have a couple of major accounts that produce 80% of your sales, this will be a problem. You may recall hearing the 80/20 rule. This means that 80% of your business comes from just 20% of your customers. A better rule to strive for would be that your Top 10 customers account for less than 50% of your business. Do you know the mix at your firm?

7. Sales Rep Non-Competes – Many people – including most sales reps – believe that “non-competes” are not worth the paper on which they are printed. Yours truly does not believe this and has been in court (as both a plaintiff and expert witness) and won. I would encourage you to meet with a labor attorney who deals in this (call me for a referral) and review your sales rep agreements. They should be specific to a set of customers by name and not a large geographic area. The term should not be too onerous, say two years ar most. If you can keep a sales rep out of his/her top 10 accounts for that period of time, you should be able to hold on to the business. By the way, be prepared to go after any and all sales reps that violate your company’s non-compete agreements.      

8. Equipment – Some owners of label companies love to go to Labelexpo and see their name on a placard stating that a certain piece of equipment is destined for the ABC Label Company. While that might be the extreme, have you been 180 degrees away from that? Is the equipment out in your plant ancient and being held together by baling wire? Do many machines look like they have not been run in some time? Is there dust on the exposed ink cylinders? A new owner does not want to have to replace a number of your presses to operate efficiently soon after the deal closes.

9. Building Leased/Owned – The vast majority of our clients personally own the building and lease it back to the company. Is this lease at Fair Market Rent (FMR)? Is it over or under market price? When was the last time you had an appraisal of the building that included FMR? Are there any environmental issues? If the building is owned by the company and there is no rent being charged, this will cause your adjusted EBITDA to come down. The new owner will have to pay you rent, which is an expense that you are not incurring since the company owns the building.

10. Legal & Accounting – Hopefully your outside advisors have you set up as an S corp or LLC and not a C corp. (A C corp is a form of corporation that’s owned by its shareholders. Both must pay taxes on the business’s income.) No one will want to purchase your shares, and having a C corp will simply complicate this issue. If your company is of any size – say $10 million or more – you should be getting a review from your CPA firm, or a compilation at a minimum. If you simply have internals or tax returns, this will be an impediment to selling the business.

I hope you can see from this column that there is more to making your biggest asset attractive to buyers – and salable – than simply the numbers. This is also something that should be done by a professional. If you would like an audit of where you stand, please ask your outside advisors such as your attorney and/or CPA for a referral, or you could call Corporate Development Associates.

Jim Anderson is the Founder & President of Scottsdale, AZ-based Corporate Development Associates (CDA). CDA is a boutique Merger & Acquisition consulting firm that has focused 100% on the printing industry since 1987. Website: www.printmergers.com. Contact Jim via email: janderson@printmergers.com or cell/text: 602-432-0426