About a year ago I wrote a column for L&NW, which you may or may not have read, so this is a follow-up with some additions to bring it up-to-date. Private equity (PE) firms acquire all kinds of companies (most are industry-agnostic) and bring disciplines to them so they can earn a hefty profit when the business is sold again – this is usually five years after their initial investment. 

Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by bank debt. PE firms shoot to return a 6x multiple to their investors of their own committed capital, excluding debt.

An acquisition by a private equity firm can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm’s skills and objectives. 

Some of the larger PE firms that are active in the label industry include: 

• Morgan Stanley Capital Partners: AWT Labels & Packaging
• Genstar: Brook + Whittle
• Clayton, Dubilier & Rice: Fort Dearborn and MCC
• Harvest Partners: Fortis Solutions Group
• Heartwood Partners: Outlook Group and All-American Label
• Wynnchurch Capital: MS2 Group (nee Iconex Labels)
• Sole Source Capital: I.D. Images et. al.
• River Associates: ID Label
• AEA Investors: Inovar Packaging Group
• Mason Wells: KDV Label and Industrial Labels Holdings
• LongueVue Capital: Traco Packaging
• Incline Equity Partners: NovaVision and PrimeSource
• Ares Management Corporation: Resource Label Group

I think you get the idea. This is just a sampling, as there are too many others to include in this column. One of the best disciplines that a public company already has or a PE firm brings to the table is financial skills. Many privately-owned companies simply do not keep their financials in order and are not being properly reported by their CPA firm.

There was an entire M&A Corner column written by yours truly about this topic in a previous issue. If you would like a copy of it, simply send me an email and I will forward it to you. Also, public company shareholders and PE firms like their investments to make money, so you can be sure that if a label company (competitor) is either publicly-traded or PE-owned they are not working on razor-thin gross margins – and this is a good thing for you!

Public companies and PE firms are absolutely possessed with EBITDA (Earnings Before Interest Taxes & Depreciation/Amortization). This is a quick metric that will tell them if they are performing well or not. Some PE firms have their EBITDA target set at say 15%, and they will not look further into acquisition if it is less than that. Do you know your company’s EBITDA %? If not, please reach out to me, and we will do an analysis for free.

If you did not sell your label company to PE during the buying frenzy for whatever reason, did you miss that opportunity? Absolutely not. Not every label company owner wants to sell or have a boss. When you sell your baby to a PE firm, let there be no mistake, you will have a boss. Keep running your label company as you have in the past, but you have been given an opportunity to spiff-it-up for yourself or a potential sale at some point in the future.

You should focus on getting your financials organized to present multiple years at a glance. What you will be looking for is to get to your EBITDA. This is a quick metric that will tell you how you are doing. If your EBITDA is less than 10% (of sales), you have some work to do.

I am sure you are aware that all public companies have an outside Board of Directors. PE-owned companies have them, as well. I suggest that if your company has more than $5 million in sales, you should have a Board, too. You can call it a Board of Advisors, if you prefer. Your Board should include major shareholders and at least three outside individuals. I would shoot for finding one person having each of the following skills: manufacturing, sales, or finance. It is not necessary that these individuals be from the label industry. The problems you might have at your company are not related to the products you produce.

You should have quarterly Board meetings with an agenda and circulate your company’s internal financial statements a week or so prior to the meeting. This will be quite humbling for you at first but a very good discipline. I would encourage you to pay your Board members something – say $1,000 per meeting plus out-of-pocket travel expenses for starters. You should not include your CPA or attorney on your Board.

In conclusion, I believe having public companies and even more PE firms in the label industry is a healthy thing to have happen. There will be fewer (albeit stronger) converters who will tend to price their products to produce healthy gross margins. Just make sure that if you do not sell your label company to a PE firm, that it remains on strong financial footing by getting solid reports from your CPA – a compilation at a minimum and more preferably a review of your firm’s sales in excess of $7.5 million. Should you have any questions about the content of this column, please do not hesitate to reach out to me.

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