Saying the last 15 months have left a mark on the copy/print industry would be an understatement. The pandemic we continue to navigate has led to many significant changes, not the least of which is how we interact with customers. Sales reps got used to working through video meetings and struggled to chase down prospects and customers at home. Many leases that came due were allowed to evergreen rather than upgrade. With many people not in the offices, clicks came down.
The total impact of this sea change varied widely among geographic and vertical markets. Dealerships that were located in large cities such as New York, Chicago and Los Angeles felt the brunt of the change more than others. Dealerships that have large portions of their customer base in vertical markets such as schools and hospitals also took a big hit. Thankfully, the government stimulus programs did what they were intended to do, replacing much (if not all) of the profit that would’ve been lost to the pandemic. Having looked closely at the financials of many dealerships in the last 15 months, I can say without question that the strong got stronger and the weak struggled.
There’s one sentiment I’ve heard from both sides of the fence—the pandemic caused dealership owners to look more closely at their long-term plans, and many have concluded that they want to get out of the business.
This leads us to the impact on the merger-and-acquisition landscape. I’m asked multiple times a day, “What’s happening with acquisitions?” or “Does my business still have value?” Like the pandemic itself, the answer is both straightforward and complicated. I’ll start at the end of the story and then fill in the details. But it’s clear that acquisitions are far from dead.
Current Climate
I’m sure you’re all aware of the move Konica Minolta made in April, moving a big chunk of its branch customer base over to dealers. You probably also recall Ricoh doing the same thing a few years back. Some took this as a negative sign, indicating that making money in this business was too difficult, but I respectfully disagree. Manufacturer-owned branches have historically struggled to be profitable. Their business model and management structure don’t favor net income; they focus on revenue. Konica Minolta and Ricoh realized that independent dealerships have a stronger model for servicing customers while making money. This shift indicates the strength of the dealer community and the faith these manufacturers have in it. This helps bolster the value of the independent dealership, even those that didn’t buy any base from their manufacturer.
The second event that illustrates the strength and interest in the industry was the unsolicited offer CVC Capital Partners made for Toshiba on April 7. As the name suggests, CVC Capital is a private equity company, and these companies have a very simple business plan: buy businesses, build their revenue and profit, and sell them off at a later date for a strong return. A large private equity firm wouldn’t put forth a $20 billion offer that was 30% above the undistributed share price at the time for a company that doesn’t have strong potential for growth and profit. While copy/print is only a part of Toshiba’s overall offering, it’s a significant piece that would likely turn attention away if it wasn’t believed to have a strong future.
The proliferation of private equity in the copy/print industry in the last five years is, by itself, an endorsement for the industry. Again, the sole purpose of a private equity group is to buy companies, build them and sell them. They only invest in industries that will provide a strong return during the time they hold the company and allow for a profitable exit when they sell it.
At Prosperity Plus, we’ve worked with all the major private equity firms in the industry, and I speak with their leaders on a regular basis. Like independent dealerships, they’ve felt the impact of the pandemic. Keep in mind that they didn’t qualify for the Paycheck Protection Program, so they didn’t receive the stimulus to bolster profits. With click revenues down, the private equity companies need to make up for lost ground. A few of them have shared with me their strong desire to move forward with acquisitions in 2021 and beyond. They need to make up for revenue lost due to the pandemic and continue to show growth. But there have been two big challenges to moving forward.
Traditional Metrics
First, private equity companies traditionally focus on the trailing 12-month period when determining the value of a company they want to acquire. These companies are struggling with how to do this knowing that the pandemic-period numbers are skewed.
The good news is that I’ve seen private equity companies get creative when they find a company they truly want to acquire. We’ve closed a few deals and have a few others in the works that have some very creative terms. These include unique formulas for determining Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); a willingness to consider time frames other than the trailing 12 months; and a willingness to increase the typical multiples when it’s known that the period being reviewed is unusually low and not a true reflection of the business.
I’ve seen some very creative earnout programs come to light, allowing sellers to remain engaged in the process while feeling more certain that they’ll receive a higher value when all is said and done.
The wildcard in today’s transactions is the future. While there’s no shortage of opinions on what copy/print volumes, revenue and profit will look like as we move forward, no none knows for sure. This uncertainty has forced many acquirers to put an earnout component into their deals. An earnout ties the seller into the future results of the business—if the business does well, the seller “earns” more value and a higher purchase price. The downside is that they place risk on the seller that doesn’t exist if the purchase price is guaranteed. I’ve seen some very creative earnout programs come to light, allowing sellers to remain engaged in the process while feeling more certain that they’ll receive a higher value when all is said and done.
The second challenge relates to the stimulus most dealerships received, which prevented a drop in profit and cash flow that might normally motivate owners to sell. While some are ready to figure out an exit strategy, few have felt enough pain to consider taking a pandemic-related discount in their business value. This is why there haven’t been as many business sales as one might think. This picture will change as the stimulus money dries up—I expect it will accelerate the timetable for some folks who may be looking to exit their businesses.
Business Impact
As I mentioned earlier, this pandemic has made the strong stronger and the weak weaker. Stimulus money has covered some of the weaknesses and, unfortunately, has allowed some dealerships to avoid or postpone correcting their business model. Those that don’t get a strong business model in place will begin to see the shortcomings manifest themselves as we move through 2021.
Regarding independent dealerships, I’ve received more calls from ones that are looking to buy than I had before the pandemic. Many of the larger independents are feeling the revenue drop and are looking to position themselves for a faster recovery by acquiring smaller dealerships. They’re looking for a “fire sale” price, but others understand that a deal must be fair to both sides for it to work. I expect independent dealerships to pick up speed this year when it comes to acquisitions.
The big question is this: how do you position yourself for the outcome you desire? The best thing any dealership can do is build a strong business model focused on driving both profit and revenue. Recurring revenue is, and always will be, a major business value driver. Be sure that you’re giving it the focus and attention it deserves.
If the recovery of copy/print volumes does indeed come out to be less than it was pre-pandemic, be ready to adjust your headcount and expenses. Also ensure your “new” business model incorporates the necessary changes to your sales process that will allow for growth. If you’re thinking about an exit, consider your options and look at the business through the eyes of an acquirer. If you’re unsure about the value of your business, get a valuation done by a qualified appraiser who knows the industry, and use it to help set your course toward the exit you desire.
The good news is that I expect acquisition opportunities to continue well beyond 2021. Understanding your business model, adjusting for pandemic driven changes, and keeping a close eye on M&A trends will pay big dividends now and when you’re ready to exit.
As always, if you need help, don’t hesitate to call.
