Navigating the rough seas of selling your company

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Michael Marcotte/ Plastics News Deborah Douglas, founder of the Douglas Group, says she wishes she had a three-year heads up to work with plastics companies on their strategy to sell the business.

CHICAGO — Owners of plastics processing companies took on a lot of risk and worry to get where they are today. They survived the Great Recession, in some cases, by personally guaranteeing debt.

They built operations that improved goods and services, created jobs and filled tax coffers. They lost sleep and gave up vacations as part of a competitive, world-wide industry.

Now many wonder: Is it time to sell, retire and sip cocktails on the beach? Or, maybe find a partner and take steps to relinquish control?

Decisions about timing and picking the right buyer or partner weigh heavy as do considerations about what can be done to make the company worth even more money.

There are a lot of things plastics company owners can do to build value in a company; face strategic, financial and general buyers with more confidence; and sell for the maximum price, according to experts who spoke at the Plastics News Financial Summit on April 2.

Business industry deal makers, who expect an active year, offered tips to make transactions easier for owners looking to reap some “ends rewards.”

Deborah Douglas, founder of Douglas Group, which has been selling middle-market plastics companies for 22 years, wishes she had a three-year heads up to work with owners on their exit strategies.

“It really pays to make your company the hot property that everyone wants,” Douglas said. “2014 is probably going to be the greatest year for plastics in my opinion.”

Private equity is in purchase mode, interest rates are low and global investors looking to deal are all making for an active selling environment. Everyone on both sides of the transaction are trying to figure out what companies are worth.

“If I had to give plastics processors kind of a rule-of-thumb pricing I’d say start with maybe five or six times pre-tax earnings. That’s kind of a beginning point. Then you go up and down for different things,” Douglas said.

Determining exactly when to entertain offers is tricky, she added.

“The best time and most profitable time for any business owner to sell is right near the top, not quite there, almost there. The unfortunate part is that owners don’t know when that it is,” Douglas said.

She recommends four steps to bolster the bottom line: creating a niche for the company, empowering the management team, developing proprietary capabilities and clearing some roadblocks.

Bolstering bottom line

Sellers often don’t realize the impact a focused product line has on attracting attention and commanding a better price, she said. Douglas and her staff talk to as many 300 buyers for the average sale before narrowing the field down to 30 to share information with and then pinpointing 10 that are serious contenders.

“I would tell you that 80 percent of those guys in the first three sentences use the word niche,” Douglas told summit attendees. “They want something nichey, something focused, somebody who is the powerhouse kingpin in his one little area that can beat the competition hands down in his segment.”

However, too much of a good thing can impede a sale. For example, Douglas said a lot of buyers took issue with a Minneapolis thermoformer that had sales fairly evenly divided between anti-static packaging and snowmobile handlebars. Some clients were impressed with the handlebars that didn’t break in sub-zero temperatures but they were put off by the employees with hairnets and booties at the other end of the plant.

“The packaging people would come in and go through and say you solved a lot of problems for customers in this industry. You’re doing a great job but is that a snowmobile fender? And, they ended up running away,” she said.

The business eventually sold to a generalist instead of the more typical strategic and financial buyers.

“We sold it decently, but I’ll always feel we could have got two times earnings more for that company if it had been focused in either of those areas,” Douglas said. “It really hurt.”

One of the biggest steps to enhancing the value of the company is putting the right people in place. Douglas suggests hiring managers with CEO potential and people skills to connect with clients.

“The strong companies are the ones that every customer knows three or four or five people that they love,” Douglas said. “That’s what makes power. It makes a big difference.”

Buyers also are looking for companies good at one thing in particular to offer them some competition resistance. Businesses with design capabilities, unique processes and patents are attractive.

The same goes for patented products — even if they aren’t solid and defensible.

“Anything you can patent has value — disproportionate value in the buyer’s eye so it’s a good move,” Douglas said.

Deal makers often use a salability analysis to show not only a company’s strengths but weaknesses that need to be addressed so they don’t detract from value.

Douglas cautions plastics processors not to borrow against the company, defer payables and unload assets right before a sale.

“Buyers look at how much equity you’re leaving in there, that you’re selling,” she said.

High volume also can help a sale. While it may not make a difference in profitability, it does in selling price, Douglas said.

“Buyers want bigger. Bigger is better,” she said. “It leaves more room for mistakes so it really pays off.”

However, Jeff Mengel, a partner with consulting firm Plante & Moran PLLC, says it doesn’t always pay to be a large company.

“Size doesn’t guarantee one thing or another,” he said. “What it does guarantee is the larger company generally consumes more resins. They have resins as a higher percent of activity. They have better manufacturing skills, inventory turnover is better and utilization tends to be higher.”

Mengel said cash flow and uniqueness, such as product development, are the two most significant drivers of value.

Buyers also look for good margins and more importantly good margin histories — even steady will do in the wake of the economic downturn. Douglas said she often has to temper expectations of sellers who think that because their businesses doubled in a year they are worth twice as much.

“No, it’s not that quick,” she said. “It takes time. If your business has ratcheted up 20 or 30 percent every year for five years you’re worth something. That has big value but it has to be longer term.”

Major equipment improvements also will help a seller fetch a higher price than 10- to 20-year-old machines. Buyers like to see a steady influx of the latest technology.

The right buyer

Plastics company owners are leaving the industry or seeking a new role for a variety of reasons: diversification of wealth, retirement and to transition control to another generation of managers, said Jim Andersen, founder of Clearview Capital.

Private equity firms and other financial buyers are in business to make a return on their investments while strategic buyers — competitors, suppliers or even customers — are trying to grow in the market by integrating related products and services.

No doubt private equity is in purchase mode, making about half the deals nowadays after their numbers swelled from an estimated 300 firms in 1992 to more than 3,000 today, according to Douglas.

“Usually it’s an equity firm that owns two other plastics companies that thinks all together you can do better,” she added. “That’s more common and that works fine.”

She also tells sellers to expect a lot of international buyers to come forward with proposals that require the owner to stay on for a while.

Andersen said it’s a tossup as to whether strategic or financial buyers will pay the higher price but he guarantees the lowest bid will come from a strategic, in part because they’re not running sophisticated financial models like private equity does.

“Sometimes there isn’t a strategic fit at all and strategics don’t bid,” he added. “They’re just not there for you or they’re just not that excited.”

For the plastics company owner who wants to retire, a strategic buyer will likely offer the best deal. They are more adept at replacing executives and less likely to ask sellers to keep skin in the game. Financial firms want sellers to leave money and manpower behind.

“We want you to stay invested,” Andersen said. “We don’t want the here-it’s-yours-now kind of thing. The fact is even if we have a lot of experience as we do in operating businesses, we are not operators. We need management on the ground.”

For this reason, sellers dealing with private equity need to determine if they have a shared vision with the firm and if they can weather economic storms together.

Culture is important

Before Clearview Capital acquired Findlay, Ohio, sheet maker Rowmark LLC back in 2006, Andersen said he had to fill out a seven-page questionnaire. In addition to a dominant market share for their coextruded and laminated thin plastic sheets used for engraving applications, the company had a strong culture and capable managers who just needed some access to capital to do more.

“My answer was like a novel because they wanted to know everything about what we’re like,” Andersen said. “They came to visit our office. They had us out. They met every person in our organization. They really took seriously: Is Clearview the right fit for us?”

The answer came back yes. Clearview bought the company for $35 million enterprise value, put an incentive plan in place for management, and invested $4 million in a plant expansion.

“In the end it was the cultural fit that made the decision for them over price, over terms, over everything else,” Andersen said. “We paid a very fair value for the business but it was something non-price related that had them really choose us.”

While real estate agents emphasize location, location, location, Andersen said it often pays off in the long run for plastics company sellers to think culture, culture, culture.

“Looking back, maybe that last million dollars that you gave up to hit the right partner is not going to matter. Not at all,” he said.

Michael Marcotte/Plastics News Jim Andersen, founder of Clearview Capital