Merger and acquisition activity in the industry has been on the rise over the last 15 months. Jamie Watson, an expert consultant on such deals, shares what you need to do to ensure successful transactions.
For Certified Marketing Consultants (CMC), business has been brisk.
The Indiana-headquartered firm specializes in advising promotional products companies on private sales, acquisitions, business valuations and more. So far in 2022, company revenue is up more than 180% compared to 2021.
The sharp spike in business is both a result and telling indicator of a phenomenon that’s been playing out in promo over the last 15 or so months: After a pandemic-era lull, merger and acquisition activity has accelerated substantially and continues to occur at a fast pace.
“Due to COVID, supply chain issues and other factors, the first half of 2021 was quiet in promo – buyers and sellers were still in crisis mode,” says Jamie Watson, a partner at CMC, which is an affiliate of ASI, a promo trade association and service provider that’s parent company to ASI Media. Watson continues: “Once the worst of the fires were extinguished, however, buyers and sellers started to focus on growth again, both organic and through acquisition. That started to happen in June/July 2021. In 2022, the whole year has been active from an industry M&A perspective.”
Which prompts the questions: As industry firms look to acquire or be acquired, what best practices should would-be buyers and sellers follow to ensure successful transactions? What mistakes should they avoid?
Watson, a certified public account with a master’s degree in accountancy, draws on her 16 years of advising promo companies on M&A and the like to offer answers to those pressing questions here.
Q: What are the biggest mistakes would-be buyers of a promo business make? A: The biggest mistake is not having a solid transition plan in place by focusing on the “wedding and not the marriage.” Buyers should work with sellers to form a strong transition plan for both their customers andtheir employees. Another mistake buyers make is assuming what works best for their company is also best for an acquired company. Sometimes there are cultural differences that need to be observed and addressed.
Q: What are the biggest mistakes someone looking to sell a promo business makes? A: The biggest mistake is waiting too long due to lack of planning. I get calls often where owners give me their annual sales from five years ago but say that sales have trailed off as they lost interest or motivation. I have to tell those owners that the older sales numbers are no longer relevant. Buyers are looking for positive growth trends and other factors that mitigate risk. Buyers place little to no emphasis on how profitable the company used to be.
The next major mistake is owners who hear rules of thumb or make assumptions about what a buyer might pay for their companies without getting an accurate picture of what a potential purchase would look like. Your company is likely the biggest asset you own and deserves a thoughtful approach to its continuity.
Q: What are top strategies that sellers should follow? A: First, all company owners should assume they are potential sellers and build valuable companies. If you aren’t focusing on the value of what you’re building, you’re doing your company a disservice. Even if you plan on passing your company to another generation, you should be focusing on how to create something resilient and prosperous. Once in that mind frame, focus on the following:
Build Smartly1. In the planning stages, understand the value of what you’re building and what’s driving that value.
2. Be flexible. Build a flexible business model that can shift when necessary and also when purchased. This is what made our industry resilient during COVID.
3. Don’t build a company based on price. If you’re getting business based on price, you’ll certainly lose it for the same reason. Buyers can easily spot this flaw.
Plan Wisely1. Start the process early – well in advance of when you think you’ll want to sell/be done with the business. Many buyers want the former owner to stay for a transition period. In the promo industry, that can be as long as three to five years.
2. Have accurate financial statements. Be ready to explain any adjustments that are made for discretionary expenses. Most of our sellers deduct auto, travel, etc. But not having those expenses split out and verifiable creates problems in due diligence.
3. Don’t tell anyone about the potential sale of your company who doesn’t need to know.
Q: What are important strategies that buyers should follow?A: There’s a lot to account for, but here are five to keep in mind.
1. Take the time to get to know what makes a company successful. Don’t make assumptions that all distributors, for example, are identical. What works for one may not work for another. To that point, all deals are different. Don’t try to fit all sellers into one formula and assume it’s going to work. Be unique in your approach and find what the important deal points are to each potential acquiree.
2. Self-reflect about what you would be willing to accept if someone buys your company. Make a genuine offer based on that.
3. Look for that 1+1=3 scenario where you can utilize resources of your company to leverage and grow a potential acquisition target.
4. Don’t forget about culture. While it’s not quantifiable, it’s still a very important aspect of any acquisition. You need to have the right cultural fit for the deal to work long-term.
5. Balance risk. All of our deals have an element of cash at closing and contingency-based payout, so risk is balanced between buyer and seller.
Q: After a record-breaking year in 2021, there’s evidence that M&A is slowing down in the broader economy, though still happening at a pace that matches pre-pandemic levels. Do you anticipate M&A activity specifically in promo increasing, decreasing or staying steady over the next half-year to year?A: I anticipate it staying steady with what we’ve seen in the second half of 2021 and this year so far. People in our industry buy and sell for reasons that have nothing to do with the current economic climate.