There are two types of valuation methods for Main Street printing companies, and they can affect how you set and defend your asking price – and what you ultimately get in the deal.
Choosing the correct business valuation method is a vital – but often overlooked and misunderstood – part of selling a print company. There are two primary valuation techniques used in printing. Picking the right one can help you confidently set your asking price to get maximum value as a seller.
Areas to consider:
- Why business valuation techniques matter
- How valuation methods can influence multiples
- Which qualitative factors can help you justify a higher asking price
Valuation Methods Vary for a Reason
Sellers ask me all the time, “Why isn’t there just one method to value a company in the printing industry?”
When most owners start their sales process and get a business valuation, they ask me what the current multiples are for their industry. It’s no different than selling a home – you want to know what your neighbor’s house just sold for.
Getting a Fix on Multiples
We have touched on this mindset in previous posts on valuation multiples. It’s impossible to establish a set multiple for the entire industry or even among somewhat similar companies within a sector.
External factors affecting multiples include the current growth of a sector, expected demand, whether a sector is in favor with investors, and other macro factors.
Nevertheless, people want a place to start.
Factors that Help a Multiple Trend Higher
In general, we can say that multiples have trended higher for specialized companies that provide some or all manufacturing or finishing in the label, flexible packaging, wide format, and particular specialty finishing or converting businesses.
However, the characteristics of the individual company also affect the multiple, including gross profit. A smaller company will generally sell for a lower multiple than a larger one. A company that can show a strong track record of profitability will be another positive factor.
Over the years, for the general commercial printing industry, we’ve seen multiples hover around 3 or 4 for sales where the buyer was looking for a strategic acquisition and happy to pay for the synergy.
Why Everyone’s Business Valuation Will (or Should) Differ
As we noted in our previous post, industry valuations and your company’s valuation are two different things. That’s important to know, but what’s even more critical for a seller is that there is no “objective” value for any company.
The actual value of your company will be ultimately set by the buyers, based on their strategic needs. However, different valuation methods will result in a better synergistic fit with a buyer’s acquisition criteria and, naturally, the ability to command a higher asking price for the seller.
An Explanation of Two Valuation Methods
Generally, there are two methods of valuing a company: one based on EBITDA value, the other on underlying assets.
1. Asset-Based Market Valuation
In this method, you are essentially looking at the underlying assets in your company, which include:
Net working capital at book value (Represents the sum value of receivables, inventory, prepaid assets, fewer accounts payable, and accrued liabilities)
Production equipment at OLV (the orderly liquidation value of your production equipment)
Value of your customer base (commission on retained sales for 2 to 5 years, with an average of 3 years)
When the industry emerged from the 2008 recession, many companies sold as a function of their underlying asset value. Today, about a third of companies for sale in the commercial printing side will be sold that way.
2. EBITDA Multiple Valuation
After the 2008 recession, the EBITDA valuation method became more widely used because it allows you to value your company based on how fast it is growing.
Essentially, you compute your company’s EBITDA, and then multiply it by the EBITDA multiple for the industry. This results in an “enterprise value” for your company (excluding any cash and/or debt your business currently has).
Qualitative Influencers Affecting Price
The two methods we’ve explained are primarily quantitative. Qualitative factors can also play a part in the value of your company and its eventual price tag.
- Management capacity
- Up-to-date technology
- Above-average operating margins
- Good culture and loyal employees
- Buyer synergies
- Competitive processes
Negative influences on the quality of your company can result in a lower valuation.
These include:
- Customer concentration ratio
- Union operation (if in the U.S.)
- Managers who will not be staying with the company after the transition
- No rollover investment
- Up and down performance
- Expansion restriction
How much can these qualitative factors affect the price tag?
Even if you check all the qualitative boxes, if your base assessment is at a multiple of 3, it’s unlikely you will sell at a five multiple. Strong qualitative factors will inch up your multiple, not hit it out of the park.
Predictions about market valuations for main street sellers in the printing industry
For companies with $1 to 5 million in EBITDA, you may see a range of 3 to 5 times for companies with interest from strategic buyers.
Strategic buyers are typically larger companies looking to accelerate their growth through an acquisition called a “tuck-in.” These buyers may look to purchase in a rapidly-growing sector. Or, they seek a complementary company with favorable geography, specific assets, or even qualitative factors suited to their operating model and philosophy.
Two Biggest Mistakes You Can Make
Let’s conclude this post with a wrap-up of why these valuation methods are tied to the two biggest mistakes you can make when selling your business:
Mistake #1 – Unreasonable expectations
It’s not unlike the sale of a home. You have deep emotional attachments to your business. You’ve built it up, and now that it’s time to sell, you want the top price you can get.
That’s fine – but you can’t count on getting more than it’s worth. Too often, we see sellers miss opportunities because they enter the process with high expectations that don’t match the market.
Mistake #2 – Selling Your Business for Less Than It’s Worth
Choosing the correct business valuation is part of the strategic process of pricing your business or pricing your business correctly.
The market will determine the value of your company — that’s true. But the proper valuation can help attract the right buyer for your company. If you don’t value your business correctly, based on all your quantitative and qualitative assets, you may be leaving money on the table.
As you can see, the methods for valuing a company in the printing industry can make a difference in how you set and defend your asking price – and the price you ultimately get. Have questions about your unique situation? Give me a call and let’s discuss. (561) 543-2323