For Printers Who Don't Know
Whether to Keep or Sell a Company

Print & Graphics
The Regional Newspaper of the Mid-Atlantic Graphic Arts Industry Vol. 17 No. 5 May 1996

by Ross Adams & Patrick Ring

If you own a printing company and are approaching retirement - or have even passed retirement age - any and all of the following scenarios may sound familiar.

Your business has been in the family since the end of Warld Warr II, but competition has intensified and technology is knocking at your and your customers' doors.

There is a real question as to whether any reasonable level of investment will allow you to remain competitive over a multi-year time horizon in a market victimized by overcapacity, where printing has become a commodity.

Running the business is just plain tough. But you can't decide if you should keep it for the next generation of family members or sell it now.

This is an emotional time, and there is a dangerous tendency to do nothing, to defer the tough decisions. But if you feel this way at all, you are not alone.

Three options exist. You can attempt to grow through new investment, by acquisition or forming strategic alliances; exit through sale or liquidation; or try to maintain you current position in the market. Each choice should be measured by whether the business is currently or can become competitive.

Competitive advantage

Before choosing an option, owners should step back and view their businesses as they would any other investment. Is this particular business an attractive place to have the family capital at work? In the cold light of day, is each new $1 invested building value, or turning into 75 cents?

Growth or maintenance options should be measured by whether and how well they allow businesses to establish and sustain a competitive advantage. If you are competitive in your markets, the business has a reason to exist, a chance to create value for its shareholders. If you are not competitive, your investment value is dropping and you should therefore consider selling. Take the proceeds and invest in a business that is competitive, where you can work hard (or let others work hard for you), build value and have fun again.

In general, there are three ways to establish a competitive advantage: become the low-cost producer; differentiate your product offering; or find a niche and service it very, very well. Let's look at each.

  • Low Cost: Given the thousands of commercial printers ranging in size from small "mom-and-pop" operations to large, billion-dollar companies, the strategy of becoming the low-cost producer is not a realistic option for most printers.
  • Differentiate Product Offering: This strategy is more common. In addition to differentiating through superior service, some companies offer seminars designed to educate customers about the printing process and about the use of desktop publishing software. Other companies we know have combined office supplies distribution with printing and have become successful, convenient providers of both services.
  • Find a Niche: Identifying a niche and servicing it well can produce wonderful results. For example, one printer we are aware of produces point-of-sale merchandising materials. By handling the production, warehousing, fulfillment and invoicing functions, the firm has successfully become a part of its customers' overall marketing process, thereby errecting a barrier to entry by its competitors.

Each of these competitive strategies will increase the value of the business, but will require investment. If one of these strategies can be implemented, invest with confidence. If capital is not available, an alliance with a strategic partner may make sense.

As a first step in the process, determine your principal strength or advantage: customer base, location, technology. Next, think about what is critical and lacking for your growth and profitability: capacity, capital, distribution. Who, then, would stand to benefit the most from your success? Who represents a "strategic fit"?

In 1989, R.R. Donnelley invested in AlphaGraphics and put themselves into 245 new markets. AlphaGraphics received capital and access to substantial resources.

If your firm is unable to develop any of these strategies and its competitive position is deteriorating, there are two options: get out of the business (quietly); or sit back, maintain the status quo and watch the business deteriorate, which can be devastating to shareholder wealth and to shareholder relations.

Decision to exit

An exit is typically accomplished through either a liquidation of assets or a sale of the business. The decision to exit may arise for a variety of reasons - lack of successors, retirement needs, changing strategy, or the difficult conclusion that the company is simply not competitive. A company's liquidation value may exceed its operationg value.

An exit, though wrenching, often produces a happier, more liquid, ex-player. However, be aware that rapid technological changes and a consolidating market can produce distressing declines in the value of equipment and of companies.

Although it is critical for commercial printers to asses their competitive position and outlook, many in the industry seem to be moving in slow motion. In light of the developments occurring in the industry, why are so many firms continuing with business as usual? Consider some of the following factors:

  • There's a strong desire to continue operations under family ownership.
  • Owners may hope to keep the business alive and profitable "for just a few more years" so that their own retirement can occur as planned. However, if the business is becoming less competitive, the delay could produce a greater loss of capital than was gained in income during the period.
  • A sale or liquidation could be difficult for all constituencies, including long-time employees who may themselves be nearing retirement.
  • Consolidation changes the surface of the playing field. Imagine the consequences of your two fiercest competitors merging. It's easier not to think about it.
  • Finally, how do we start the process? Is there fear of disclosing information during merger or acquisition discussions? Can new capital be raised: at what cost; are guarantees required?

Although there are lots of reasons not to take action, look at your business as an investment and you will understand what you have been feeling in the pit of your stomach.

Decisions can be clarified. Either find and develop a competitive advantage, join with someone who already has on, or get out quietly. Holding on to a non-competive investment will prove to be a costly choice.

P&G

Ross Adams and Chip Tompkins are principals of the Baker-Meekins Co., a Baltimore, Md. - based corporate financial advisory firm specializing in family business strategies.