Friday, June 3, 2011

Have you given any thought to your “exit strategy”?

Over a period of more than ten years, when ARC was very active in acquiring companies, many reprographers looked at ARC (selling out to ARC) as their “exit strategy.” But, as the A/E/C economy continued to drive south, ARC discontinued its acquisition program. Even though ARC management, not too long ago, made statements that implied that ARC would resurrect its acquisition activities at some point, I’ve not yet heard of any new ARC acquisitions. So, on that point, we’ll just have to wait and see.

The past four years have been difficult, to say the least, for many reprographers; probably for the majority of reprographers. It’s not easy to sell a reprographics business, even when times are good, and, when times are not good, it is extremely challenging to sell a reprographics business … but not impossible. One sentence ago, I said that it’s not easy to sell a reprographics business even when times are good, and that’s “simply” because the reprographics business is not very well known. Most people outside the reprographics industry “think that” reprographers are no different than printers. And, because of that, most people compare reprographers with printers (such as comparing CGX with ARC). But, inasmuch as the reprographics business is heavily tied to the A/E/C business/economy, whereas that is definitely not the case with the printing business, there really is no basis for a comparison. Reprographers are different, for sure.

Well, I managed to get slightly off-topic, so let me get back on-topic. The topic is “exit strategies.”

For older reprographers considering “exit strategy” (and, certainly this might apply to less-than-older reprographers) …’ve worked most of your adult life, or, in some cases, all of your adult life, building a company, and, for many, many years, times were good. For most of your years in the business, you earned excellent compensation, benefitted from perqs,etc … “life was good.” But, over the past few years, business has been very challenging; you’ve seen your compensation drop and have had to reduce perqs, as revenues declined, in some cases quite sharply, and as expenses have continued to climb. Hopefully, you’ve managed to “right-size” your business to the point where your company is still earning a bottom-line profit.

Staples’ CEO believes that there will be consolidation in the office supplies market space (see previous post on this blog). I believe that there will be further consolidation in the reprographics market space. I think there’s going to have to be further consolidation. The larger “Printing” Industry is continuing to shrink and we are seeing further consolidation in that industry. The reprographics industry may not still be shrinking (best case, the reprographics industry is now drifting along the bottom of this horrible business cycle and things won’t get any worse), but, still, the future outlook for “printing” for A/E/C projects does not look as rosy as it looked coming out of previous recessions. As we’ve said in several previous blog-posts, the A/E/C industry will recover and its recovery will be robust (at some point), but, due to changes in business process, the A/E/C industry’s recovery does not guarantee the reprographics industry’s recovery. As to the reprographics industry’s recovery “mirroring” the A/E/C industry’s recovery, In the past, that was a given, but, in the future, that is not a given.

Possible exit strategies for reprographers:

1) Consider merging your company with a competitor (or with more than one); work into the merger agreement an agreement for a future buyout and retirement, based on a formula-price, after the merger has been in effect for a few years. In other words, give the merger a few years to work, give the merger time to effect elimination of duplicate expenses, give the merger time to work from a marketing and sales perspective. Two (or three or even more) can live cheaper than one. Joining your business with a competitor’s business won’t be easy, but it is certainly a doable thing. (I’ve done that myself, and on more than one occasion, and it worked out fine in the long run.) Your “merger partner” does not necessarily have to be one that’s in business in your present market area. In spite of the lingering A/E/C recessionary environment, there may still be companies looking at geographic expansion or at market-consolidation (ARC, Thomas Repro, NRI, ABC Imaging, Gill Reprographics, Service Point, etc.)

2) Consider selling your company to your employees, using an ESOP format. That’s how Paul Koze, former owner of BPS Reprographics (San Fran, CA based company) exited his company. Later on, ARC bought the company, but that was a few years after Paul sold BPS to the company’s employees. (Bank lenders have an incentive to fund ESOP purchase loans, and there tax benefits to the company as well. You will need a knowledgeable accountant to help you better understand this exit strategy.

3) Consider selling your company to one or two of your key, long-term employees or selling your company to a new person, new to the business and industry (or two more more new people, new to the business and industry), under a “phased” approach, meaning, over time. You continue to work for a couple of years, they to immediately begin working with you at deal implementation. This is the approach that the owners of Lellyett & Rogers (Nashville, TN based company) took.

4) Find a “printing” company that’s interested in diversification and diversifying into the “reprographics” business. The lines have been blurring between the printing industry and the reprographics industry, and there may well be “printing” companies who are interested in diversifying beyond their traditional services and customers.

5) Consider finding a “private equity” company that’s interested in getting involved in the reprographics market space. That’s how ARC got its ball rolling, well prior to ARC going public. ARC’s owners sold a good slug of their stock to a private equity company, and the rest is history.

6) Consider finding a non-traditional merger partner, such as a large distributor/dealer of imaging equipment, or an MPS enterprise, one who is interested in the significant FM (ooops, Managed Print Services) business your company has developed over the years.

7) Consider taking your company public! Don’t laugh at this one, even though it would be hard not to laugh. I did (took my first company public). (I shouldn’t have, but I did.)

Don’t wait until the last minute to work on your exit strategy. It is best to do your homework well in advance of exit strategy implementation.

Well, I’ve certainly not compiled an extensive, exhaustive list, so, those of you who have suggestions for additional exit strategies to consider, feel free to add those by “comments” … or send me an e-mail with your thoughts.

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