Value Judgment: A Guide to Determining What Your Business is Actually Worth

It’s true in personal transactions as well as in business deals: to place a value on something, begin with the number of people who show interest in buying it. By that yardstick, printing and packaging companies are looking golden. There are more buyers in the industry today than ever before. But, in order to be in a strong position to maximize your proceeds, you must have a clear idea of what the business is worth.

Understanding what motivates buyers is another key to setting and achieving optimal value. Whether they’re private equity investors, the principals of their own printing companies, or ambitious individuals looking for a way to break into ownership, they make growth and efficiency their main strategic objectives.

They know that in a maturing, consolidation-prone industry like printing, organic growth alone won’t be enough to sustain even the best-managed companies. They correctly see growth by acquisition, and the resulting synergies and cost reduction, as the best long-term solution for staying ahead of the highly competitive markets that printing and packaging have become.

The first decision an owner must make is whether to approach the market as a seller or a buyer. Buyers are forward-looking. They’re out to replace sales from mature markets with sales from less mature, still-growing markets. They’re seeking ways to drive efficiencies that will help them mitigate downward pressure on prices. And they’re seeking new markets, new products and services, and new technologies, which figure strongly in their strategic planning.

At the Turning Point

Sellers, on the other hand, have reached a point where they are asking themselves whether disengaging from ownership might be the best personal and business decision they can make. The turning point could be a reluctance to go through another cycle of capital investment. Or, it could be realizing that the business could grow faster with a partner who has more resources.

For an owner who has made the decision to sell, business valuation becomes a priority not just because it determines what the business is worth, but because it also reveals the type of transaction in which the business is likely to be acquired by a buyer. Two methods of valuation — asset-based and earnings-based — yield different indicated enterprise values when they’re applied to the seller’s business. The method that yields the higher figure becomes the one that is used to structure the transaction.

Asset-based valuation adds working capital, the orderly liquidation value of equipment, and a goodwill factor typically in the form of a royalty rate paid on sales that successfully transitions to the buyer post-closing. After subtracting debt, the model produces a net value at closing and then adds the royalty to be paid to the seller — the starting rule of thumb being 5% of sales for three years after closing. The bottom-line number is the indicated enterprise value based on assets.

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The EBITDA Approach

For comparison, the seller can also take the traditional earnings-based approach. Here, the formula uses an adjusted EBITDA and an EBITDA multiplier to calculate the indicated enterprise value. It assumes that the transaction will be cash- and debt-free, with the seller retaining the cash and paying down interest-bearing debt at closing.

The chart illustrates both types of valuations and the different enterprise values they produce. In most cases, these numbers will determine what happens next.

If the asset-based method indicates a larger enterprise value than the earnings-based approach, the transaction is best valued as a tuck-in of the seller’s active accounts. Vice versa, if the multiple-of-EBITDA model is more profitable to the seller, the sale will proceed as an earnings-based acquisition of the business as a whole by the buyer.

We’re often asked about trends in EBITDA multiples, which determine the selling price in transactions of this kind. The answer is that their range remains pretty much what it always has been, with higher multiples occurring in growth segments like retail POP, large-format printing, 1:1 direct mail, omnichannel, cross-media marketing, and packaging of all types. Having critical mass in a segment — meaning a segment-leading share of the customer base — also lifts multiples for sellers.

Every owner can improve valuation by focusing on the quantitative and qualitative factors that drive it. Buyers — and private equity buyers in particular — want to see measurable and sustainable growth in revenue and profits; EBITDA margins of 12% or more; a non-concentrated account list; and a healthy balance sheet. On the qualitative side, the desirables include specialization; customer loyalty; a stable, non-unionized workforce; and investment in growth-promoting technology.

Run the Numbers

Business owners ought to strive to check as many of these boxes as possible and should routinely assess their progress. Even if their plans to sell are not imminent, we recommend conducting both the asset-based and earnings-based exercises periodically as a running financial scorecard.

Our perennial advice to owners is to choose the role as seller or buyer that every owner eventually will play. The printing industry continues to rank among the most highly fragmented industries in the U.S., and fragmented industries inevitably consolidate. Aggregation is the natural solution to serving the market efficiently as it continues to challenge suppliers to it.

All of this makes now the time for owners either to chart their courses as consolidators, or to begin planning their exit strategies. Developing a reliable estimate of what the business is worth now is a logical first step.