The most commonly asked question from printing owners who are thinking of selling their business: What is the multiple for the printing industry? My answer is 4. Read on for my explanation on multiples, and the insight of three industry valuation experts.
Now let’s be clear what printing owners are asking me. Before they put their printing or print-related business up for sale, they want to know what the multiples are for the industry. Their perception is that if it’s 4 for the industry, then they’ll get 4 or more.
That’s a big mistake. They should be asking what’s the multiple for their business. And that’s not such an easy answer. So we’re going to ask the advice of experts, and we’ll start out with the late, great Rodney Dangerfield:
What is the Valuation Multiple of a Printing Business?
A valuation multiple for a printing business involves the attempt to capture key operating and financial characteristics into a single number that can be used as a comparison to other companies and the market as a whole.
That’s the simplified answer. As the three experts I consulted with on this article will tell you, there’s a whole lot that goes into that single number - such as cash flow, EBITDA, assets - and not everyone will agree on what they are.
We’ll get to the experts and their opinions in a minute. What’s important to shake off is the idea that there is a uniform standard for evaluating the multiples for an industry, and that the price of your business is dependent upon that mystery number more than any other factor.
So with all that being said, why am I telling you the multiple for the printing industry is 4 and why does it even matter?
Printing Industry Multiples Are a Ballpark
We all measure ourselves - both personally and professionally - based on others. Many business owners believe they should emulate their competitors without any idea of how the competitor is really performing.
It’s like when you look at your competitor’s website and think, “Wow, I wish our website looked like that.”
Do you have any idea how that website is working? How much traffic it’s generating? How many leads they produce?
No. But it’s a benchmark. Something tangible. Industry multiples fill that need. They’re a starting point for people who want to sell their business. And in truth, as you’re about to hear from our three experts, they do play a significant role in the valuation of a business.
Throughout this post, we’re going to refer to two types of multiples:
Printing industry multiple: A general number for the multiple of the industry as a whole
Your valuation multiple: The multiple your business can expect on the marketplace
Your valuation multiple will be used by a buyer when they offer you a price. As a simplified example, they might take your EBITDA, which may be $1M, and they determine the multiple for your company is 4, they’ll offer you $4M ($1M x 4).
Before we delve into what the experts say about multiples, one of the terms we’ll be using is EBITDA (Earnings before interest, tax, depreciation and amortization). Here’s a great explanatory video on exactly what EBITDA is:
The Experts Speak on Valuation and Industry Multiples
Multiple Factors Affect Multiples for the Printing Industry
The first of my experts is James M. Hill, Vice Chairman for Benesch Law and Chairman of the Private Equity Group. Jim’s industry insights are highly-valued, and I’ve heard him speak many times on what is shaping valuations and company sales. Here are his factors for determining the multiples for a company.
Factor 1 - Compounded Annual Growth Rate
Jim’s valuation and multiples factors start with the Compounded Annual Growth Rate (CAGR) and if the company is gaining new accounts. Is the industry growing, and does the company have a diverse range of accounts?
Factor 2 - EBITDA
Next, Jim looks at the company’s EBITDA. Is it organically growing (not including acquisitions that have benefits such as large profit margins or substantial revenue, but are not experiencing large organic growth), and is it improving based on the revenue factor (without a lot of expenses such as Sales and General Administration costs)?
Factor 3 - EBITDA to Revenue
Now Jim compares EBITDA to revenue. “Most strategics and sponsors will not look at a business that is under 10% EBITDA, but if they see an opportunity to improve the EBITDA margin, they will buy it,” he notes. Exceptions are made for distribution businesses that are close to double digits.
Factor 4 - The Industry
Is the industry consolidated? Is organic growth driving the company? Jim consults a wide range of data sources to get a read on the hot (and not so hot) markets.
Factor 5 - Strength of Management Team
In the case of an acquisition, the management team also needs to be evaluated. Do they have any experience with acquisitions? Or, if it’s a strategic buyer, the strategic may not care about the management team, as they could be redundant.
Factor 6 - Assets
Does the seller have up-to-date capital expenditures? Have they been cutting back in these areas?
Factor 7 - Innovation
Where is the company in terms of innovation? Do they need further R&D staffing?
Expert #2 -
Multiple Valuation Techniques Affected by Reducing Risk
Darren Mize performs hundreds of business valuations each year, both inside and outside the printing industry. He notes that while there is a “blanket multiple of 4” for the printing industry, that’s just the average. Depending on the specific risk factors your company possesses, that multiple could be anywhere between 3.5 X to 6 X.
Darren believes much of a company’s valuation is “dependent on cash flow and risk.” In the audio interview below, he provides an example of a rural printing company that has little competition, great cash flow, and above average cash flow margins. This looks like an attractive acquisition for a buyer, so the multiple might be higher than a print shop in an urban area with a higher level of competition and lower profit margins.
Most assume that multiples are “obtained” from somewhere but in fact they are simply the inverse of a Capitalization Rate (Cap Rate). So in theory, appraising a business in its simplest form is developing a Cap Rate, which is based on risk, and applying it to cash flow to calculate value.
Darren notes that the blanket statement I’m making in this post - the printing industry multiple is 4 (or a Cap Rate of 25%) - is a place where you start in a company’s valuation. “Where you finish is based on the individual company you are valuing,” he said.
Here are some risk factors that can affect your valuation:
Not utilizing assets to maximum capacity: Asset Turnover is measuring how efficient you are with the company’s operating assets. The goal is to do the most you can (cash flow) with as little as possible (assets). Let’s say you have a printing company that has $1MM in assets generating $200,000 in cash flow versus a company with $1MM assets generating $300,000 in assets – the latter is more valuable than the former if risk is the same.
Limit concentration in key customers: If 80% of your business is derived from one account, that’s a major risk. A diversified customer base will pay dividends in the long term. But if you’re faced with customer concentration, long-term relationships and the length of the relationship can help mitigate the risk.
Niched in under-performing industry: Here’s where that ballpark multiple comes into play. Are you in a dwindling industry? If you are, do you have a business plan to work your way out?
Expert #3 -
EBITDA Not the Most Important Valuation Factor
Vince Mallardi is a long-time authority on the printing industry. Besides heading the Printing Brokerage / Buyers Association International (PBBA), he also published one of the most anticipated reports in the industry - the Hot Markets Report - sought after by some of the biggest players in the game. (We’ll detail some of its findings next month.)
By combining years of experience with a razor-sharp business acumen, Vince wields a no-holds-barred review of some of the valuation methods championed by many in the industry - especially EBITDA.
Vince believes that EBITDA in setting a multiple is a “useless measure.”
With EBITDA, you are determining a company’s earning before interest, depreciation, amortization and taxes. That’s folly, Vince notes, as “those four gremlins are all over the place.” He breaks it down in the following way:
Amortization: “No printing company should have amortization in the printing industry,” he said. Mickey Mouse and Coca-Cola are amortizable agents, he explained, but a “customer list” is not. “To say your customer list is amortizable because you MIGHT get a reprint is wrong,” he said.
Depreciation: Because everything depreciates so quickly, (a computer’s shelf life seems to be shrinking on a daily basis, for example) Vince believes depreciation is worthless. “We should expense everything,” he said. “Besides, most companies lease, they don’t buy.”
Taxes: He also believes taxes should be removed from the equation. “State taxes are all over the place,” he said.
Vince also notes that EBITDA is really attributed to public companies. You can’t attribute it to small, privately held companies. Therefore, the person who is buying your company is going to buy assets. They’re not going to buy your stock.
For valuation purposes, he likes “absolute value,” which he believes should be at the low end of your range. “Find the tangible bottom line,” he said. “After that, the only thing you have is your contracts.”
He’s referring to one of the keys to producing real value in a company - multi-year contracts. Even if the buyer will have to discount the cash flow into net present value, those multi-year contracts are extremely valuable to a buyer. What are you left with otherwise?
How Do You Improve Your Multiple?
There is no denying that there is a true and accurate science to valuation and pinpointing top performing industry segments. But what financial characteristics are most important? As you can see, this will be difficult to establish consensus on that question.
I will review a recent case where we had a seller eager to find out the multiple for his industry. Naturally, I told him the industry multiple was “4,” but I told him we could beat it IF we could find a synergistic buyer.
This was essential with this particular seller. If you judged his company based on what the experts listed as important valuation factors, there is absolutely no way in Hades this company should get anything above a multiple of 4.
With a synergistic buyer, however, you can find someone who was willing to look past the company’s shortcomings. In this case, we did. We found a buyer who was eager to buy the company because there were true synergies between the organizations.
They made us an offer. A very good one. With great joy, I returned to the seller to inform them the multiple would be 6. Their response?
“Then let’s ask for 10.”
Valuation is in the Eye of the Beholder
Needless to say, that deal went south. Multiples and valuation are in the eye of the beholder. But if common sense and smart business strategy doesn’t come into play, greed can cloud your vision and the sale of your company.
So the question you should be asking me isn’t what’s the multiple for the printing industry. That’s why I tell people it’s 4. It’s a good approximation based on values for the past few years, but it’s really not worth. As Darren Mize said, it’s a starting point.
The question you need to be asking is how to get to the end point. You need to ask: What’s the multiple for my company - and how can I improve it? Your answer can be found in the advice of the experts above.
We’ll also be delving into these topics in future posts, so subscribe to our newsletter to learn more!