You’ve heard the saying “one man’s trash is another man’s treasure”. Well, it is especially true in mergers and acquisitions, where one director’s failed dreams become another’s business opportunity.
Plenty of printers have found a low cost way of generating rapid growth by acquiring competitors out of the hands of receivers or administrators or plucking assets out of liquidation. When insolvency practitioners put a business up for sale, it generates interest. Everyone loves a bargain. And as the cliché goes, changes in ownership may well revive a trashed business and turn it into treasure.
But if you’re looking for an acquisition target among the list of distressed companies, be warned – completing these deals can be a frustrating and difficult process. Insolvency practitioners are required to get the best possible price and terms so that as much of the debts can be cleared and creditors paid out. Indeed, these firms can be liable for any failure to sell on proper terms. This means there will be extensive advertising and negotiations with anyone expressing interest in buying the business. They have a statutory obligation to look after the interests of all the parties and are required to get the maximum possible price. This can be frustrating for any suitor that sees itself as the obvious purchaser.
But for those with the right finance and confidence, there are opportunities in this troubled market. A number of print companies have fallen over the edge only to be picked up cheap by a new owner.
In May, nationwide franchise operation Kwik Kopy acquired troubled Sydney printer CityPrint. The business was bought out of administration, before its residual assets and liabilities were placed into liquidation. Kwik Kopy effectively saved the business, says David Bell, managing director of the franchise group. CityPrint had all the makings of a solid business, he says, but it was over-capitalised on machinery and was locked into three long-term leases. Bell fixed that by recapitalising the equipment and reducing the premises to one in Pitt Street, Sydney.
“CityPrint was a good underlying business but it was floundering on the back of huge overheads it couldn’t get its head around. By buying it, we rescued the business and will take it forward,” says Bell.
Buying the clients
In June, Brisbane-based Print Approach picked up new clients through the buyout of the customer list of liquidated outfit ABC Printing, which had gone into liquidation with $3.7 million of debts after a torrid year due to the Queensland floods.
Print Approach managing director Tom Eckersley says he initially approached the administrators, who had told him they were looking to sell the business. They put it on the market but when no one came forward to buy it at the required price, they went to plan B and sold off the component parts, including the customer list.
Acquiring any business or assets can be a complicated and risky business, but Eckersley says his experience in the trade made the due diligence easier. “I have been in the printing game since my father started the business in 1971 so we know the Brisbane market pretty well.”
That meant he had a good idea of who the clients were. But the real value of the customer list, he says, can lie with the quote and job activity in the list, setting out exactly the kind of work the customers were getting.
“If a client has had a broad range of products produced previously and in those tickets there are all the idiosyncrasies of the job noted in that system – what stock was used, what plates were used, what files were used and samples that you can colour match – that’s of value’’ he says.
These details can actually be more valuable than the list itself, particularly because in some cases, the liquidators or receivers sack the salespeople to cut costs and get the business right for a sale. By the time the acquisition goes through, the departing sales reps may have taken their customers to rival companies.
Eckersley says the longer a business is in administration, the less valuable it becomes. After two months, the value will have just about disintegrated. The client list could be well and truly out of date.
“If there is a time delay when a company goes into administration or liquidation, a lot of that business is severely damaged and a lot of those clients would have moved on well and truly. It’s a punt.
“Ultimately if the business is in trouble, their client base and the goodwill of the business is exponentially more valuable if it’s sold in a smooth seamless transition than if it has a two-month delay in it.”
So what does buying a client list actually entail? Generally, would-be acquirers are only given a broad outline of the customer list when they put in expressions of interest. The customers are not identified by name. There are only details about the size of their orders. The names and full business history is revealed only when the money is handed over, or when there is a deed of arrangement fixing the sale.
Invest in people
While Eckersley and some administrators say the most valuable part of a business is the customer list, Steve D’Souza, the managing director of up-and-coming New Zealand print group Kalamazoo, says the workforce is the most important asset.
Kalamazoo has made a habit of buying up companies in trouble. Acquisitions of distressed companies have helped Kalamazoo quadruple revenue to reach $130 million in just two years.
D’Souza buys companies before they are put into receivership. He says the banks approach him to acquire the companies and take their debt off their books. “The banks normally bring it to me or tell me it will go into liquidation. I look at the numbers. I look at what changes I can make and see whether I can save jobs. If I can save jobs, I get involved. If I can’t, I don’t.”
For due diligence, he looks at numbers such as the ratios of direct employment costs and variable costs.
“When you are in the game for a long time, you have a good gut feel of what you can and cannot do. I don’t spend thousands of dollars appointing accountants to do due diligence, I just look at key numbers and then make a choice,’’ he says.
Another printer, who asked not to be named, agrees the workforce is the most important asset. “You want the best staff, you want someone who knows where all the plates are, who the customers are and how to deal with them. You would want that sort of thing in place.”
Real estate and capital equipment – valuable in other sectors – may not be worth as much in this game. Most premises are leased, and kit is only valuable if the acquirer doesn’t have it and needs it.
But there are exceptions. When Sands Print Group was sold out of liquidation to BPA Print Group and TIC Group this year, the liquidators at Lawler Draper Dillon got $1.7 million for the plant and equipment but only about $200,000 for the client list. This was despite the fact 75% of Sands Print’s seemingly blue-chip customer base comprised top 200 companies, such as Coles, Target, Kmart and Sigma.
One printer, who would only speak off the record, tells ProPrint that he was always looking for an acquisition target among businesses that had gone into receivership or administration but had not been successful so far.
“Over the past five years, we have looked at 10 to 15 companies. With the exception of two, they were either too far gone or there were red flags, like the sales staff had gone to new companies and taken the customers with them.”
The reason he didn’t buy the other two was price. Buying a distressed business is attractive because the price is usually low. If this box isn’t ticked, the deal very quickly becomes less attractive.
“We have always been keeping an eye out for any company that would be a good fit. A distressed company has certain attractions,” he says.
In fact, it was a better business proposition than taking over a competitor, he said. “If you are looking for someone who is advertising in the papers or in ProPrint, then nine times out of 10, they are asking for a ridiculous sum of money.”
Stop the sky falling
Administrators are called in by directors to put a restructuring plan in place. Receivers are called in by secured creditors, usually the bank. They both have the same aim: to stop the total collapse of the company.
Stirling Horne, a partner at accounting firm Lawler Draper Dillon, explains it simply. “Effectively, the director’s role is replaced by the administrators. The administrators or receivers take control of the operations entirely. What they would do on day one is establish the asset and liability situation. They would count stock, get an evaluation of plant and equipment, put their foot on bank accounts, open a new bank account, make sure insurance is in place or arrange new insurance. From that day, the administrator is effectively responsible for everything.
“Over a few days, he would make his mind up about how to go forward and make an assessment of the company’s ability to trade in the short term, medium term and long term,” adds Horne.
Statutory obligations require receivers and administrators to follow this process.
Horne says: “You’re there to try to resuscitate the business if you can. You have to look at things you can do to affect that. It might mean you might have to dismiss a few people in the early days just to get the structure right, or you may even curtail what the directors have been doing. Maybe they’ve been drawing too much money out of the business. There are a lot of things you would look at to see whether in fact the business could be viable. That’s what the role is.
“Within eight business days, we have to call a first meeting, where we inform creditors of our appointment. At that meeting, creditors have the right to appoint another administrator if they are not happy. The administrator will give all the creditors who attend an overview of the company’s affairs. He will give the creditors an indication of where he is heading with the matter, whether the company can trade out of its situation or whether there will be a sale.
“On business day 17, you have to send out a report to creditors making a recommendation about how you see the company’s affairs being dealt with going forward. If we think there is some possibility of the business trading out over time, we would put in front of creditors a detailed profit and loss budget and cashflow budget and showing the returns to creditors,” explains Horne.
But the chances are the business will be either sold or its assets sold off and liquidated. Horne says the chances of a business in administration or receivership trading out are “one in 20”.
He adds that acquiring a company out of administration is better than liquidation. When a firm is liquidated, it’s too late. “There is no doubt that once a company goes into administration, if there are people out there who want to buy the business, they could buy it a hell of a lot cheaper but they have to buy a going concern. If they don’t buy it as a going concern, the business is all lost, it’s disintegrated.
Wiping the debt
Insolvency practitioners say the business and assets are sold without the debt. The money from the sales goes to pay the creditors. The first in the queue are the secured creditors, usually the bankers. Unsecured creditors come next, and usually don’t get much.
Former insolvency practitioner Lindsay Aitken sums up the work it takes to get some return for the creditors.
“It’s an assessment that an administrator makes over a period of time and there’s probably a degree gut feeling in it, more than absolute knowledge. There’s a bit of guessing involved,” says Aitken.
“But it would be hard to imagine that a company that has gone into voluntary administration would stay intact and continue trading. In fact, you would expect some part of it would have to be chopped off because presumably the business is not trading successfully because they had a bad contract or in some cases the directors have a lifestyle that exceeds the income of the business.”
So how should the would-be buyer deal with administrators? David Stimpson, a director of insolvency accountancy firm SV Partners, says it’s a case of working with the processes. “Administrators would usually market the business so there would be an advertising campaign through all the main media outlets. There would be a full information package prepared and provided and then there may even be a data room where potential buyers could access the necessary books and records to do a due diligence,” he says.
“As a potential buyer, you would ask the administrators for recent financials and a full breakdown of the assets and liabilities of the business and obviously you would want the information package and access to the data room so that you can start your due diligence.”
All up, insolvency specialists say that if you are a serious purchaser, you need to conduct due diligence investigations immediately. That not only helps you decide whether to proceed with the purchase. It also shows the insolvency specialist that you are serious and not just a tyre-kicker.
Business born again phoenixes
Phoenix operations and pre-packs have been used frequently in the insolvency business for the past few years. A phoenix operation is part of a pre-pack process where the distressed company is sold to a new entity that may or may not be owned and governed by the same persons involved in the original distressed entity.
A pre-pack administration is a way of selling the business immediately after it falls over. The buyers can be made up of previous directors, and it is this that makes the process such a controversial one. To an outside observer, it looks as if the same owners are continuing to run the company, having wiped the debt clean. Pre-packs have become particularly heated issue in the UK printing industry, where there was a big spike in the number of these kinds of sales to former directors when the printing industry hit the skids during the GFC.
The Australian government is now legislating to stop illegal phoenix operations where the business and assets are transferred from one entity to a related entity without any valuable consideration, leaving only the liabilities behind. With the assets gone, creditors have nothing to make claim against. In other words, these are failed businesses that avoid debts to creditors and employees by being resurrected by some or all of the same operators.
The Australian government plans to pass legislation that will give Australian Securities & Investments Commission more power and will expose directors to personal liabilities for company debt.
But it might not be enough. A report by the Fair Work Ombudsman released in July estimates that up to $3.19 billion has been lost as a result of companies trying to avoid paying debts and taxes by going into liquidation. The Fair Work Ombudsman has recommended amending the Fair Work Act to address the problem, and putting in a provision to prohibit an employer entering into a transaction with the intention of preventing its staff from recovering their entitlements.
This could see the Australian government cracking down on phoenix companies with a package of legislation.
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