Investopedia describes private equity (PE): Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt. The private equity industry has grown rapidly; it tends to be most popular when stock prices are high and interest rates low. An acquisition by private equity can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm’s skills and objectives.

Some of the larger PE firms that are active in the label industry are Morgan Stanley Capital Partners: AWT Labels & Packaging; Genstar: Brook + Whittle; Clayton, Dubilier & Rice: Fort Dearborn & Multi-Color; Harvest Partners: Fortis Solutions Group; Heartwood Partners: Outlook Group & All-American Label; Wynnchurch Capital: MS2 Group (nee Iconex Labels); Sole Source Capital: I.D. Images et. al.; River Associates: ID Label; AEA Investors: Inovar Packaging Group; Mason Wells: KDV Label & Industrial Labels Holdings; LongueVue Capital: Traco Packaging; Incline Equity Partners: NovaVision & PrimeSource; and Ares Management Corporation: Resource Label Group.

I think you get the idea. There are also quite a few smaller PE firms also active in the label industry – too many to include in this column. Why does PE like the label industry vs. other segments of the printing industry? It is called the lack of technological obsolescence. We will always have labels on products, whether they are consumer or industrial products.

Our firm specializes in the sale of companies in the printing industry – all segments, which could include labels and tags, business forms, envelopes, commercial and digital print, and promotional products. We have never seen the concentration of PE ownership in any other segment like what has occurred in the label industry.

Many label company principals have been exhausted by the number of approaches made to them (to sell) by not only the PE firms themselves, but the emerging “buy-side broker” industry. These are firms that know nothing about the label industry other than names on a sheet of paper as leads. They will call you simply wanting to know if you might be interested in talking to their client, who is a PE firm.

One of the best disciplines that a PE firm brings to the table is financial skills. Many privately-owned companies simply do not keep their financials in order and are not being properly reported by their CPA firm. There was an entire M&A Corner column written by yours truly about this topic in a previous issue. If you would like a copy of it, simply send me an email and I will forward it to you.

Also, PE firms like their investments to make money, so you can be sure that if a label company is PE-owned, they are not working on razor-thin gross margins. What should you do if contacted by a PE firm or one of their buy-side brokers? If you have even the slightest interest in possibly exploring the sale of your label business, it is always a good idea to know the approximate value of this asset – most likely the largest one you own!

If you have never had an appraisal done by your CPA or a business appraisal firm, it might be a good idea to do so before you get too far into negotiations. Firms like ours also do appraisals and will most times accept a reduced fee if you want them to advise on a specific buyer’s entrée. You will need to have your financials organized to present multiple years at a glance. What the PE firm will be looking for is your EBITDA (Earnings Before Interest Taxes & Depreciation/Amortization) – this is a quick metric that will tell them if there will be interest on their part or not. Some PE firms have the EBITDA target set at say 15% and will not look further into acquisition if it is less than that. Do you know what your company’s EBITDA is?

label industry: ripe for consolidation

Industry estimates are that there are more than 2,000 label converters in the United States with sales in excess of $1,000,000. They all use the same equipment to produce their products on pretty much the same base substrates. Many of the company owners started their firms in the 1960-1970 timeframe and are now nearing (or at) retirement age. Some have children in the business, but others do not, and most employees do not have the money to acquire the company from the owner. That is where PE has succeeded.

Better to be proactive vs. reactive?

There is no question about it – you are better off proactively engaging an intermediary firm to market your label company vs. simply reacting to a PE firm’s approach. The PE firm (or their buy-side broker) will not like it, but a little competition will be better for you. A good example would be if you receive an RFQ from a company that you know is going out to say three or more of your competitors.
In conclusion, I would like to say that PE’s interest in the label industry is a healthy thing to have happened. There will be fewer (albeit stronger) converters who will tend to price their products to produce healthy gross margins. Just make sure that if you do not sell your label company to a PE firm, that it remains on strong financial footing by getting solid reports from your CPA, a compilation at a minimum and more preferably a review if your firm’s sales are in excess of $7.5 million.

Should you have any questions, please don’t hesitate to contact me by email at [email protected] or call 602-432-0426. My website is www.printmergers.com.