Blog


Got the Right Value for Your Company? Here Are Tips on How to Sell It

By: James Callari 27. May 2015

 

In part one of this-three part blog series, we featured a Q&A with Deborah Douglas in which she offered tips on what plastics processors need to know to get more savvy on evaluating the worth of the their company. Her insights are both useful and timely in light of the spate of M&A activity in plastics processing of late.

 

Ms. Douglas is an expert on such matters.  Sheis the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recentRipe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.

 

In part two, she provides tips on how owners of processing businesses can get better at selling.

 

Plastics Technology: As companies prepare to move forward in the selling process, what are the “keys” to ensure they do well in the end?

 

Ms. Douglas: First and foremost, it is critical for owners to keep the process highly confidential. We have never had an owner sorry about keeping the sale confidential.  Unfortunately, we have had owners who insisted upon open discussion, who were sorry in the end.  If your employees know that you are considering sale, they may become afraid.  That doesn’t mean that all will race out to look for alternative jobs, but your best people encounter those opportunities without really trying.  If they’re insecure at the moment, they may just think, “Maybe I should at least look.  You never know…” Also, customers too may become insecure to know you are thinking of sale.  They may think, “At least I should try to make sure I have alternative vendors I could turn to.  Just in case…”

 

The most successful owners who sell for the true home run pricing usually find the “best” buyers in unusual places.  Many of the seller owners we talk with tell us at the outset, “I probably know who’s going to buy me.  It will be one of these three or four companies.”  Usually they’re thinking about competitors who they know. 

 

Plastics Technology: And is this how it usually turns out?

 

Ms. Douglas: After 24 years in this business, I have learned that those top three or four are almost always wrong.  The best buyer is not the obvious.  It’s the company that’s not in your business, but does something slightly adjacent.  They get more when they buy you.  They can, for the first time, now do something they could not do before They’ll pay a premium for that head start.  If you want to have a chance for the true homerun sale—the grand slam of a lifetime—hire help who will look exhaustively to identify the perfect buyer.

 

Plastics Technology: Let’s talk a bit about pricing. How do you work that into the conversation?

 

Ms. Douglas: In early conversations with buyers, they will always ask how much you want for your company.  Professionals never set price.  We make the buyer set the price.  The open market will decide who wins.  It is easy for us to maintain that policy, but it is hard for the do-it-yourself owner to do.  Buyers tend to make you feel disingenuous for not responding to that question.  “How can you expect me to move forward if you won’t tell me your price?”  Buyers big enough and smart enough to have the money to make acquisitions know how to set price.  (We would never get the huge prices for transactions that we sometimes do get, if we set the price ahead of time.)

 

In presenting information about your company, it is important to be thorough and honest.  Even if there’s bad news sometimes, or a weakness that you must acknowledge, buyers generally take it quite well if you’re up front about it.  In fact, in many cases if you find the perfect buyer, they will think of it as an opportunity!  (“If this company is making this much now, just think how it will do when I fix the problems!”)  Great deals are consistently made from a foundation of honesty and thorough information.  In this case, honesty pays.

 

Buyers looking at your company may be amazingly fast to offer you a “letter of intent.”  Novice sellers get excited about such offers, and are often far too quick to accept.   A letter of intent gives the seller nothing.  It says the buyer has an interest in buying, it says a price (or sometimes a price range), and it says the seller, by signing, agrees that the buyer can now do due diligence to actually decide if he wants the deal.  In the meantime, the seller, by acceptance, normally agrees to deal exclusively with just the one buyer, and not talk to others.  If you’re thinking of accepting such a letter, consider the following:

 

If the buyer needs a “stop shop” (an exclusive dealing clause) to continue, consider requiring a nonrefundable deposit first.  If you chase away other alternative buyers, they usually will not come back later.  It’s a big deal to pull yourself from the market.

 

Plastics Technology: What kind of information should be included in a letter-of-intent?

 

Ms. Douglas: If you are contemplating a letter of intent, first make sure you have all of the critical transaction details worked out in advance.  If you have to stay with the company—for how long, and what will your compensation be?  Will there be a cap on the indemnifications the buyer will ask for in the purchase agreement?  What happens to profits or changes in balance sheet between the letter of intent date and closing?  Will the physical property be purchased or leased as part of the deal, and if so at what price?  If there’s any noncash piece to the deal, what is the collateral or guarantee that it will really be paid?  The more thorough the seller can be in working out details before exclusivity, the stronger the deal.

 

Plastics Technology: Any other considerations?

 

Ms. Douglas: If you enter into a letter of intent, be sure to define timeframes tightly for the period until closing.  Normally 60 days should be adequate. You may want to put in interim dates for completion of certain elements of their due diligence.  Silly long timeframes to close increase risk of failure and are extremely costly to the seller, who must provide time and attention constantly to buyers as due diligence progresses.

 

Make sure to insert a provision to say that if the transaction price or terms change materially, the exclusivity for the buyer is void.  Such a provision encourages buyers to think long and hard before proposing changes, and can make the difference in preserving the deal or not.

 

Selling is a complex process, and sellers generally need good professional help to get it done.  Look for a representative who does only the sale of companies.  Our normal time to get a sale done is something over 2000 hours (and we’re efficient and know what we’re doing).  It’s time-consuming, and it’s important.  Your attorney knows how, for the legal mechanics, but he does not know the competitive marketplace, and he does not have that kind of time to spend focused on your deal.  Your accountant is not terribly motivated; he’ll probably lose a client when the deal is done.  And he can’t represent you on a success fee basis, because then he wouldn’t be independent.  There are good intermediaries out there, who serve clients reliably and competently.  It is worth the time and effort to find them.

 

Business owners do great things for our country.  They create jobs, and opportunities for people.  They improve goods and services for everyone.  They fill the public coffers with tax dollars.  They deserve success in the end.  Sale of the company is often the culmination of a lifetime of hard work.  It’s worth the time and attention to do well.

What’s Your Company Worth?

By: James Callari 19. May 2015

As I wrote in a previous blog, this is a good time to be in the business of melting plastics. More and more existing processing concerns are expanding by adding to their manufacturing footprint and buy new machinery. Processors from Europe and even China are setting up plants in the U.S. to tap into a growing and very optimistic American market.

 

And, to no one's surprise, this bump in business has also resulted in an uptick in mergers and acquisition activity. Obviously, making an acquisition is another way to expand a business. What’s more, when business conditions are good that also presents an opportunity for firms seeking an exit strategy to get maximum value for their operation.

 

So, what’s your business worth? To help you find out, Plastics Technology reached out to one of the experts in the field. Deborah Douglas is the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recent: Ripe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.

 

In this Q&A blog, Ms. Douglas discusses some of the issues processors need to consider to properly evaluate the worth of the business should they be pondering selling it. In two blogs to follow, she’ll offer her tips on how you can be better at selling and buying a plastics processing business.

 

 

Plastics Technology: So please fill plastics processors in on what’s happening on the M&A front?

 

Ms. Douglas: There is so much acquisition activity right now that navigating it is really a difficult and hot topic for owners. We are receiving a lot of requests from owners about how to value their companies, and questions on how to proceed in considering sale.

 

Owners of plastics processing companies have intense interest in the merger and acquisition activity they see, but the primary hook to that interest is a desire to know how much the company they own may be worth in the M&A markets of today.

 

Plastics Technology: So how do they get started?

 

Ms. Douglas: The simplistic and most obvious answer to that question involves some sort of multiple of the pretax earnings of the company in question.  However, real-life market conditions actually go far beyond that to come to value.

 

Owners seeking such value probably always need to “start” with a calculation of EBITDA, which approximates cash flow of the enterprise.  EBITDA is earnings before interest, taxes, depreciation or amortization.  To develop such tally owners also need to make that “owner- neutral” —by adding back or subtracting out any odd-ball impacts on the numbers caused by non-arm’s-length transactions. 

 

Plastics Technology: Owner neutral? Could you provide a specific example?

 

Ms. Douglas: For example, If the owner takes out salary $ 1 million a year for himself, but his arms-length value (i.e., a sensible fair market value for a replacement person) might be, say $250,000, that means there’s a $750,000 add-back to the numbers to really come up with a fair EBITDA level of performance (restating EBITDA to be “ as if” expense were really only $250k per year). 

 

If, on the other hand, the owner doesn’t take any salary as expense, even though he really does put in hours and work extensively for the company, that company should have a “deduct” to come back to approximate arm’s length EBITDA.

 

Plastics Technology: What needs to be considered after EBITDA?

 

Ms. Douglas: After coming to a reasonable fair value of EBITDA for the company, owners then need to estimate what sort of “multiple” of EBITDA their company would likely bring in a competitive buyer market.  The average plastic processor could generally estimate that they might get someplace between a 5 multiple and perhaps a 6.5 multiple for sale.  That multiple could sink below 5 for a very small enterprise, or for an entity with significant owner dependency, or other problem issues.  On the other hand, that multiple could rise above those guidelines, maybe to 7 to 10 for example, for patented proprietary products or technologies, or for ownership of binding long term contracts with customers.

 

Plastics Technology: What are the kinds of things that tend to drive up value?

 

Ms. Douglas: The things that tend to push pricing up include:

  • Exceptionally high profit levels (15% plus for plastics processors)
  • Strong and growing customer base with promising future prognosis
  • Outstanding second tier management
  • State of the art equipment and facilities
  • Well-defined focus, with exceptional expertise in some defined area
  • Long term contracts with customers
  • Double-digit growth rates
  • Strong and stable balance sheets

 

Plastics Technology: On the flip side, what are the conditions that tend to drive value down?

 

Ms. Douglas: Things that tend to suck pricing downward include:

  • Dependency on one or a few big customers
  • Declining margin trends
  • Lack of capable second-tier management
  • Litigation history
  • Lack of growth in recent history
  • Below average profitability (EBITDA under say 5-7% for processors)
  • Serious capital-equipment needs in the near future

 

Plastics Technology: Of course if there is more than one prospective buyer that certainly strengthens the seller's position. Is that fair to say?

 

Ms. Douglas: Regardless of company-specific situations, pricing is always, inevitably, much stronger if the would-be seller is able to find and court multiple competitive buyers. Good competition for any given seller can throw all “norms” for pricing out the window, to the great benefit and happy day for the selling owners.

 

Our firm sold a company several years ago, which we thought would produce a value of around $30-35 million.  As we progressed on the deal, we found that there was one group of particular buyers, who desperately wanted access to our client’s customers.  Before we came upon the goldmine of truly great buyers, we had 15 offers for our client.  Offers ranged from about $25 million to high $30s.  When we found the perfect buyers, we suddenly, in one week, had three offers over $50 million.  We closed that deal about 60 days later, at an all-cash price of $67 million.  Our client was ecstatic, and we were well-paid and very happy.

 

Competition can make a huge difference.  There’s a quote I like that paints the picture.  Al Capone said, “You can get a lot more with a kind word and a gun, than with a kind word alone!”  A good competitive selling process is the seller’s gun!

PE Film Market Analysis: Shrink Film

By: James Callari 18. May 2015

 

Last year, processors consumed approximately 805.6 million lb of PEs of various varieties to produce shrink film. With an average annual growth rate (AAGR) of 2.2%, PE resin consumption for the production of shrink film is expected to reach 860 million lb by 2017. The biggest application for shrink film is for unitization of consumer products, with new applications for constantly being developed. The public’s growing appetite for the convenience and cost savings of purchasing products in bulk has spurred the increase in demand, as has—relatedly—the continued popularity of superstores, warehouse stores, and wholesale clubs.

 

The physical characteristics required of shrink film include strength, puncture resistance, sealability, clarity, and excellent load retention. Some shrink film applications require coloring, ultraviolet light inhibitors (UVI), corrosion inhibitors, venting, varying coefficient of friction (COF) levels, anti-static additives, moisture barriers, printability, hot-tack strength, and controllable shrink or draw down percentages.

 

 

These are among the conclusions of the most recent study of the PE Film market conducted by Mastio & Co., St. Joseph, Mo.

 

 

The study notes that shrink films are classified by the amount of contraction or shrink percentage when heated in both the machine direction (MD) and the transverse direction (TD). The percent of contraction in the machine direction (MD) typically ranges from 50% to 70%, with 60% being the most common.

 

Contraction in the transverse direction (TD) typically ranges from 5.0% to 15%. Shrink films utilized for wrapping paperback books, magazines, and skin or blister packaged products with a cardboard backing require a soft shrink or low percent shrink film. Low force shrink films eliminate buckling or distortion of products and related packaging, according to the Mastio report.

 

MATERIALS TRENDS

 

The Mastio study reveals that LDPE resin remains the principal material of choice for the production of shrink film due to the resin’s high clarity and ease of processing. LDPE-homopolymer and LDPE-EVA copolymer resin grades are extruded separately, blended, or coextruded with other polyolefins for shrink film production. LDPE-EVA copolymer resins are often used to increase the shrink film’s clarity, low temperature flexibility, impact resistance and heat-seal properties. LDPE-EVA copolymer resin is well suited for shrink film and bags that require printing or freezing. LDPE-EVA copolymer resin also provides excellent adhesion when used as a bond layer in coextrusion or lamination with other heat-sensitive substrates such as BOPP film, because the film surface softens as the EVA copolymer content increases. Additionally, a small amount of LDPE-acrylic acid copolymer (LDPE-EAA) was also reported.

 

 

Mastio notes that other resins utilized in the production of shrink film include blends or coextrusions of LLDPE resins including butene, hexene, super hexene, octene (LLDPE-butene, LLDPE-hexene, LLDPE-super hexene, LLDPE-octene), and mLLDPE grades. LLDPE resins, alone, lack the physical characteristics necessary to produce shrink film.

 

More processors continue to use metallocene grades of LLDPE in the production of shrink film, according to the study. The metallocene process produces resins with very predictable performance characteristics that are extremely uniform and consistent. Improved film clarity and impact resistance, in lower gauges are some of the value-added benefits of using mLLDPE resin.

 

TECHNOLOGY TRENDS

 

Blown film is the preferred process of producing shrink film, because it allows the manufacturers to custom design film with the required percent of contraction. Control of contraction and orientation in both the MD and the TD is possible in blown film extrusion.

 

The cast film process, on the other hand, allows greater control of shrink film gauge uniformity, increased clarity, and higher output rates. Another benefit of cast film extrusion is the ability to produce shrink films with less shrink force in the TD, since most of the potential shrink force is limited to the MD. Shrink films produced with the cast film extrusion process are often called “low force” shrink films and are used for applications such as magazine overwrap. Over contraction of shrink films in those types of applications can cause the magazines to wrap or buckle when the outer packaging is heat shrunk.

 

Last year, coextruded structures accounted for about 61% of the market, states Mastio. Three-layer coex structures are most common, though some processors go up to seven.

 

MY TWO CENTS

 

Last year, Mastio reports, the industry’s top six shrink film processors held a collective market share of 60%. These are among the industry largest, most recognizable and most technologically advanced names in the film extrusion market, such as Berry Plastics, Sigma Plastics Group, Bemis North America, AEP Industries, Inc., Sealed Air Corp. (Cryovac Div.), and Cove Point Performance Packaging (Clysar, L.L.C. Div.). Most industry players categorized the market as “strong and stable,” with future growth depending on the overall economy (GDP).

 

Some of the smaller players are introducing new products for bulk packaging to reduce overall packaging usage. Others smaller players are looking at new markets and unique resin blends and combination in an effort to differentiate their product offerings. Market niches seem to suggest an opportunity for smaller processors to compete.

Transplants: More Evidence of Processing’s Resurgence in U.S.

By: James Callari 12. May 2015

It was the fall of 2013. I was attending the Global Plastics Summit in Chicago, a yearly event cosponsored by the Society of the Plastics Industry and IHS, an international “thought leader” in the area of plastics, chemicals and other industries.

 

The topic was shale gas, more specifically the opportunity that abundant, inexpensive feedstock materials would present to plastics processors in the U.S. Greg Jozwiak, North America commercial v.p. for Dow Packaging and Specialty Plastics, was one of the speakers that day. Looking into his crystal ball, and referring to PE packaging in particular, he said, “Core growth (due to shale gas) could boost growth by 2.5%, reshoring 1%, substitution (of non-plastics packaging) by 0.75% and export of finished goods another 0.25%,” he explained.  “That’s 4.5% of growth, representing 770,000 metric tons/yr.” Perhaps even more intriguing to me, Jozwiak added that Dow customers outside of the U.S. are looking at establishing a manufacturing footprint in America to tap into this potential.

 

My first thought was “Wow.” Then I wondered, “Maybe a bit optimistic?” Then, as the next speaker was being introduced, I concluded my thought process with “I guess we’ll find out.”

 

In late April, I found out.

 

I was part of a tour of worldwide journalists invited by CORE PA Global to visit a group of companies in Pennsylvania. The organization is the centerpiece of a state government initiative to increase the visibility of a 53-county footprint to international and domestic investors and reshoring prospects.

 

Most of the companies we visited were long established in the region. Companies like sheet processor Sekisui Polymer Innovations, custom molder and foam processor Ralph S. Alberts, rotomolder Playworld, and compounding equipment supplier Technical Process & Engineering. We also heard presentations from the likes of PS foam profile extrusion processor Highwood, and custom molders Viking Plastics and CJ Industries. Central Pennsylvania has been a prime location for plastics processing ever since I got into the industry back in the late 1980, so hearing about the rich histories these companies have in that region was not all that surprising.

 

What I found even more curious was the arrival of two new transplants to the area: Greiner Packaging Corp., an Austrian packaging powerhouse; and Fuling Plastics USA, a division of Taizhou Fuling Plastics Co. Ltd. of China that makes straws and cutlery for fast-foods. In the June issue of Plastics Technology magazine you can read the full report on these companies in the Close-Up article.

 

To say these companies selected central Pennsylvania to set up operations because of shale gas would be misleading. (In fact, because of lower oil prices, some fracking operations have reportedly slowed down a bit.) Certainly low energy was a factor, as was proximity to a broad customer base and easy access to transportation services. Not to mention the proximity of Pennsylvania College of Technology in Williamsport, from which Greiner has already recruited a new employee.

 

I think you need to look at these developments more broadly. In fact, also in the June issue you’ll see yet another “transplant” article on the plans Raumedic of Germany has to build a $27.1 million plant in Mills River, N.C., where it will mold and extrude medical parts. And I’ve heard rumblings of compounding capacity reshoring to the U.S. from Asia.

 

Manufacturing is returning to the U.S. In plastics, many existing operations are expanding and we get reports of new ones coming on stream on a regular basis. This a pretty good time to be in the business of melting pellets.

 

Technician at Greiner inspects combination PP and cardboard cup prior to packaging

Industry Veteran Reflects on the History of Controls

By: James Callari 12. May 2015

 

This year marks the 50th anniversary of Eurotherm, a global leader in controls systems for plastics processors of all kinds. In light of this landmark event, we chatted with plastics-industry veteran Steve Schroeder, currently Eurotherm’s business development manager, to reflect on the history of controls and the advances that he has seen first-hand over the course of his 38-year career in the industry.

 

Plastics Technology: Steve, Eurotherm is celebrating a landmark anniversary this year—50 years in operation. There must have been many changes that you have seen happen in the industry since you started out as well as for Eurotherm?

 

Schroeder:  Yes, Eurotherm has come a long way, diversifying into other industrial electronics areas creating many world firsts with many innovative product developments. What still is clear to our engineers today, is that customer process problems and finding ways to solve them have always been the key focus point enabling those leaps forward for so many years.  So it’s no surprise then that many Eurotherm employees have been with the business for most of their careers. 

 

Plastics Technology: You started working in plastics with EPCO, which made injection molding machines. Now, 38 years ago the technology would have been very different? What stands out for you?

 

Schroeder: Back then, most machines were run with relays, timers, limit switches and manual throttle valves.

 

Plastics Technology: And what were you using at that time for plastics processing?

 

Schroeder: We offered as a standard, the Barber Colman (now Eurotherm) 520 temperature controller that was smaller than its predecessor and more precise in control than most controls that were on the market. It was just about that time, in 1974, Barber Colman introduced the Maco IIB rack controller with thumbwheel switches for timers. ‘What a fantastic advancement,’ we thought! It replaced the vast number of relays needed and ran all the sequences through one control rack. It soon became the standard offering on all our new machines. Shortly after, we were retrofitting older machines with the Maco IIB system as well.

 

Plastics Technology: And what developments came next to improve upon that?

 

Schroeder: It wasn’t too much later in 1978 that the Maco IV controller was released with a 5-in. display screen, push buttons, built-in temperature control, closed-loop process control and a memory card that was about the size of a credit card that held all the setup of one mold.  What we had for the time was a fast operating control with leading edge technology!

 

Plastics Technology: Like today’s smart phones and computers, technological advances and competition must have been running at a quick pace in our industry. What was the next advancement for Eurotherm?

 

Schroeder: It sure was. In fact, just five years later in 1983, the futuristic Maco 8000 was launched.  The first truly distributed, modular plastics machine control system with its ‘touch screen’ (actually horizontal/vertical grid pattern) operator stations and its many single, large card holding plastic modules that occupied a vast amount of cabinet space. Oh, and let’s not forget the ‘8-Track Tape’ sized, single mold set up memory cartridge. It was faster than the previous offering and many of the North American OEMs began using it as their main control in various formats.

 

As the leading remanufacturer and retrofitter in the industry, we offered it in a conversion package with a hydraulic modification to run closed-loop process control for both applications. This helped molders bring their machines up to the current standards for plastic processing without buying new machinery.

 

Plastics Technology: As machines became more sleek in design and manufacturers were downsizing footprints, cabinet space was a big issue as most cabinets were large to house all those modules. What change came about for Eurotherm to compensate?

 

Schroeder: It was about eight years later, in 1991, that the single rack Maco 4500 came along with its updated 12-in. screen, integrated pushbuttons and small memory cartridge that held up to 15 mold set ups.  And in 1996, our patented Impact closed-loop process control feature was introduced as the first automatic adaptive tuned injection process control algorithm and it became a huge seller. The Maco 4500 was sleek looking, reduced the amount of cabinet space and wiring that was required with previous controls, and it was fast. That first IMPACT design still stands out amongst all the innovations over this time. Its reputation and acceptance as the best in its field rapidly grew and remained for many years to come.

 

Plastics Technology: Since those huge advancements was there anything since that had the same impact?

 

Schroeder: In fact, you could argue that it wasn't surpassed  until  2006 and the release of the Maco Compact and its great number of advancements in size, a full (this time real) touchscreen HMI and a reduced footprint that made the previous offering look huge in comparison. It stores over 500 recipes internally, has more advanced features that all other systems combined with response and processing times measured in milliseconds. Now that’s fast!

 

Plastics Technology: Steve, it has been interesting to hear from your perspective so what do you see happening next?

 

Schroeder: When I started in this industry, I never thought I would see such an evolution of controlling machinery processing like I have. It’s 2015 and I say wholeheartedly that the advancements in machinery control systems is still running at a rampant pace. Just reflecting upon the recent NPE, the amount of new and highly advanced control systems on new machines was amazing. Features that even had some looking like large iPhones.

 

It will be interesting to say the least, to see where it goes next. I think that there is no way to accurately predict the future in controls but to say they will certainly advance at the continuing pace.

 

Plastics Technology: And so, what is next for Eurotherm? 

 

Schroeder: We will continue to design and develop new products and systems to keep up with the demands of plastic processing.  And, if the last 50 years is anything to go by, it will be impressive. Especially with the added strength and scope that the integration with Schneider- Electric offers to Eurotherm. This means for us, truly anything is possible. If I may add, I have to say that all these years, it has been a real pleasure to have been involved both directly and indirectly with Eurotherm products and their people in working together to enhance the operation and functionality of molding machinery and the processing of plastic.




« Prev | | Next »

RSS RSS  |  Atom Atom


Additive Conference

twitter

All rights reserved. Copyright © Gardner Business Media, Inc. 2015 Cincinnati, Ohio 45244