Paul Holohan, Richmond Capital Partners
From funding the kit to growing the business, finance is essential, but printers and converters aren’t always aware of all the options. Michael Walker breaks open the piggy bank.
Money is the working fluid of any business and you generally have to spend it to earn it – premises, staff, equipment, utilities, consumables, shipping all have to be in place before the first invoice can go out. While many of these are principally cashflow matters in a profitable business, some of the big capital items that can increase productivity or add new capabilities can also become major hurdles on the route to growth.
A recent survey by Close Bothers Asset Finance suggests that in the UK’s small to medium (SME) print sector, around half of the 900 companies responding were unaware of the full range of finance options available to them and two-thirds had not heard of asset finance. The most popular sources for financial advice are bank managers and accountants, with a third opting for the former and just under a quarter choosing the latter, with financial advisers covering around an eighth. Perhaps unsurprisingly, banks loans were the choice of about 30%, though “other” sources accounted for early a quarter and one in ten were using overdrafts.
While the conventional “balance sheet” lender will look at a company’s assets, liabilities, income and net worth, asset finance companies don’t just focus on historic data but also the value of an asset that could be sold if necessary, explained Roger Aust, managing director of Close Brothers’ print division. ‘The issue has always been that the assets are phenomenally expensive, though they have a long life, longer than most funders would be interested in,’ he commented, referring to conventional analogue print and converting equipment. ‘This brings a new slant – not necessarily a larger or longer loan, but a more proactive approach to the business.’
The value that remains in costly and long-lived machinery, which includes converting and finishing equipment as well as the presses themselves, can be used as equity against shorter-lived and more rapidly depreciating digital equipment, though there is a distinction between the labels and packaging sectors. Hybrid analogue and digital systems are well-established in label converting and so are not viewed by lenders as being unusually high risk, especially when viewed in the context of a complete production line or facility.
‘Labels have been hugely impacted by digital print,’ confirmed Neil Falconer, managing director of consultancy Print Future. ‘The lowering run lengths fit it perfectly, with hybrids using flexo or screen print or foiling. The technology is established, digital is the obvious way to do it, and the business model for most is similar across the board; you can’t complete if you haven’t got scale.’
The story’s different in packaging production, however. At the bottom end of the market are flatbed printers that might be used for prototyping or very short run production on carton board or for lamination onto corrugated board (or direct printing onto pre-cut sheets). The higher quality and more productive models in this category are seen as having good residual value, and being based almost exclusively on inkjet technology, are preferred by lenders to toner-based printers that are typically restricted to the SRA3 format or a “long” version thereof.
Unknown quantities
The new breed of larger-format higher productivity digital devices that can print onto film substrates, cartonboard or corrugated is still something of an unknown, as Mark Nelson, director of Compass Business Finance, which acts both as intermediary and as finance company, explained, ‘Digital packaging is developing. It’s seen as similar to commercial print but inkjet is different [from toner]. It has better residual base but it’s still new, so we’re watching.’ He added that like others, Compass will look at the company as a whole to see if there are solid financials to levy against for digital equipment, but said the majority of applicants prefer to finance their digital equipment as a standalone item.
Mark Nelson, Compass Business Finance
That attitude is seconded by director Matt Tydeman at Imaginators, a wide format print specialist who, although not involved in packaging, makes the relevant point that once digital print equipment is paid for, any period of use without ongoing finance payments is something of a bonus. ‘Once it’s bought and paid for, it still has purpose, it’s a great earner,’
he said.
What “paying for it” actually means is a bit unclear. Some of the top-end digital printers for cartons and corrugated that are starting to reach the market – devices like EFI’s Nozomi corrugated press or the S10 from Landa – don’t come cheap, but as Mr Falconer explained, ‘Inkjet costing is based on ink consumption, it’s less about financing a £1 million machine and more about the volume you expect to put through it.’
Mr Nelson of Compass also commented that directly financing larger press purchases in the £500,000 to £1 million bracket is “difficult”. ‘Could you get it moved [in the event of business failure] and how quickly? The market is reticent, and some are supported by the manufacturer’s own finance or receive support from the manufacturer,’ he said.
The beta units of these types of machine that have been installed so far are most likely done under special deals, as the manufacturer has a vested interest in making them work, not just for PR purposes, but to get the designs real-world tested, proven and tweaked as necessary to support future sales.
Mr Falconer also suggested that the opportunity for these types of digital presses may be exploited by more entrepreneurial converters, ‘The larger packaging converters are very traditional. They have big flexo investments and are risk-averse because they have large contracts with major brand owners. When they’re asked to do lower runs for promotions they can charge huge premiums. They don’t want to go digital.’
He thinks that smaller companies are more likely to pursue the opportunity as it gives a good point of differentiation, and that some of them will be commercial printers who move into packaging to meet the requirements of a key client, and having gained a foothold, gained familiarity with the substrates and supply chain, can develop from there. ‘The technology, speed, cost and quality have only fairly recently reached the right point and it’s now becoming disruptive; pension funds for example can see opportunities to buy companies in this area, seeing a three-to-five year opportunity,’ Mr Falconer explained. However, the ability to gain the finance necessary to follow such a plan may be dependent on having a viable business plan as well as good-enough historical figures. ‘Most have good enough books for the kit but become a major risk when there is no clear business plan or KPIs (key performance indicators),’ he warned.
Buying your way in
An alternative therefore to buying the equipment and developing the skills with digital print to use it might be to join forces with – or to acquire – another business that already has them.
There are three routes to doing this, explains Paul Holohan of Richmond Capital Partners, a mergers & acquisitions and business disposal services firm specialising in the print and packaging sector. A merger usually involves two businesses coming together with a share swap plus cash to arrive at an agreed deal structure. This can be attractive not only for growth but also to rationalise costs over two sites and businesses.
An acquisition involves the complete purchase of another company usually to add additional services – such as digital printing capability – to provide extra capacity or to gain access to new customers or geographical areas or markets.
The third option is a joint venture or strategic alliance, a formal arrangement between two businesses to work together for mutual benefit, in particular to achieve growth from new markets or with new products. A joint venture usually involves establishing a new joint business entity while a strategic alliance is an official collaboration between existing businesses.
Echoing Mr Falconer’s warnings, Mr Holohan said that in addition to addressing the “hard” issues of the value of a business and funding the acquisition or merger, “soft” issues are equally – and arguably more – important. What do you hope to achieve? Do you have other options? Is this a personal thing? Does the acquisition fit within your planned strategy? What are you buying? Do you know and understand what the target company does?
‘It is important to determine your acquisition requirement before you step into the market and to make sure that the acquisition target clearly does “fit the bill”,’ he said.
Shop around for suitable candidates and be prepared to walk away from unsuitable deals, advised Mr Holohan, who also suggested that approaching someone who is not currently looking to sell their business might get a better response. ‘You can often build empathy with them by explaining your plans for the joint business model,’ he explained.
However the other business is found, it is important to allocate adequate time and resource to the due diligence process to establish exactly what is being bought; this might involve bringing in additional management support.
When the deal goes through, in many ways that’s when the work begins. ‘You must have a clear “first 100 days” implementation plan,’ said Mr Holohan. ‘This is where you will make – or lose – the money and there is clear evidence that this has a direct influence on the success of the venture.’
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