How do you finance the purchase of a commercial printing company?

Which printing business are you buying?

Lenders who finance printers know that marketing collateral printed on offset presses has been shrinking for years in many markets, while packaging, labels and short-run digital work have held up better. So the first thing they ask for is revenue and gross margin by product line, for each of the last several years. A printer whose mix is moving toward the steadier lines can support debt that the same earnings from a shrinking line would not.

Packaging and label converters attract sponsors building platforms, and lenders price them closer to light manufacturing. Commercial printers are more often bought by other printers consolidating capacity. Both are financeable; they are underwritten differently.

Customers, and the people who hold them

Printers often do a large share of their work for a few accounts: a retailer's catalog, a health system's forms, a manufacturer's packaging. Few of those relationships sit under long-term contracts; most run on purchase orders, job by job. Lenders read sales by customer for several years to see who stays, and size more cautiously when one or two accounts carry the business. See customer concentration in an acquisition.

The harder question is who holds each account. In many printers the relationships belong to salespeople paid on commission, some of whom think of the accounts as theirs. If a top rep leaves after closing, the accounts may go too. Lenders ask for the sales rep agreements, whether they contain enforceable non-solicitation terms, and what retention arrangements the buyer has made. Where the seller is the top salesperson, the transition plan carries the credit, and a seller note or rolled equity keeps the seller invested in it.

In printing, the customer list is often a sales rep's list. Lenders want to know whose it is before they lend against it.

The plant: collateral, leases and capital spending

A printing plant looks like strong collateral, and some of it is. But lenders value equipment at what it would fetch in an orderly sale, net of the cost to take it down and ship it, not at what it cost or what it is worth running in place. An older offset press may appraise for little once rigging and removal are paid; newer digital, finishing and label equipment usually holds value better. Lenders commission an appraisal and lend against the net orderly liquidation value; some asset-based lenders add a term piece against it, covered in machinery and equipment in an ABL.

• Equipment leases and service contracts. Digital presses are often leased, sometimes with service agreements that charge per impression. Lenders treat the lease payments as debt in substance: the buyer assumes or pays off each lease, and the payments count when coverage is tested. Per-impression charges are an operating cost the earnings must already carry.
• Replacement spending. A press line near the end of its life means reported earnings overstate the cash the business really produces. Lenders deduct a replacement allowance, and a buyer who plans to replace a press in the first years should put that in the model rather than leave it for the lender to find. See maintenance versus growth capex.
• The building. Where the plant is included, lenders taking the real estate typically require an environmental review, and a printer's history with inks, solvents and cleaning chemicals gets a closer look than most businesses'.

Working capital: receivables, paper and postage

Commercial customers pay on terms, and large accounts pay slowly. Paper and substrate inventory, often bought ahead when prices move, adds to the cash tied up. That makes an asset-based line alongside the term debt worth sizing properly. Asset-based lenders typically advance 80% to 90% of eligible receivables; invoices more than 90 days past invoice are typically ineligible, and borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables. That last rule bites in printing: a printer whose largest customer carries well above that share of receivables will find much of that balance outside the borrowing base. See how a borrowing base works.

Direct mail needs one more check. Printers that mail for customers often collect postage in advance. That cash belongs to the job, not the business, and the working capital peg should treat customer postage deposits as the liability they are.

How the capital structure is usually built

Printing has consolidated for years. A buyer that moves the target's work onto its own presses and closes the target's plant may be right that the combined business will earn far more, but lenders credit those savings only in part, and only when the plan is specific: which jobs move, which presses go, which costs end and when. See financing add-on acquisitions and lending on run-rate EBITDA. For a management team buying the company from its founder, management buyout financing sets out how the equity is usually assembled.

Risks lenders price in a printer

• Volume decline in offset and marketing-collateral lines, and price pressure from competitors with idle capacity.
• Concentration in a few large accounts, and in the reps who hold them.
• Paper and postage costs that the printer cannot always pass through quickly.
• Obsolete equipment that forces capital spending soon after closing.
• Labor. Skilled press operators are scarce. Where a plant is unionized, lenders ask about the labor agreement and any multiemployer pension plan, because withdrawal liability stays with the company in a stock purchase and an asset sale can trigger it.

What goes in the file

For the term debt: the P&L, the balance sheet and a debt schedule, with a year-to-date P&L and an AP aging where available. For the asset-based line: an AR aging by customer with days outstanding, an AP aging, the debt schedule and existing liens, and an inventory report for paper and substrate. For the acquisition: the target's latest full year of figures, never an older year, and the letter of intent. A printer's file is stronger with:

• Sales by customer for each of the last three years, and sales and gross margin by product line.
• An equipment list with make, model, year and whether each item is owned or leased, with the lease and service agreements.
• Capital spending by year, and any planned press replacements.
• Sales rep agreements and commission plans.
• Any labor agreement and pension plan documents.
• For an add-on, the integration plan: which work moves, which costs go, and when.

Senior bankers run every Midas Partners engagement. From those documents, software builds the financing model, lender presentation, blind teaser and underwriting memo in a day, and a senior banker checks every page before the client approves it. The model shows the product-line trend and the capital spending plan, so lenders see the decline question answered rather than discovering it. Lenders that fit see the blind teaser first; the client approves each by name before it learns who the company is. See the package.