A ‘multiple’ is then applied to the appropriate cash flow measurement which differs by industry and changes over time. In the label industry a multiple of 3-6 is typically used. 4 is a good starting point for a baseline valuation. The product of the cash flow and multiple becomes the basis for the valuation. Adjustments are then applied based on the particular circumstances and other factors.

In addition to the cash flow there are many other factors which will impact the business’ valuation. These factors may include fixed and current assets to be transferred to a buyer, liabilities including interest bearing debt to be assumed by a buyer, lease and contract rights and obligations, past and projected future growth and profits.

Unfortunately for the business owner, a single formula to compute the value of a business does not exist.  Nonetheless,  a valuation of 3-6 times a label company’s EBITDA is a good starting point. You are welcome to contact us for a confidential, no-obligation discussion.

Bemis Company, Inc. announced mid September that it is selling its global Pressure Sensitive Materials (MACtac) business to a California-based private equity firm, Platinum Equity, in order to raise $170 million in cash to fund the growth of its flexible packaging business. The sale is expected to close in the fourth quarter of 2014. Bemis actually agreed to sell MACtac already in 2002 for $420 million, then to UPM-Kymmene. The transaction was however blocked by the US Department of Justice. 

Over the 12 years Bemis has probably focused on their core business, flexible packaging, and not invested in MACtac. They only managed to grow sales by about 10% over the 12 years, while operating profits were higher in 1998 - 2000 than the last many years. So a sale was overdue.

The selling price of $170 million represents a multiplication factor of about 5,5 on operating profit. The $420 million represents a factor of over 10. A strategic buyer like UPM-Kymmene would at the time have been able to gain an important presence on the North American market as well as access to technology they didn't have back then.

Timing, positive top and bottom line results and the right buyer is critical to get the best price for your company.

The Alexander Watson executive Merger & Acquisition forum in Chicago offered lots of interesting learnings for buyers and sellers of  label companies. Here are some of them: 
       
The positive trend since the bottom was reached in 2009 continues with more and more Mergers and Acquisitions happening in the packaging industry. 
        
Multiples of EBITDA (Earnings before Interest Taxes Depreciation and Amortization) is a key measure for quick valuations in the packaging  industry. See my blog from February for more information. For companies with  critical mass, continued growth and a positive outlook EBITDA multiples of 6-6.5 for financial transactions and about 7 for strategic acquisitions are often being paid. 
        
Our experience is that for label companies, who mostly are smaller and do not have the critical mass, typical multiples realized are 3-5, in exceptional cases 6.
 
My recommendation is to take advantage of  the positive trend and start preparing for selling your label company. Even more so, if you experience profitable growth. Do not wait till you are forced to sell. We have many serious buyers looking to acquire label companies around the world…… 

There are many methods of valuing a label company such as the market approach, income approach and asset approach. The market approach compares sales of similar companies in ratio form. The income approach is based on the value of future earnings while the asset approach typically estimates the value of assets minus liabilities. Sometimes all are used, other times one is preferred.

The market approach is one of the least complicated and most widely used methods overall and in the label industry. It is based upon pricing multiples derived from comparable business sales, typically a multiplier to the 'normalized' annual earnings before interest, taxes, depreciation and amortization, also called EBITDA. Some use EBITDA as a proxy for cashflow. Other like it because it's less dependent on arbitrary accounting principles and how you finance your company. 

The key is which multiplication factor to use. We have seen many deals being made at ratios between 3 - 6. The more unique the company, the higher the ratio.

The first step in selling your company is to have a good understanding of the value. 3-6 times 'normalized' earnings before interest, taxes and depreciation will give you a first indication. The price you get for your company then has to be split between you, the owner, and the debt holders.