“Tuck-In” as Relates to M&A

By | November 17, 2014

Presently there are two major methods in which a merger or acquisition occurs in the graphics industry. It is either strategic or a tuck-in. Today I will address the tuck-in method.

A tuck-in occurs when a Buyer is seeking to merge with or acquire a company whose earnings are weak or non-existing. The Buyer is seeking to purchase the Seller’s customer list and sales revenues, along with other intangible assets and “tuck in” the Seller’s production into their own facility. Typically the value of the transaction would have the Buyer offering the Seller a percentage of their trailing 12 month sales revenues. The amount offered might be in the range of 20% to 30% of sales depending on the quality of the customers; large concentrations of sales with a few customers; the gross margin the Buying company believes they will receive utilizing their equipment at the Selling company’s prices; and the likelihood that the Buyer will be able to retain the business. This amount will be paid over a 3 to 5 year period on the retained business year by year, with a cap equal to 20% to 30% of the original trailing 12 months’ sales. An upfront amount will be negotiated and paid at closing.

The acquiring company may or may not retain the Seller’s sales personnel, customer service representatives, or other key inside personnel.

The Seller will retain all of the equipment not needed by the Buyer, working capital, and long-term debt. The Seller will then proceed to have an orderly liquidation of their business. In most cases, the Buyer works with the Seller to make this as painless as possible for both the Seller and the customers.

 

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One thought on ““Tuck-In” as Relates to M&A

  1. Joel Salus

    Tuck-in acquisition are a great way to grow the acquirer’s business.

    But, if you are the acquirer, be aware that there are laws (Federal and State) that may come into play if the business being acquired is insolvent (unable to, or going to be unable to, retire its debts to creditors.) If you are going to buy the customer lists (intangible assets) of an insolvent business, and, if, immediately after the sale, the selling entity won’t have sufficient funds to entirely pay off its creditors, then you could be held liable for those debts, much to your surprise. I’m referring to the laws dealing with the Bulk Sale or Bulk Transfer of Assets of an insolvent business. Before closing any “tuck-in” deal, make damn sure that you check with an attorney about this, for, if you don’t follow the necessary procedures (to conform with the laws), what may have looked like a simple, no-brainer deal could end up getting very messy for the buyer.

    Couple of links that shed light on this.

    http://stimmel-law.com/articles/bulk_sales.html

    http://en.wikipedia.org/wiki/Bulk_sale

    All bankruptcy attorneys know this stuff, so consult with one before you do the deal!

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