The other day I had a conference call. On one end was Steve, a print shop owner, and on the other end was Steve’s attorney. They were calling to inquire as to my expertise in business valuations, what I might charge to prepare a valuation, and whether I could qualify as an expert witness.
I told them that I had appeared on behalf of the federal government as an expert witness on two or three occasions. But after those experiences, I would have to think long and hard before I would do it again.
Putting the topic of expert witness aside for the moment, I asked Steve and his attorney what was the purpose behind the call. It seems the firm is a 20 year old company with annual sales of approximately $6.4 million. A fair portion of the current sales came as the result of four acquisitions made during the past six years. Unfortunately, two of the four acquisitions turned out to be nightmares.
In one situation the former owner was suspected of embezzling funds, but getting authorities to bring charges has been a prolonged challenge. In another acquisition, the company they acquired lost its single largest customer within six months after the acquisition—that customer represented 70% of total sales.
Acquisitions going sour are not that unusual, I told the pair. They agreed. Apparently, the real problem and the reason for the call was the fact that this company is structured as a partnership. Steve owns 55%, and has two partners. The company’s production manager, owns 15%, while a second partner, Robert, owns the remaining 30%.
Steve and Robert have been close friends and partners for more than 20 years. Unfortunately, the company, although continuing to grow, has been challenged in the past three or four years. This caused the firm to expand its line of credit. It was also forced to turn to the partners to secure additional financing.
To hear Steve tell the story, Robert was always a bit conservative, but for the most part had gone along with Steve’s more aggressive management style. Despite the financial challenges presented by the recent acquisitions, the three partners have always been well compensated, but much of this compensation is now coming at the expense of a deteriorating balance sheet. About a year ago, especially after the second acquisition went south, tensions got so bad between Steve and Robert that Robert stopped coming in to work, and that was fine with Steve.
Well, a few months ago, Steve received a letter from Robert’s attorney. The letter demanded that the partnership buy out Robert’s 30%, and implied it had to be done immediately in order to avoid a lot of messy litigation.
Well, as I see it, we have three problems on our hands now, none of which are going to be settled soon. First, there is more than a slight hint, according to Steve, that Robert may actually be suffering from the early signs of dementia, thus explaining his seemingly out of the blue demands and actions.
Second, this company’s balance sheet looks like something created by a firm specializing in derivatives. Nothing is what it looks like. The balance sheet is filled with loans to and from stockholders and other questionable obligations backed by nothing more than handshakes. Unfortunately, many of the handshake deals are between Steve and Robert, who are now estranged.
Third, Robert and his attorney are under some delusion that Steve should present an offer first. In the meantime, Robert has yet to secure his own valuation, but we have a gut feeling that he has a figure in mind that is totally unrealistic; possibly based on some multiple of sales—with no regard to profitability.
When to Acquire Valuation
We are convinced that Robert has no concept of the real value of his firm, and anything we offer will be rejected as too low. I completed my valuation and submitted it, but strongly encouraged Steve to withhold sharing it with the plaintiff until such time as the plaintiff has secured his own valuation. Only when both valuations have been completed should they be exchanged. At least that will provide a starting point for further negotiations.
As I said, this is a real mess. Considering the general economy and the financial health of this company, this is certainly not the time to be adding huge amounts of attorney expenses to the mix. Ironically, the partnership will be paying for Steve’s portion of the legal expenses, while Robert will have to pay his attorney out of his own pocket.
Lesson to be learned? Get a valuation of your business before you need it.
NAQP has released its 2010 Financial Benchmarking Study.
The best thing you could do for your business in the next 18 months is to purchase a copy of this 100-page study. To order, go to: http://www.napl.org/eseries/source/Orders/index.cfm.
It is packed with profit and loss statements, balance sheets, and key ratio pages—all designed to help you maximize profitability, regardless of your annual sales, location, or population mix. Plus, this study includes an outstanding industry overview and executive summary by well respected consultant and author Larry Hunt.
In my opinion, this is by far the most valuable publication available to the printing industry—and shame on you if you don’t have it! After you get the study, if you have any questions, don’t hesitate to give me a call. I will be glad to offer my assistance.
With a huge database available from the study, it is quite easy to enter a set of parameters and produce a P&L, balance sheet, and key ratio page for companies that match the criteria I select. So I thought I would keep it simple.
My search was to find single companies that fell in the 20-25th percentile and to compare their financial performance against those in the 74-80th percentile. Ordinarily, I would have restricted this search to companies within a specific sales range, but I forgot to do so. Interestingly enough, the average sales for both sorts were very close to each other, thus adding more importance to the ratios I uncovered.
Space will not allow for much commentary. However, there are many lessons to be learned when searching out how some owners withdraw $175,000 or more from a $1 million company while others struggle to withdraw one fourth that amount ($45,921.)
One last thing. There was no magic in my selection process, other than I did not want to necessarily look at the very worst or the very best. I wanted a good selection of the under-achievers to compare against what I would call the over-achievers.
Top Firms: 74-80th Percentile
Total Sales $1,040,278 100%
Cost of Sales $311,750 30.0%
Payroll $293,072 28.2%
Overhead $259,807 25.0%
Total Costs $864,630 83.1%
Owners Comp $175,648 16.9%
Sales per Employee $126,709
Excess Earnings $110,027
Profits per Employee $15,260
Current Ratio 3.23:1
Return on Assets 27.07%
Bottom Firms: 20-25th Percentile Total Sales $988,785 100%
Cost of Sales $293,643 29.7%
Payroll $357,301 36.1%
Overhead $291,921 29.5%
Total Costs $942,864 95.4%
Owners Comp $45,921 4.6%
Sales per Employee $115,512
Excess Earnings $(17,270)
Profits per Employee $(2,284)
Current Ratio 1.79:1
Return on Assets -29.8%
The breakdown for sales was quite similar between the extractions. Approximately 45% of total sales for the laggards came from offset printing, while the leaders reported about 42%. The profit leaders reported significantly higher sales (12.2%) from mailing services than did the laggards (5.4%).
The average cost of goods between these two extractions was almost identical. In fact, COG as a percent of sales has changed less than 0.5% in 27 years. As a general rule, most printers appear to keep their COG within a range of 28-30%.
Payroll is the big number that almost always seems to jump out. How can a company doing about $55,000 less in sales can end up spending about $64,000 more in payroll costs? Payroll costs of 36% or more is almost indefensible.
Note that companies at the top report healthy Excess Earnings, companies near the bottom report negative Excess Earnings. This is the stuff that makes for high company valuations.
If you would like to know more, contact NAQP today and purchase this information packed study.
Senior contributing columnist John Stewart is president of Q.P. Consulting. He is co-author of the industry best seller “Print Shop For Sale” (www.printshopsforsale.net). Follow John’s blog on his website at www.quickconsultant.com. Contact him at 321/727-2444 or firstname.lastname@example.org.