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.