Every week I hear from printers who have urgent questions about valuing their business. The scenarios differ, but the sense of urgency is a constant. One partner approaches the other partner and demands that he be bought out. A divorce looms on the horizon and both spouses need a quick valuation. A large, local competitor approaches a smaller company with a “no cash” deal, but a fair salary and 10% stock in the buyer’s firm. The common theme among these situations is that they involve a sense of urgency.
If you really must sell now, there just isn’t a lot you can do to increase the value of your business. You can dress it up a bit, add a fresh coat of paint, and get rid of junk that has piled up for the past 20 years. But in the end, the value of your business is what it is.
How Much Is Your Business Worth?
Let’s assume your business is about average size for this industry, meaning it is doing about $1 million in annual sales. How much do you think it might sell for? I just grabbed my handy copy of the NAQP/NAPL Benchmarking Study and ran some quick numbers.
The average company in this industry, with annual sales of approximately $1 million, could be priced at $356,000, and probably would sell in the $310,000-325,000 range after negotiations. The seller, if he is lucky, will also retain an additional $100,000, which will represent the cash in the bank, the accounts receivable, and responsibility for accounts payable. This company has average profits, average net assets, and average SPE.
Now, let’s look at a similar size company that falls in the top quartile in terms of profitability. How much can it be worth? According to the Benchmarking Study, the result was a valuation of $780,000. That’s more than twice the value of one of its peers.
It is important to note at the outset that there is a distinct difference between the value of a firm and its suggested selling price. The reason for this is that, in almost all sales, the typical seller automatically takes out some of the value of the business prior to transferring it. This typically involves keeping the cash, savings accounts, and assuming the net balance between the current AR and AP accounts. While cash and savings retained by the business clearly contribute to the value of the business, they are rarely sold, because it makes no sense to sell cash.
Planning to Sell in 2011-2012?
The more time you have before putting your business on the market, the greater the opportunity to add value to your business. Remember, however, that “short sales” and foreclosures abound. If you don’t have to sell, don’t. If you must sell, at least take the time to boost the value of your firm by considering some of the following issues.
Realistic Expectations: You can kill a potential sale or prevent a “for sale” from even getting off the ground if the business is not priced properly. Not only do you have to be realistic, but you also have to recognize your “reality” may be far different than that of a potential buyer. First, forget all those rules of thumb you have heard bandied about in years past. Most didn’t work then, and they certainly don’t work now.
Second, accept the fact that your business, first and foremost, must be profitable in order to be attractive to a buyer. It must be producing profits above and beyond what would be considered a fair market salary for the owner. In other words, a business must produce enough excess earnings to buy itself.
Third, remember that the value of your business is primarily based upon its current performance. (For more details on business valuations, visit www.printshopsforsale.net.)
Fourth, if the business has potential, it should already be demonstrating that potential in terms of profits. Telling a prospective buyer that someone with selling expertise and knowledge of social networking could really take this business to the next level is not a very logical method for justifying a higher selling price.
Emotional Preparation: The process of putting your business up for sale can be emotionally draining. Be prepared. Qualified buyers will ask you to provide and explain financial details about your business in great detail. And yes, they are entitled to that info. My advice? Put yourself in the shoes of a potential buyer who is preparing to risk a major portion of his entire net worth to buy the right business. Once the buyer has signed a confidentiality agreement, and possibly provided a statement of net worth and brief biography, you will need to provide a great deal of information to close the deal.
Clean, Up-to-Date Financials: You need to have profit and loss and balance sheets for at least the past five years. If you’re not receiving financial statements on a monthly basis, start now. The process of selling a business is an arduous one, and can easily take six to eight months. The financials you started off with eight months earlier will not be sufficient as the buyer prepares to make his final offer. Keep him updated, even if it means more bad news.
Be prepared that if your latest P&L reflects a downward curve, so will the offer from the buyer. Most printers tend to sell at the wrong time. They sell when things are rough and getting rougher, not when things are getting better. A moderate improvement in the P&L and balance sheets can do wonders to justify a higher asking price.
By the way, start cleaning up those balance sheets. If your balance sheet shows you owe Uncle Henry $25,000, pay that off now. If you’ve made personal loans to the business, make sure the business pays them off as well. Your balance sheet needs to be squeaky clean and totally unencumbered by strange notes payable and receivables.
Avoid False Expectations: You may have done very well in this industry in the past 20-30 years. But it is also possible that you have been buying yourself a job. Yes, it was nice knowing you did what you wanted to when you wanted to do it. It was also nice not having to worry about being fired. But in the end, after taking out a modest salary, is there anything left over to add value to the business?
If you have grossly overpaid yourself, that is a different matter. In that case, the excess salary would translate into increased value to the business. If, on the other hand, you have pretty much taken out a basic salary and perks based upon what the business could reasonably afford, then it is going to be difficult to convince a potential buyer that your business is worth buying.
Payroll Costs and Company Value: The single biggest factor impacting “excess earnings” (which is at the core of most valuation methods) is the difference in payroll costs between those firms at the top and those at the bottom. This is something that cannot be addressed too soon!
Revisiting our $1 million dollar companies for a minute, we note that the profit leaders report average gross payroll costs, excluding that paid to the owner, of approximately 26%. The profit laggards, on the other hand, report employee costs as high as 40%.
How does that 14% difference impact the value of a $1 million dollar firm? First, it represents a potential savings or additional profit of $140,000. Second, and far more important, is the fact that this $140,000 is subject to a multiplier ranging between three and five. That means a $1 million company at the top of the profit pyramid could be worth between $420,000-700,000 more than its counterpart at the bottom. This shows the negative impact that having high payroll costs or too many employees can have on the value of your firm.
In fact, I know of no better, faster way to improve the value of a company than to take a magnifying glass to payroll costs and make whatever changes are necessary. If you find yourself unable or unwilling to make these types of decisions, then you must accept the consequence of lowering the value of your printing firm by hundred’s of thousands of dollars.
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 2110 S. Dairy Road, West Melbourne, FL 32904, call 321/727-2444, or email firstname.lastname@example.org.