7 Steps To Determining the Market Value of Your Business

You could not write the history of the printing industry during the past 30 years without devoting near parking-lot size space to the frequency of buyouts, mergers, and reorganizations of companies nationwide. In 1980 there were roughly 55,000 printing companies if you included all the “mom and pop” and small instant printers in the mix. Industry estimates at the time suggested there would 40,000 in 1990 and only 15,000 by the turn of the century. Although there can be much dispute over how accurate that prophecy actually was, no one will dispute how much buying and selling and valuing has gone on in our industry.

I fix printing companies. That’s what I do. However, among the licenses I carry is that of a business broker—a person who helps owners buy and sell businesses. And I receive few questions more frequently than ones concerning how the market value of a business is determined. Whether you are thinking of buying, selling, or reorganizing (or just want to make your company as strong as it can be), here are—pretty much in order—seven basic steps for how a business is valued.

1. Black Ink
What is the net income of the company? This one will surprise no one. We are talking about pre-tax profit here. In the last analysis, we are in this industry to make a buck. Hence, the blacker the bottom line, the greater the value of a business.

Be careful here. Make certain your accountant (even if that’s you or a family member) constructs a profit and loss statement that shows the true profitability of your company. By that I mean one that includes only expenses that are absolutely tied to the business. Most businesses are rife with what I call “gray expenses.” Gray expenses are those that may be accepted by the IRS but are not necessarily critical to the business in question. Traveling, entertainment, even medical and insurance expenses can be gray. Get those out.

“Does an unprofitable business have no value?” you ask. Not necessarily. I can tell you as one who does turnarounds, that if there is evident potential for turning it around it may have real value. Besides that, there is the Hardware Store, my next point.

2. The Hardware Store
The printing industry is capital-intensive. Heavy equipment dollars need to be spent to make your operation competitive

That hardware (and not so hard-ware) has value. It is called tangible assets. Value the equipment at cost and add that to the valuation. A buyer wants a turnkey operation, not just a profitable enterprise grinding away with equipment in disrepair and needing replacement.

There are businesses that are currently not profitable but not due to any recession, but rather to recent equipment acquisition. Such businesses may become profitable once the sales and marketing capitalizes on the efficiencies of that equipment.

3. Service with a Smile
The more a business depends on the quality of its service the better. The reason is that service is far less costly to a company than constant equipment upgrades.

Now I understand niche printing and all the rest. However, if you have a unique mousetrap, chances are it won’t be long before your competitors find the right cheese to make a similar one. If you can bullet-proof your service and show that the income flows heavily from that service, you have a stronger company.

4. Rain Coat
How can a printing company be recession proof? It can, depending on the nature of the clientele. Printers are victimized by recessions because their clients are feeling the crunch.

Insurance companies, huge tax firms, funeral homes, even large pest control companies are raincoat clients. They do business no matter the economic weather. People need to be insured in every economy, the tax man comes annually recession or not, termites don’t knock off during economic downturns, and people keep dying in good times and bad.

This is more a matter of degree than kind. In other words, companies are more or less affected by the economy. The point is this: The more accounts you can get that hold up in good and bad times the stronger your company.

4. Goliath Is Not Your Friend
The broader the base the better. I once had an East Coast client, let’s call him Harry. He was swimming in wealth because he had a contract with a national company based in New York City. They placed the orders, he produced them, and the cash register sounded like the Mormon Tabernacle Choir.

Until that national Goliath opted to redo the contract. That’s right. Year after year, as Harry’s costs went up, Goliath wanted better pricing. Sound familiar? Of course it does. Harry wound up selling his company under duress.

The broader the base, and the less dependent on Goliaths the better.

5. Up, Down, or Sideways
Are sales increasing, stable, or decreasing? More particularly, how much are they increasing or decreasing or how long have they been flat-lining?

This is a complex issue. Sales may be driven the economic conditions, internal issues at the company, seasonality, or any of a variety of other factors. The point is this. Is the arrow pointing upward or at least straight out or not. If not, can this be turned around?

6. Instant Coffee
Believe it or not, coffee was not always instant and fast-food restaurants did not exist. We are less patient now—with everything. What does this have to do with the market value of a business? Just this. Smart valuators look at a business and ask themselves: Could a new owner walk in and run this business the day he or she took over? This involves the key personnel, the hardware store, and how well the operation is organized.

The closer the answer is to being truly turnkey, the better the business.

7. Do You Have Tenure?
Professors and U.S. Supreme Court justices are pretty much the only people in this country that get tenure—lifetime job security. Printers surely don’t. However, the older and more established the company the better.

This one doesn’t rank very high, because clients often could care less about how “Graybeard printing has been the printing needs of our metropolitan area for the last 14 billion years,” but it does speak to company visibility in the marketplace and, as such, merits note.

Disclaimers
Remember, this is just a start, my friend. Every business is unique and so one size doesn’t fit all. Moreover, there a variety of multipliers used to arrive at a dollars and cents value of a company. These change regularly and are affected by region, type of company, the economy, whatever. This grid, however, is pretty solid. Six of the last seven businesses I valued drew buyer interest almost immediately because they did nicely on these seven steps.

Maybe your not even thinking of selling? So why should you care about this criteria? First, because you always want to have as marketable a business as possible should you need to put it up on the market. Also, as previously noted, it is the positive side of these steps that typifies companies that make money and will do so well into the future.
Do you have a question? You may contact Dr. David at (702) 448-6622 or e-mail him at drdc46@yahoo.com.

Loading