Quick Consultant: Financial Benchmarking & Golden Parachutes

Financial benchmarking and golden parachutes—what do they share in common? I'll begin by telling you a brief story about a gentleman with a golden parachute (something we would all love to have) and the problems he has encountered trying to purchase a profitable printing firm.

A couple of months ago a gentleman in his late 40's (we'll call him Bob) asked me to help him find a printing firm he could purchase. His home is in the Northwest and for the past six years he had been COO at a large corporation involved in the music industry.

Last fall the company downsized and his position was terminated. He had been earning $140,000 a year plus benefits and bonuses that, in some years, were equal to twice his salary. He received a very generous severance package, in the $300,000+ range.

As generous as it was, Bob still needs to work, so he began to research various industries and businesses he might purchase. Printing was one of those industries. He told me he wanted to purchase a business with a solid record of performance—one that could produce enough earnings to pay him at least $125,000 to $140,000, while still generating enough additional cash flow to purchase the business.

"First things first," I told him. "You need to call NAQP and purchase the 2008-2009 Operating Ratio Study and read it thoroughly. If you do, you will most likely know and understand this industry better than most of those who are already in it." Well, Bob followed my advice and hired me to help him search for some ideal candidates.

Now I want to connect the dots and explain how a golden parachute and financial benchmarking relate to Bob's search to buy a printing company.

Benchmarking Study Launched

In mid-February, NAQP launched its 2010 Financial Benchmarking Survey. This biennial survey (previously called the Operating Ratio Survey) is one of the most important surveys conducted by NAQP. If you did not receive an email invitation to participate, there's still time, but you must act right away. The deadline for returning this survey is March 22, 2010, and this deadline will not be extended.

Based upon more than 30 years of consulting and research in this industry, my advice is quite simple. As sexy as studies dealing with pricing or wages and benefits might be to readers, the value of these types of studies pale in comparison to the contributions that a financial benchmarking survey can offer to your business.

NAQP's 2010 Financial Benchmarking Survey asks 65 key questions regarding the financial health of your business. The vast majority of these questions can be answered using your company's 2009 year-end financial statements, i.e.: your P&L report and balance sheets. With this information, even if it is only preliminary, it should take no more than one hour to complete the survey and submit it electronically. You may also return your survey by mail, but you will still have to download the survey PDF. Getting your bookkeeper or CPA to complete this survey is also an option.

Participating in this survey involves a two-step process. First, go to www.surveyadvantage.com/NAQP10financial, read the instructions, and print out a PDF of the survey. It should take no more than 40 minutes to enter the data. You then have two choices, you can either enter your data electronically, or you can return the survey by mail, being sure to include your business card.

So, what do you get in return for your participation in this biennial survey? You will receive a customized Financial Benchmarking Study that compares your P&L statement, balance sheet, and key financial ratios, side-by-side, against other participating companies.

These customized reports were offered for the first time in 2008, and they received praise from virtually all 345 companies that participated. Please note that these customized reports are made available at no charge only to participants. NAQP will, however, sell a much larger 2010 Financial Benchmarking Study in May 2010.

Despite all the economic challenges facing this industry, we know that some companies will continue to far out perform others. In 75% of these cases, the answers to why they prosper while others struggle to stay afloat can be found in these financial benchmarking studies. How much have sales dropped, what's happened to payroll costs, healthcare costs, and the other key ratios affecting our industry? These are questions this study will answer, but we need your participation in order to succeed.

While many industries charge a fee to obtain key industry studies, NAQP has historically provided the results of its industry studies for free to all companies that participate, whether or not they are members of the association. However, there is one catch: Your survey must be completed and submitted no later than the March 22 deadline. If you don't submit your data by the deadline, you don't get a customized report. It's as simple as that. Remember, this is the website you must visit: www.surveyadvantage.com/NAQP10financial.

He Knows What He Wants

So, let's get back to Bob's story and how it relates to NAQP's benchmarking surveys and the reports they generate. Bob decided early on that he wanted to start looking for printing companies with annual sales in the $1.5 to $2 million range, especially companies with above average profits.

Why that size? Because working backwards and using information from the 2008-09 Operating Ratio Study, Bob knew that a well run printing firm of that size could pay him what he expected and generate enough excess earnings to finance 60-70% of the purchase price, with the remainder of the purchase being financed from his severance package. Note that Bob wasn't interested in a "turn around" or troubled company. He was, and still is, looking for a profitable company with good earnings.

Despite a direct mail campaign, and many calls to printers in his market area, Bob is still looking. Why? Well, most of the shops for sale are in some stage of decline; some more serious than others. Those companies that do meet Bob's criteria are way overpriced.

The irony is that Bob, having purchased and studied the Operating Ratio Study, knows more about the printing industry than many of the owners he has encountered because most of them have never read or purchased one of these key studies. Bob knows the ratios. He knows what to look for. The majority of the printers he has met know little about their industry or its potential. They don't seem to realize that, even in troubled times, there is a vast difference in performance and profit levels between companies at the top and those at the bottom.

Here's another irony Bob has encountered. Most of the firms at the top, those with healthy profits and steady growth appear not to be interested in selling. That's too bad, because my February column dealt with this specific subject and argued that many printers sell for the wrong reasons at the wrong time.

If you read my column last month you'll remember Allan Bark, the California printer who sold his business in 2006 for a healthy profit. He is now retired. In his letter, Allen offered four specific pieces of advice, one of which is appropriate to Bob's current dilemma.

Allen noted that, "Selling a business for profit is counterintuitive. You (should) sell when business is good and you are making profits. Over the years, I saw too many owners try to sell a business that was in trouble. Losing your biggest customer is not a very good reason to put your business up for sale. I was approached several times during my printing career to buy a troubled print shop. Typically, the desperate seller was not able to value his business rationally, with the net result of having to close the doors before any sale ever occurred."

Still Looking But No Luck

Bob is still looking. Last week he visited three printers in his market area. Two of the firms were simply too small to generate the income he needs to withdraw. The third company is in the $1.8 million range, is relatively healthy, and the owner is interested in selling. Unfortunately, the owner is only interested in selling a minority share of the business, and even that portion, as it is in so many cases, is woefully overpriced using even the most generous valuation approaches.

The lesson to be learned in all of this is that there are qualified buyers out there, many with golden parachutes, who are interested in buying printing businesses. The problem is that many printers lack a specific exit strategy. Consequently, the first time they think of selling their business is when the business enters a downward cycle. That's not a good time to be selling—unless you are desperate and ready to shut the doors.

The better strategy, especially if you are thinking about selling, is to do what my client did and purchase the 2010 Financial Benchmarking Study when it is released in late May. At least then you'll have an idea of where your firm stands in comparison to others. And remember that if you complete the survey you will receive the latest study for free. At the very least, you will discover some of the key financial differences between those firms at the top and those at the bottom.

P.S. If you worry about confidentiality, don't! Only Larry Hunt and I see the surveys. The identities of individual participants are held in the strictest confidence, and all raw data is destroyed once the data is entered into our database.