Asset-based valuation begins with a calculation of balance sheet liquidation value. It doesn’t mean you are actually liquidating your company. It means you are just figuring out the market value of your equipment. As we all know, there is excess capacity out there, and used equipment values are considerably lower than they were two years ago, so be realistic. To compute this, sum up the Accounts Receivables and assign a probability or percentage of collectability to each. You would do this with all your assets, including equipment, to realistically figure the total value you would receive on your assets.
Once you compute what you are going to receive for you assets, add to that what you can expect from the sale of your sales/customer list or book of business. Asset-based transactions make attractive tuck-ins, in that buyers are willing to pay good money for your sales because they don’t have to buy your other assets, such as equipment. In most cases, the sale of the seller’s book of business is arranged through a royalty rate (percentage) that is paid on the actual sales that are produced and sold by the buyer to the seller’s customers subsequent to transaction.
The range we are seeing for royalty rate is four percent to seven percent over two to four years. We typically use five percent for three years for calculation purposes. Royalty fees do not tend to exceed seven percent unless there are extenuating circumstances—for example, if you are not paying a sales commission on some of your revenues, the buyer might consider paying a higher royalty rate.
Royalty fees in an asset-based transaction can sometimes be a source of friction. Some buyers want to put a ceiling on the royalty rates, or commissions, paid to the seller. On the other hand, some sellers want a floor as part of the transaction agreement, whereby the seller receives a guaranteed minimum payment, even if the royalty is less. Our recommendation is that parties avoid the ceiling and floor mentality. But measures conflict with the big picture goal of a tuck-in. If the buyer ends up paying more royalty fees than anticipated, it means sales are actually above expectation. The ultimate goal of a tuck in is to achieve higher than projected sales. If royalty commission helps that happen by making customer transitions smoother, it is simply a tool to a successful process.
On the other hand, a seller who wants a floor usually requests it so he/she knows the minimum amount they are going to get in order to liquidate the business. But sales are not hard, fast, and absolute for the buyer to predict. If the buyer thinks he/she is purchasing a company with $3M in sales and only $1M comes in, it doesn’t seem fair for the buyer to pay the floor when he/she is already dealing with an unexpectedly large sales loss. It is a matter of what is fair for all parties.
Tuck-in (asset-based) transactions will continue to be popular because they give the buyer the opportunity to take on only variable expense, with no extra fixed expenses, and move into his/her plant and fill up excess capacity—and almost every printer out there wants to fill excess capacity these days.
Estate Tax Valuations
In today’s depressed market, every company should consider getting an estate tax valuation done right away. We mentioned estate tax earlier as another reason for valuing a company. It is important to note that estate and gift tax planning and M&A valuations are two different valuations. For M&A, you want a high value. For estate/gift valuations you want to justify a lower value to minimize your taxes.
With the lower EBITDA values we’ve seen the last couple of years, many of our clients are finding it advantageous to do estate tax transfers and using lower valuations to reduce any tax effect. It is often said the best time to prepare for the future is now. With today’s depressed EBITDA values, now is the time to look at how much stock you can get out of your estate and consider gifting it.
It is easy to support a very low valuation in today’s market, so this is something all stockholders should currently consider.
Whether you plan to sell or buy your printing company, or just gift your stock to maximize tax benefits, be sure you first know exactly what the printing company is really worth in today’s terms. Work with a qualified professional in the industry who can assist you in identifying applicable adjustments and discounts, as well as help you with the most effective timing to put your plan in action. PN