For Sale: A Tale of Two Printing Firms

It's a Great Time to Buy a Competitor was the subject line I used recently in an email blast sent to printers, and it's a theme I want to continue in this month's column. While the email was meant to promote "Print Shop For Sale," a book written by Larry Hunt and me, that is not the purpose of this column. Rather, I would really like to expand on the basic premise that this may be a great time for buying and selling printing businesses.

Based upon phone calls and emails I receive almost daily, I am convinced that there are probably more print shops, large and small, profitable and unprofitable, in the process of being bought or sold than at any time in recent memory. I believe there are two primary reasons driving the increase in the number of formal and informal "listings" and sales.

First, the more obvious reason: The current recession is clearly placing great pressure on many printing firms, especially smaller ones, and even more so upon those firms with weak balance sheets and even weaker profit and loss statements. Because cash flow is poor, and because they never achieved the kind of "current ratios" they should, many of these troubled companies now find themselves faced with enormous challenges in keeping payables current and making those weekly and biweekly payrolls. What about upgrading equipment? Forget about it, at least for these companies. They can't afford it and they can't get loans.

Second, like most industries, the quick printing industry has undergone various stages of growth in the past 35-40 years. One of the earliest stages, what some refer to as the heyday or growth segment in our industry, occurred in the very late 1960's, throughout the 1970's, and into the early 1980's. It is during this 15-20 year period of time that a majority of printing firms, both franchises and independents, came into existence. Many franchises can trace their roots back to this period, and many independents started during this time frame as well.

The combination of these two factors, the current recession combined with the number of individuals who are in their late 50's or early 60's (those who entered the industry in the 1970's and 1980's) has resulted in a large body of owners who are ripe to sell their businesses, despite the lagging economy. Fortunately, there appears to be an equal number of buyers willing and able to take their place.

Finding Opportunities

Suffice it to say, I strongly believe there are more opportunities for sellers to sell and buyers to buy than ever before. But if you aren't proactive, the only activity you will hear about is when your local paper sales rep asks, "Hey, did you hear about the Sir Speedy over in Glenmont? They just bought out two small competitors and are combining all their operations under one roof."

Here's a suggestion that sounds almost too obvious: Do something as simple as write your competitors a letter. That's right—send your competitors a non-threatening, confidential letter that tells them you are interested in acquiring other printing businesses and that you would love to meet with them privately if they have any interest, now or later. If you need a nudge on how to write this letter, visit my website (www.quickconsultant.com) and go to "downloads" where I offer a sample inquiry letter.

Better yet, you can even offer to share with them your general ideas on how firms should be valued and the price range various printing firms are selling for these days. In any event, sending out 15-20 personally addressed and signed letters is, of course, the easy part.

The Real Challenge in Buying & Selling

The real challenge in buying (or selling) a printing firm is in doing your homework and being fully prepared to discuss how you might calculate the value of a typical printing firm. Whether it is valuing your own firm or valuing a competitor, "pie in the sky" numbers will not work.

Theories provided by a brother-in-law or a neighbor who owns a local chain of pizza shops will not work either. Trust me; you need to understand some basic principles used in our industry. And, more important, you need to be able to explain these principles to others.

If you're a seller and you've always heard about some multiple of sales being common in our industry you can forget it. Business valuations are rarely, if ever, based upon a simple multiple of sales. Such an approach totally ignores the most basic valuation element of all—a business' ability to produce profits or excess earnings. If a business cannot produce the latter, then it may be worth only what a buyer might use in valuing the worth of your customer list or book of sales along with all the associated records and artwork. Remember, if these customers were unable to produce a reasonable profit for your firm, a buyer may be very reluctant to pay you more than a token amount.

To illustrate the enormous range in values for similar size firms, I will show an example of each. Using two valuations reviewed in "Print Shop For Sale," I will attempt to explain some of the reasons why two firms, although very similar in annual sales ($816,500 vs. $790,300), can produce two dramatically different valuations.

Riverview Printing Valuation

First, let's take a look at Riverview Printing. This fictitious company is representative of a number of real world firms Larry Hunt and I have come across during our 60 years of combined experience in this industry.

As we note in our book, Riverview Printing is a fairly young firm started in 1999. It has an excellent reputation in the community and is located in a 4,000 square foot building, which it rents under a favorable lease with an option to renew.

Annual sales growth has been consistently in the 6-10% range. The company has a diverse base of customers, with no single customer representing more than 5% of sales. The company is up to date technology-wise and its services and products are slightly ahead of others in the industry. Earnings are far above average and employee turnover is very low.

The current ratio of the company is 2.5:1, with current assets of $202,150 and current liabilities of $80,500. The owner is willing to take 25% down and carry a note for the balance over a 10 year period. The owner will also stay on for 60 days to train a new owner.

Valuation — Riverview Printing
(High profit, high value company)
Gross Sales (last fiscal year) $816,500
Owner's Compensation $181,508
Fair Market Salary* $ 55,059
Net Assets $121,650
Annual Cost of Net Assets @ 10% $ 12,165
Excess Earnings (line #2 less (line #3 + #5)) $114,284
Excess Earnings Multiplier** 4.75
Excess Earnings x Earnings
Multiplier (Line #6 x #7) $542,849
Estimated Value of Business
(Line #4 + #8) x $664,499
 
*Based upon a formula described in "Print Shop For Sale."
**Based upon responses to 14 questions used to value printing firms, as described in "Print Shop for Sale."

Based upon the methods we describe in our book, and more specifically the "Excess Earnings" approach, we would value a business such as this at $664,499. Based upon all the numbers provided, the seller would be receiving a fair price for his business, while a knowledgeable buyer could feel comfortable—especially considering the terms offered—that the purchase price would indeed be a fair offer.

In real life, of course, a seller who has gone through our valuation process might initially add $50,000-$75,000 as a cushion to his valuation price. A buyer would do just the opposite and initially offer $100,000-$150,000 less. In the end, however, the closer they can come to our $664,499 the easier it will be for both parties to settle with the belief that the final price is indeed fair.

Valley Press Valuation

Now let's look at another fictitious company that is far too common in our industry. Valley Press is about eight years older than Riverview Printing. It has an average reputation in the community. It is located in a 5,000 square foot building and soon will be coming to the end of a five year lease.

Sales have been flat for the past few years, despite the fact that the local economy has a broad mix of industries and is relatively healthy. It has two large customers that, combined, represent 25% of total sales. Its equipment package is in reasonably good shape and it is computerized.

Unfortunately, due to excessive rent, high paper costs, and higher than average payroll costs, earnings have been extremely poor in recent years. In fact, after paying the owner a basic, living salary, the company is producing no excess earnings whatsoever. Employee turnover is also a problem in this company and sales per employee (SPE) is a very low $98,750.

The owner is willing to finance, but wants 50% down and will only offer three years to pay the balance. The current ratio of the company is 1.13:1 with current assets of $162,200 and current liabilities of $143,200. The total value of net assets is $119,030.

Taking the above factors into account, along with a valuation multiplier of 3.82, we estimated this company to be worth slightly less than the value of its total assets. Because this company produced no excess earnings, we turn to our modified valuation approach. This approach is most likely to be used whenever owner's compensation drops below 10% of sales.

In our modified approach, when there are negative excess earnings, we take the value of the net assets and decrease it by the value of the negative excess earnings. Valley Press has net assets of $119,030, less negative excess earnings of $4,872, for a final value of $114,158.

In such a situation, the parts may be worth more than their sum. As an example, an owner might do better by selling off his equipment and then attempting to sell his book of sales, based upon their potential to produce excess earnings or increase the contribution to margin for the potential buyer.

Valuation — Valley Press
(Low profit, low value company)
Gross Sales (last fiscal year) $790,300
Owners Compensation $ 60,853
Fair Market Salary* $ 53,822
Net Assets $119,030
Annual Cost of Net Assets @ 10% $ 11,903
Excess Earnings (line #2 less (line #3 + #5)) $ -4,872
Excess Earnings Multiplier** 3.82
Excess Earnings x Earnings Multiplier (Line #6 x #7) $-18,610
Estimated Value of Business (Line #4 + #8) See Note
Modified Valuation approach when line
#6 & #8 are negative $114,158
 
*Based upon a formula described in "Print Shop For Sale."
*Based upon responses to 14 questions used to value printing firms, as described in "Print Shop for Sale."

Note: Earlier we pointed out that Valley Press had problems with high rent, paper and payroll costs, poor earnings, employee turnover, and SPE. A new owner would have a great opportunity to improve some of these ratios, but a seller should never be given credit, or expect to receive credit, for improvements or potential brought to the business by a new owner!

Some readers may see portions of their own firms described in one of these two scenarios. Whatever you do, dont rationalize or lie to yourself that your firm is different or worth more than the numbers might indicate.

As I said at the beginning, there has probably never been a better time to buy a competitor. On the other hand, if youre an owner who has thought about selling, but put the decision on the back burner because of the economy, think again. If youre reporting above average profits and your sales are stable or growing, theres a better than 50/50 chance that someone might be willing to purchase your firm. Of course, those odds improve if you have a good handle on valuation theories and you are willing to listen objectively to all serious offers.

Senior contributing columnist John Stewart is president of Q.P. Consulting and the co-author of "Print Shop For Sale." Visit his website at www.quickconsultant.com or a special website for the book: www.printshopsforsale.net. You can also email him at qkconsult@aol.com, write to him at 2110 S. Dairy Road, West Melbourne, FL 32904, or call him at: 321/727-2444.

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