Two Valuations: Polar Opposites

By John Stewart

I have sitting before me on my desk valuation folders for two different printing firms. One is green and the other yellow. The colors themselves don't mean anything, but the contrast between what they each contain inside is simply shocking.

I finished both valuations late last week.

The Green Folder represents a company projected to do almost $700,000 in 2011. Two years ago their sales were $820,000 but the drop in sales doesn't concern me. It is typical in this industry. What does concern me is that this company's final valuation came in at less than $50,000! That doesn't mean they can't sell the business for more or that the customer list itself might have a higher value, but from a strict valuation standpoint, based upon actual financial performance, the business has little value.

How does that possibly happen? Well the owner will make less than $18,000 in total owner's compensation this year - that's less than all of the six remaining employees will earn this year. With that low a salary, this company doesn't even come close to the threshold we set for a fair market salary for an owner, thus it is producing no "excess earnings."

Without excess earnings, the company has virtually no value. It assets are old and total $89,000 but even that amount is penalized by the significant negative excess earnings. This company may sell for more than our estimated value, but not by much, and only because a new buyer may be willing to certain risks above and beyond what our formula suggests.

What about the Yellow Folder? The yellow folder represents a polar opposite of the prior company. This company did $1,218,902 in sales in 2010. The sales for this company have remained strikingly similar for the past four years, despite the recession. Interesting that this company employs a total of only seven employees (including the owner) which is only one employee more than our previous company - thus producing a Sales Per Employee of $174,000! Total owner's compensation for this company in 2010 was $280,000 which results in a 23% OC ratio.

Combined with a solid list of productive assets, the valuation on this company came in between -$910,000 and $1,122,000! The only problem is that it is almost too profitable! While, in our sound judgment, the business can easily fund its own purchase, at that high a purchase price there are simply far fewer qualified buyers, especially buyers with printing experience.

One more thing about this company: Although the company is very valuable, I have told the owner that his facility, in terms of general appearance and cleanliness, comes across as sort of a "pig sty". It needs a major clean-up or it could result in offers being $100,000 to $200,000 lower based on that first impression.

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