Thursday, November 12, 2009

Brokering Destroys Value of Business

When brokered sales reach certain levels in a printing company, the value of that company tend to drop off dramatically, so much so that the company may have no value to formerly qualified buyers.

Case in point, a company stumbles on an outstanding opportunity to provide a large amount of flexography to a nearby growing company. The owner develops an excellent relationship with two individuals in the company. Neither of these individuals own the company but have extensive purchasing authority. Within a relatively short period of time, this account grows from $10,000 to $20,000, $50,000 and eventually to more than $180,000 annually!

When the jobs started coming in, the owner, who tends to be timid when it comes to pricing in-house jobs, decided to markup every job, large or small, by 100%, thus producing a 50% gross profit. The gross profit on this one account continues to be 50%! By now, the brokered work has grown to the point that it represents approximately 60% of total sales.

In the past 12 months, the company was approached by another printing firm who was looking to acquire another local printer. However, as soon as the prospective purchaser discovered that 60% of the sales of the entire company, and about 90% of all brokered work, came from one customer he backed off quickly, never to be heard from again. No one will touch this company, even though the owner would like to sell.

Easy to suggest that this company needs to refocus and concentrate on in-house sales, but the reality is (as it is in so many cases) that the tail is now wagging the dog, and the risk and fear of losing this HUGE customer dominates almost all of the day-to-day activities of this owner.

All it will take is for one of the two people in purchasing to have a heart attack, or the death of one of these two individuals, a change in ownership at the client's place of business, or even a casual sales call by another printer and everything that this owner has worked to build will collapse in a matter of weeks!

This is a true story with no happy ending. We are now in crisis management mode trying to turn this situation around as quickly as possible, but that is going to be very difficult.

Meanwhile, two or three times a week, the client calls the printer and gives him another $1,500 to $2,000 order that needs to be filled.

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Blogger Bill Alpert said...

This is an extreme case; and it isn't as much about brokered sales as it is about too many eggs in one basket. Most of us have been bitten by that bug more than once.

I wouldn't turn away good brokered accounts; they enhance client retention and bolster overall sales. In many cases it's just makes more sense to outsource than to produce it in house. There's a good supply of dependable trade vendors in my area, and they've become an important part of our overall sales.

November 16, 2009 at 11:08 AM  

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