Wednesday, February 10, 2010

Seller is deluding himself!

I am dealing with a franchisee in the Northwest. There are some health problems in the family and he has decided to sell. The problem is that even when both he and his wife were healthy he had deluded himself into thinking it was Ok to invest in his business for the long term while forgetting short-term performance. The business is doing approximately $475,000 in sales.

The business was originally purchased with the hope of turning it over to a son-in-law. When that didn't turn out and the in-law moved to another state, the owner was forced to take a serious look at the business and try and make it grow.

Bottom line now is that he has four employees in addition to he and his wife. Three of the four employees are so highly paid that he is lucky if he can pay his wife $16,000 plus cover her healthcare costs of about $12,000 a year. What about his salary or compensation? I don't think he has ever paid himself a cent, choosing instead to "invest" in people and equipment - at least that is what he would have us believe.

His rent represents 14%, of his total sales; his payroll (excluding he and his wife) is approximately 40% of sales, and almost 45% of those sales are brokered. His sales per employee is hovering in the $80,000 range and he has no idea how bad this is, let alone the rest of the ratios.

Oh, I forgot to mention. He has a note payable to a local bank of $450,000! The current net worth of the business is approximately -$425,000! Net worth of the corporation is -$430,000!

He has been trying to sell the business (once again for health reasons), but when the franchisor has hinted that it isn't worth the $350,000+ that he thinks it is he just argues with them. They brought me in to do a valuation and my generous estimated value was $205,000, and that assumes that the seller will absorb all assets and liabilities (except for equipment), including that $450,000 note!

I just sent off a detailed valuation report to the franchisee, and I am awaiting his call where I am sure he will gloss over all these serious problems, and try to convince me about the great "potential" that this business has to offer for the right buyer!

If you think you can sell a business or value a business based primarily on "its great potential" I think you are deluding yourself, just like this owner is doing.

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Friday, February 5, 2010

Rise and Fall of Mallard Press

I normally don't find a lot of time to read a lot of industry publications, but I strongly want to urge readers a two-part article that appears to be making the rounds in the printing industry.

Titled "The Rise and Fall of Mallard Press," the interview appeared in a special interest newsletter titled Print CEO which in turn is published by Whattheythink.com. This article is well worth the 15-20 minutes it will take to read.

Wednesday, February 3, 2010

Payroll Costs - What's Included?

Just had a printer call me with a question as to who or what should be included under payroll costs. Specifically, she was referring to a statement that I made in Quick Printing Magazine that suggested a payroll ratio of 26-28%. She asked what about salaries and commissions paid to outside sales reps.

My answer was pretty straight forward. All salaries, wages and commissions for all employees, excluding a single owner, should be included in this calculation. And that of course would include outside sales reps.

Remember, that employer's FICA, medicare, workman's comp., health insurance, and unemployment payments should be included in this calculation. If the expense wouldn't otherwise exist but for the fact that you have employees then it should be included in or under payroll. By the way, that would even include payments made to outside payroll services or money spent internally to generate pay checks.

Large Customer Impacts Business Value

Within the past two months I have encountered two different firms, each of which had one specific customer that accounted for approximately 50% of all sales!

One case involved a $575,000 company with one customer accounting for $250,000 of those sales; In the second case, the firm had annual sales of $1.55 million, with a single customer accounting for approximately $700,000! Almost hard to believe.

Both firms are indeed profitable, with one qualifying in the top 25th Percentile in terms of profits. However, the vast majority of potential buyers out there will simply not consider a company like this, almost regardless of offering price, when a customer represents that large a percentage of sales.

In one of the situations there is 3-year printing contract up for renewal. If the contract is renewed it would make the purchase a bit easier to swallow, but most printing contracts that I have seen are not that rock solid. Even if we had a contract in place, a smart buyer would make the sale contingent upon retaining this customer and/or the length of the purchase contract would equal the length of printing contract. Also, if the buyer could not finance the purchase out of excess earnings during that same period of time then he probably should walk away.

In the other situation, there is a sibling who has been working for the business for more than 15 years and the parent's are ready to sell. However, there is a huge difference between what the father thinks the business is worth and the sibling who wants to buy the company. By the way, the sibling is the one responsible for attracting and maintaining the $700,000 account.

In a real sense, the sibling has the parent over the proverbial barrel and lately discussions as to the purchase of the business have gotten quite heated. What is really surprising is that neither the sibling or the parents have discussed the value of the business or its purchase in the past 15 years!

So now what happens. Stay tuned...