Thursday, September 8, 2011

Shockingly Low SPE

I'm currently working on a valuation for a company with 2010 sales of $600,000 and operating losses of almost $80,000. The company's payroll is running 51% and that does not include any wages or benefits paid to the owner.

Of course the company has been losing so much money since he bought it in 2006 that he not only has been unable to withdraw a salary, but he has been forced to plug almost $900,000 of his own funds just to keep the business afloat!

This is the classic example of ingorance is bliss. Had this owner made any attempt to seek sources for key industry ratios he would have discovered that most of his, especially his payroll percent, was totally out of whack and sooner rather than later would destroy him.

To be candid, I am surprised he has lasted this long, but he apparently has been successful enough in the past that he feels that if he just keeps loaning the business money it will somehow turn around!

NOT A CHANCE - It is statistically impossible to have payroll costs anywhere near 50% and still produce a profit, no matter how low your COG and Overhead Expenses might be.
Worse, however, is that I didn't even need to see the financials... all I needed to hear was that their sales were $580,000 and he was employing an equivalent of 8.25 FT employees - that works out to a shocking, almost "off the chart" $70,300!

By the way, if you loan your company money you better find a way to pay it back to yourself because no sane buyer is going to take that type of liability when you go to sell your business.

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