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.

Franchise Owners Shocked

I just completed a valuation for a couple in the northeast. They own and operate a franchise they purchased 10 years ago. There sales reached $940,000 in 2010 and seem to be holding steady for this year.

The problem? The couple has used up $118,000 in credit card debt to finance the day to day operations of the business. They are in over their head. The husband decided to turn the business over to his wife while he went out and got a "real job" to earn some real money.

The wife is frustrated and ready to throw in the towel and/or divorce her husband. She hates the business and the daily pressure of having to pay bills when there is no money in the bank. She hates it!

The valuation I completed for the business ended up concluding that the business truly had little value other than the fair market value of the assets to be sold. The owners had over-valued the assets to a tune of $100,000. After making that adjustment and attempting to calculate their owner's compensation, the business value is approximately $205,000....

UNFORTUNATELY, they will still have to settle up their balance sheet debt. After keeping the cash, collecting the accounts receivable, they will also be responsible for all the current notes and loans payable. The net result will be a -$64,000. That does not include a $23,000 liability listed on the balance sheet as a "note payable to stockholders."

To say the least, the owner's are in a state of shock and still don't know what they are going to do!

My job was to conduct a valuation of this company, not to provide consulting advice.

Had I been involved in a consulting relationship with this company 12-18 months ago I would have been jumping up and down and scaring the life out of the owners with the stuff I found on their P&Ls. Many of the corrective steps that needed to be taken were quite obvious, others were not so obvious.

I must admit that while I put most of the blame on the shoulders of the owners themselves, I think the franchisor has some responsibility for this situation as well.... where was the monitoring, where was the mentoring, where were the warnings that needed to be raised.

Didn't someone tell these folks that you can't broker out 42% of sales and still have the ordinary ratios of a typical printing firm? You can't broker that much, even if you are marking up costs by 100% or more.

You can't run a $900,000 company 10.5 employees (including the owner)... you will never survive with a sales per employee ratio that poor -- that's $85,714 and that number is off the end of my survival charts!

Quit Blaming the Economy for Your Problems

I'm tired of all the moaning and groaning in our industry.

There are too many owners out there in the marketplace who are looking in the wrong direction for excuses as to why they are failing or doing so poorly.

Many of them ought to look where most of the blame has always been found - within their own company! If the economy (and granted it is bad in many areas) was the primary source or cause of failure, then all similar businesses - printers in this case - ought to be failing equally, but nothing of the sorts is occurring.

With only one or two exceptions (Michigan being one of them), I know printers located within a few miles of each other and the differences in attitude, productivity and profitability, between the two are nothing short of startling. Some companies, although their sales may be down, continue to report good to excellent levels of profitability. Their SPE is in the $140,000 range and higher and their owner's compensation continues to put them in the top quartile - i.e. 20-24%. (Added on 9/23:P.S. just the other day I talked with a printer in Michigan and he and his partner are doing quite well; sure the local economy has impacted their business, but despite the challenges they are doing quite well, so even Michigan isn't a total exception to what I have said.)

On the other hand, there are competitors just down the road or across town who are constantly blaming the economy or one political party or the other for most of their problems. Hogwash! Many of these companies would find some way to fail even in the best of times. Their SPE is low, their equipment is out-of-date and their employee team, which is typically too large, is often best described as a team of misfits and bad apples.

Quit the excuses and get to work. Start marketing, start improving your company's SPE and get back to doing what only an owner can do - Manage your business with a sense of urgency.

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