Editor's Note: Mergers and sales of reprographics firms peaked several years ago, but there are still many owners interested in selling. However, the game has changed! Now most reprogaphics shops do much more than large-format engineering printing, so the metrics formerly used when preparing for a sale may not apply today. With that in mind, below is an article that originally appeared in Larry Hunt's High Speed Copy News. The focus is on print shops, but everything in the article pertains to reprographics shops, too. This article is reprinted with the generous permission of the publisher of Larry Hunt's High Speed Copy News; for information about subscribing to that valuable publication, click here.
Getting Your Business Ready To Sell!
By Larry Hunt and Dirck Holscher
Although the sale price of your business will depend greatly on the profitability of the company, other factors can affect the final price. Here are some of the additional factors to be considered, whether you are planning to sell your business or buy another one.
- Recent Profit Trends: Two businesses with the same current profitability can have two very different valuations because of profit trend. A company that has a history of increasing profits over the past two or three years will be worth significantly more than one that has flat or declining profits.
- Departure of the Owner: This factor can be positive or negative, depending on the situation. If the owner has built the business through many personal relationships, his or her departure could adversely affect sales and profits, since some key customers may leave because they don’t feel any personal connection to the new owner. On the positive side, if the business is being sold because the current owner is in ill health or has lost interest, an energetic new owner could be just what is needed to quickly rebuild sales and profits.
- Terms of Sale: This factor could be and often is one of the biggest in determining the final selling price. The sale price will be vastly different depending on the amount of the down payment and the payment schedule for the remainder. An old business adage is that the seller sets the price but the buyer sets the terms. Or, as the old joke goes “I’ll agree to any purchase price you want as long as I can put nothing down and pay you forever at $1 per week.” On a more serious note, if you want 100 percent up front, you will likely get a significantly lower sale price than if you are willing to take a more typical 20 or 25 percent down, with the balance financed by the owner over 5 to 10 years at a reasonable interest rate.
- Remaining Employees: Once the owner and other family members have departed, who will be left to manage and produce the work? Getting a good sale price will probably be more difficult if the remaining employees are relatively new and unskilled. Another factor to consider is whether key employees are incentivized to stay on for the new owner.
- Lease Terms: This can be a very critical factor affecting the sale price. If your building is rented on an unfavorable long-term lease, it could kill the sale or significantly reduce the sale price. Just as bad, or worse, could be a very good lease that is about to end, with no option in place to renew. If you have a good location that is key to your business, make sure that you have a good long-term lease in place, or an option for a long-term period that can be transferred to a buyer.
Terms and remaining time on equipment leases can be very critical as well. Although it is important to stay up to date with technology, it is generally not a good idea to enter into long-term equipment leases just before attempting to sell a business. Often the new machine is being leased in order to upgrade technology and help build future sales and profits. In the short run, though, this approach may lead to higher monthly costs without any of the future benefits. This increase in monthly costs will lower profitability and therefore lower business value. In addition, new equipment declines in value very rapidly in the first year or so. Thus a buyer will see the lease as upside down when considering the value of the underlying equipment and will want to take this into account when valuing the business.
Age of Equipment: While most successful companies upgrade equipment on a regular basis, some shops tend to hang on to older machines longer. For these companies, profits can look much better during periods when equipment purchases are at a low point. If you are considering buying a shop with a lot of older equipment, you need to take this into consideration when determining operating costs. Typically the average depreciation and equipment lease costs run about 7 to 8 percent of sales. If the company you are considering has equipment costs much lower than this level, I believe you need to calculate the potential costs once you have upgraded to more current equipment. You then need to use the revised cost figures to determine company profitability.
In addition to the above factors, following are some Thing to Do and some Things Not to Do when getting ready to sell your business.
Things to Do
Reduce operating costs: As covered in Larry’s book, How Much Is Your Printing Business Worth?, the value of any business is based on the assets included and an appropriate multiple of earnings. In quick and small commercial printing companies, a good rule of thumb is that the excess earnings (earnings over and above a reasonable owner’s salary and return on assets) can be multiplied by about four when calculating the goodwill portion of the business value. For example, if you could improve productivity and reduce staff by just one-half of one employee, you could reduce payroll costs by perhaps $20,000. This reduction in costs could increase business value by about $80,000 (four times the annual cost savings). Knowing this figure should give any seller great incentive to lower costs prior to putting the business up for sale.
Clean up the shop: Although shop appearances might not cause financial statements to look any better (though a better organized shop might very well be more profitable), it could well be the factor that convinces a buyer to make the purchase. Take a look at your shop from a buyer’s perspective, both inside and out. Does it have good curb appeal, or does it look shabby and outdated? Is your production area clean and well organized? These factors can be very important to buyers, although sellers often overlook them.
Put together at least three years of increasing sales and profits: As mentioned earlier, a good profit trend can be very beneficial in getting a high price for your business. With this in mind, it’s never too early to get your business in good financial condition for an eventual sale. At least three years before attempting to sell, you need to concentrate on building a positive trend in sales and profits.
Things to Avoid
Don’t move to a larger space with greater expense: Shop relocations are expensive and can be disruptive. A move generally should not be undertaken if a sale of the business is planned in the near future. It may take several years to increase sales enough to overcome the higher expenses.
Don’t expand your outside sales efforts during the year or so before the business sale: No matter how successful outside sales may eventually become for your company, it is almost always a cash drain in the first 12 to 18 months. As a seller, you don’t want to have to tell a buyer that conditions will be better in the future. Buyers don’t want to hear promises. They want to see results.
Don’t start a large ad campaign near the planned sale: For the same reasons as discussed when hiring outside sales reps, the cost of a large ad campaign will generally take some time to be recaptured. In the meantime, these costs will depress your profits.
Summary
It’s never too early to get your business ready to sell. You don’t always have the luxury of selling when you want to, and unfortunately ill health and other factors can force a sale sooner than you would like. In those cases, time will definitely work against you. Without time to plan for a sale, the price you get will almost surely be much lower than you would want and lower than you could have otherwise received.
So, what are you waiting for? Whether you plan to sell in two years or 12 years, I strongly recommend that you consider the points discussed in this report and work to improve the value of your business. Do it now! Not only will you be better prepared in case you have to sell suddenly, but you will also reap the current benefits of a more profitable operation. If you can reduce costs by $50,000 per year, you will be able to enjoy this amount each year and then realize at least another $200,000 when you sell.
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Copyright 2013 by Larry Hunt Publications. No part of this report may be copied or reproduced in any form without the express written consent of Larry Hunt Publications. Material presented in this publication is based on the best information available but cannot be guaranteed for completeness or accuracy. To subscribe, contact Larry Hunt Publications, P. O. Box 1269, Berryville, VA 22611 – 540-336- 3360, Fax - (888) 345-3860, email:dirck@larryhunt.com, web site: www.larryhunt.com. To contact Dirck Holscher, call 540-336-3360 or email dirck@larryhunt.com.