Editor's Note: Below is an article about printers buying the accounts of other printers, rather than acquiring the other company entirely. This article was written for Larry Hunt's Color Copy News, but the idea would apply to the reprographics industry as well. The article is reprinted with permission. If you enjoy it, please consider subscribing to the excellent Larry Hunt newsletters, http://larryhunt.com/
Introduction ... Buying accounts - an alternative to the purchase of a going concern - continues to be of interest to our readers. Here is a discussion of why this approach has become more popular for both buyers and sellers. The first two comments below present the advantages of this technique from the seller’s perspective. In addition, a reader shares his experience with buying accounts, discussing both the deals that worked and some that didn’t.
Rationale for buying accounts: Printers buy accounts for a wide variety of reasons. Here are some of the factors that motivate them to purchase accounts. As a seller, you may need to remind your potential buyer of some of these advantages of buying your accounts:
• The cost of winning new accounts in slowly growing markets is substantial
• You need to be aware of the total cost of winning new accounts, including the following:
• The cost of advertising, direct mail and other marketing costs
• The cost of a sales representative’s salary, plus commission and benefits
• Extra customer-service and sales-management expenses
Specific advantages of buying accounts that the seller can emphasize:
• You have a diversified account base covering many industries.
• Your accounts pay on time and are financially sound.
• Your accounts are profitable, based on the profitability of your company.
• Many of your accounts have strong growth prospects.
• The buyer will be able to offer other services to accounts that you don’t provide.
• The buyer can bring work in house that is now vended out.
• The buyer can experience better capacity utilization.
Reader’s comments on buying a book of accounts ... “Conceptually, the issues are pretty much the same, whether you are considering a purchase of accounts only (book of business) or a purchase of a complete turnkey operation.
“One approach is to use the concepts in the book by John Stewart and Larry Hunt (Print Shop For Sale) about buying a business. The concepts of valuing the accounts are similar. The numbers just need to be modified to allow for the “accounts only” method of purchase. I would measure gross margins and find a multiplication factor that relates to that approach (easier said than done).
“I have discussed possible book-of-business acquisitions with seven to eight businesses over the years but have closed only two deals. Whether selling just the accounts (book of business) or the entire assets/company as a going concern, sellers always think their businesses are worth a lot more than buyers do. This is the fundamental stumbling block.
“Sellers like to point out that by reducing overhead, the buyer can make “lots of money,” despite the fact that the seller never made that kind of money. There is some truth to the concept of reduced overhead, but it is presumptuous to think that a buyer can make more money from new accounts that he/she does not know than the seller could from those same accounts, despite a much closer relationship and much better knowledge of those customers.
“The biggest issue is the question of how much of the business will remain with the new buyer. Obviously lots of factors are involved.
• Location
• Strength and nature of the relationships
• Service
• Pricing
• Types of customers (walk-in, commercial) • Other factors
“When buying a book of business, I have been told by others to expect to keep between 50 to 75 percent of the business, depending on the above factors. This makes sense, as I believe that if I simply moved our location across the street (no ownership change), a loss of 10 to15 percent of business could occur, since customers are creatures of habit, and it does not take much for them to go elsewhere.
“These percentages also seem to be in line with our experience on our two acquisitions. In the first one (about five years ago) we kept about 55 percent of the business. In the second purchase, made in 2014, we are running at about 60 percent. In the second case, we acquired another business within our franchise network. As a result, I think it was easier to make the transition. When customers call, they still hear us answer the phone with the same business name. Our invoices look the same, and we use the same business/estimating software.
“We have made an effort to keep pricing about the same as the seller used to avoid irritating customers. We are still providing free pickup and delivery, despite being 30 miles away from some of these “new” customers. We were friends (buyer and seller) for many years, which made the due diligence easier. Yet despite these similarities we are “only” keeping about 60 percent of the business.
“Let's assume that the book of business being considered is $300,000. But based on my thoughts above, I can expect to keep only about $180,000 of that business. That volume difference has a bigger impact on the value of the business than most other factors, such as the multiplier referred to in John and Larry's book.
“So from my perspective, the best/fairest way to do these deals is with a contingent payout. Some money is paid up front with a percentage of sales for the next two to three years. Ten percent should be a reasonable percentage, as any more will impact shorter-term profitability too greatly. That way we don't pay for business that does not transfer. And if we can add incremental business to some of the acquired accounts through better service and more capabilities, the seller can get some additional payout. The contingent payout also keeps the seller vested in the success of the transfer by working to introduce the customers and resolve any outstanding issues, or the seller may be working for the owner for a period of time.
“So let’s look at an example. That $300,000 book of business is expected to yield me $180,000 per year. Let's assume that we agree to pay $20,000 up front and 10 percent ($18,000/year) for three years. That will add up to about $74,000 over the three years.
“My first deal was all cash up front because the seller did not want to wait for payments. But I used this approximate formula and discounted the cash payout accordingly.
“The problem is that buyers think that they generate perhaps 70 percent gross margin on $300,000 (not 70 percent of $180,000). So they think that the gross margin of $210,000 is a realistic number, even though they made little if any money other than a ‘living wage’ from the business.
“So let's assume that we agree on $20,000 down plus 10 percent of sales for three years. We calculate our expected payout (the value) at $74,000, but the seller thinks that the value should be 50 percent of sales ($150,000) or one year of gross margin ($180,000). Therefore it takes a committed seller with realistic expectations to get a deal done.”
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