Date: Wed, 3 Jun 1998 06:26:28 -0500 
Subject: Crouser Report #191; May 31, 1998, Part 1
To: martin@lata.net

Crouser Report OnLine Copyright 1998 Thomas P. Crouser, Sunday, May 31, 1998 -
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*****
Crouser Report #191; May 31, 1998
Urge to Merge
Transmitted from 100 degree Dallas, Texas
*****
INDEX: Urge to MERGE is on a lot of tongues these days. One reader asks and we
respond to several questions about it. Dave asks about MAIL Lists and
desirable data. Chuck wonders what the effect of consolidation could have on
his son's future running the business. Howard asks a follow up question on
Charitable DONATIONS. A recent client wrote asking a number of questions. We
reproduce some of the more general topics for your information such as
VACATION Policy
And Calculating BILLABLE Hours. Sam's owner wants to sell him the shop. Sam
asks us about Buying a PRINT Shop. Craig gives us his recent experience with
Shop HOURS and Closing Time. And then there is the Internet, a.k.a. jokenet.
Yes, I get the pass along jokes just like you do, but now and again, there is
one where strikes home. So, here it is. It's How to Know when you have
finished Your MBA. It's from my smart mouth friend in North Carolina. You'll
find all these stories in this edition of the Crouser Report Online.
***
Travelog: This week: our 1998 Production Management Conference for clients,
June 3-6th in Pittsburgh. Then, it will be on to the Signal Graphics
convention in Vail, Colorado on June 27th; the NAQP Print Image meeting and
show, Chicago July 23rd to 25th; and then our 1998 Print Shop Sales Conference
for clients, August 5th - 8th in Pittsburgh. Hope to see you soon.
***
Urge to MERGE

A reader writes:  Under what condition or in what situation is considering a
MERGER a good and logical idea? Conversely, when is a merger a bad idea? 

Okay, here goes. It's good when the remaining entity can prosper easier,
better and faster. It's bad when it can't. Two struggling mediocre companies
merging rarely make a really strong one, although I guess it's possible. I
just don't see it a lot. Usually one company is stronger financially and
operationally than the other.

What are the main magic ingredients that will make a merger more likely to
succeed? 

By merger, I assume you mean a merger between tactical buyers and that two
prime families would now live out of the business rather than one. If so, the
magic lies in significant enough gross sales to allow both families to
prosper. In printing, I see that being about $1 million per prime family
living out of the business. Why? That should generate some $200,000 income
before owner's compensation. I see most folks earning that much not worrying
too much about earning more. According to Stanley and Danko (Millionaire Next
Door) average millionaire earns some $131,000 per year.

So, if you merge two $300,000 shops, then I would prefer to see one set of
owners retire.

 What are the most common causes of failure in merging operations? 

My guess is people and the lack of cash. From what I have seen, there are
people within the shop attached to the customers. It is extremely important
that you assure these people continue, at least for the transition period.
Usually, these people ARE NOT THE OWNERS! How come? Owners have usually
retired in place and just aren't relevant by the time they sell. Who is
relevant? The CSR or salesperson that has been doing the real work with the
customer. So, merge and have these people walk and there are problems with the
merger.

Merging two struggling cash-strapped businesses usually doesn't produce the
desired results either . . .although I can say that we don't have enough
mergers to really be able to have common causes of failures in the industry.
Maybe this will be clearer in the future.

 How many different ways are there to merge an operation - from alliances to
partnerships to new incorporations? 

Generally a merger is a pooling of interests. Two entities become one.
Anything other than that - someone would buy. You pointed out in your earlier
message several tax-related potentials. So, talk to your local professional
accountant about the tax implications of your specific situation. I think that
would guide you. Hope this helps. Tom
*****
Subj:   MAIL Lists
From:   Dave
To:     tomcrouser@aol.com

Tom, you have talk about mailing list and I was wonder when you order a list
what exactly I should ask for.  I have collect some 1400 (names/addresses) so
far but I have many more to input that I have collect.  But was thinking about
buying a list, but I don't know what to ask for.  I don't what other printing
companies (use.)  Also, these list companies will only let you use it one time
(I think).  I enjoy your articles; I have your book.  We have set up or
financials like yours (I would like to fax you one and see what you think). I
would consider joining one of your groups if I think I can afford it.  Tom I
have been with you since I open January 1991 you have been a great HELP!
Thanks again I look forward to hearing from you. Dave
***
Dave, we assist printing companies with just the dilemma you describe and for
the reason you describe - most of us really don't know what to ask for nor do
we know how to get it, what form, etc. Well, Clark Workman in our office at
(304) 342-5100 or fax (304) 342-5187 handles this and he would be glad to chat
with you.

That said, here's some general information. We help provide a database of
businesses in a computer format (PC or Mac) and they are yours to use as many
times as you desire. In fact, since the addresses you buy have a created date
attached (a born on date for my friends in Atlanta), you can then purchase
all the new additions every year or so. And, since you are using address
correction on your bulk mail, you get the changes, etc. on the list provided
to you by the postal service. Clark can also provide you with an inexpensive
PC mail list manager program to handle the data if you don't have one.

What's the first step? We get a business count and some summary information on
the businesses in your area. There is no cost or obligation for this. And that
way you can tune your purchase to your budget. Now, your area can be by zip
code, by county, or even by a certain distance from your specific address.

Now, what kind of data should be included? I usually recommend: contact name;
business name; address and zip; sic code; telephone number; fax number;
employee size; sales volume; year 1st appeared in yellow pages (age of
business); office size; and credit rating.

Anyway, Clark can help you with all of your questions. The minimum purchase is
$200. You can make several minimum buys and then later add on another minimum
purchase if you wish. Anyway, call Clark and he will be glad to assist you in
this matter. And thanks for the kind words. And while we're on the subject of
mail lists, here's a related question.
= = =
Tom, I am working on mailing list. For those companies without a named
contact, what do you suggest for a to line? Printing buyer, Office
Manager, Manager, Marketing Director, Head Honcho? Wondering. 

I prefer to use the phrase printing buyer if you use a to line without a
specific name. As you can see above, I usually buy a name with the business.
But, then, work your list so you know who the buyer actually is and direct
your piece to their attention. How do you find out? Sales calls and
telemarketing are the main ways. Hope this helps.
*****
Subj:   Future of Printing
From:   Chuck
To:     TomCrouser@aol.com

Tom, The largest (major Texas City) printer was just purchased by Mail Well.
This is the second printer in two months that has been purchased.
Consolidation companies now own three of the largest printers in town.

Our three sons did not show much interest in the printing business as they
were growing up and we did not push it at all. We thought they would be
doctors or lawyers. Now two are showing some interest, one of which is saying
he wants to come into the business for sure. Is this a good idea? I get a
little concerned about the future with all of the consolidation going on. What
are your thoughts? Thanks, Chuck
*****
Consolidation could only enhance the future of the boys, as consolidation
will make well run and financially stable printing companies more valuable,
not less. It would also give them a bigger future than a smaller one. However,
as is always the case, poorly run printing companies will fail. But, isn't
this true in anything the boys could get into? (By the way, poorly run
consolidators will fail also and take a lot of retirements with them.)

I think it's a great idea for them to consider coming into the business and I
don't think consolidation has a very big part in the decision. And, by the
way, if you are so worried about the future, how could you sleep at night
after purchasing that four-color press? Tom
*****
And following up on our charitable donation comments of two weeks ago, Howard
asks:

Subj:   Charitable DONATIONS
From:   Howard
To:     tomcrouser@aol.com

Dear Tom: We give non-profits a 10% discount (we show it on the invoice) is
there any way we can deduct this as a charitable donation? Howard
***
Nah, you didn't book it as a sale. At least that's what I understand you said.
You show total sale of $100, then a $10 discount to net out a $90 sale. What
happened to the $10? If it's in your income statement at all, it's sales
returns and allowances (it's an allowance) or sales discounts, etc. So, you
are deducting it just as if you kept the sale at $100 and deducted the $10 as
a charitable donation. If it's not in your income statement, you are just
recording the real net $90 sale. Either way, you can't deduct it twice. Mother
IRS doesn't like that. Besides, if it were a charitable donation (rather than
just a sales allowance you could potentially give any customer) you would have
to keep track of each one all year and report it, etc.
*****
A recent client wrote asking a number of questions. We reproduce some of the
more general topics for your information.

VACATION Policy

 6) You mentioned that the policy of forfeiting vacation for a quit without
notice is a violation of the Fair Labor Standards Act. This doesn't seem
reasonable since no vacation benefit is required at all! 

You're right. No vacation or holiday benefit is required under the Fair Labor
Standards Act. However, the issue is whether you grant one and, if you do,
when does the accrual occur? Once accrued, you can not arbitrarily take it
away because a person didn't give you notice.

 You don't happen to have the wording they use for this, handy, do you? I
guess I could modify it, but the policy I have of earning vacation each month
seems to be much more fair than getting it all on your anniversary and losing
it all because they fired you the day before! 

Well, you can accrue vacation time on a monthly basis (some states like
California requires it) or you can do it yearly. Either way, once accrued, you
can't arbitrarily take it away.

Wording would be something like this:

If an employee voluntarily quits or is dismissed, all vacation benefits shall
be forfeited except for the amount of time already accumulated. Vacations are
cumulated at the end of the period. One week is accumulated at the end of one
year's employment. Termination prior to one full year's employment would mean
no vacation had accumulated. Two weeks are accumulated at the end of the
second consecutive year of employment. Termination after one full year's
employment, but less than two, would result in payment of one week's vacation
benefits assuming the employee had taken none of the vacation time.

Calculating BILLABLE Hours

 8) I am going to add a feature to my estimating and management program to
allow me to generate a report that will show how many billable hours we had
over a year, I can compare to payroll hours and calculate the production
efficiency. I'll only compare production payroll hours. Does that sound like a
good way to do it? 

You will be calculating your price efficiency, not your production efficiency
using this method. Not bad, but just won't show you what your people are
doing. The report you are discussing would take sales, say for typesetting,
and divide that by some billable rate, say $70 hour. You then would think
that's your billable hours, but it is not. No, a full job cost system must be
used to really show worker efficiency. All you are showing is what you sold
the hours for, divided by an arbitrary rate. Theoretically, they should be the
same, but in the real world the owner sells for less so it is not a good
measurement of production efficiency. It is a good measurement of price
efficiency only.
*****
Buying a PRINT Shop

Had a recent letter about how much to pay for a print shop. The question isn't
an easy one to answer. We do have a couple of chapters in my book, Dead
Printer Working about the subject. But, the only way to really get at the
value is for someone to do a business valuation, a service we do for both
buyers and sellers. With that in mind, let's dive into this message.

In a message dated 98-01-22 10:56:05 EST, you write:

 I have the opportunity to purchase a print shop from the man I have been
working for the last 8.5 years. I am very interested, but I have a concern.
The owner has only shown me last year's financial statement. 

Well, this might be enough to get me interested, but you would need the last
three to five years statements tied into income tax returns for a final
valuation.

Average net sales are about 340k for the last 5 years - he suggests that the
way he determines the selling price of the business is 80% of net sales. 

This, in my opinion, generally will result in too high of a value for the
business.

 He will discount the selling price to $255K - there is a 20k down payment
and he will finance the rest at NO interest for a period of 5 years to 10
years (my choice). 

Terms usually are 20-25% down so the down payment he is offering is good for
you. Of course, we don't know if the $255 K price is. But, choose 10 years,
it's a no-brainer.

 The only problem is the difficulty in getting tax returns. We are a C Corp,
so I think he tries not to show profit to avoid corporate income tax - the
deal sounds great, but the tax return issue is major - he thinks he's shown me
enough (1 Yr. financial statement & my 8.5 years experience). This has the
potential to be the deal breaker. 

Then let the deal die. Better to have a dead deal than be a dead printer. I

would never buy it under these conditions. I don't know if something is being
hidden, but I would want to know what the real issues are. Financials can be
restated during the valuation process to reflect owner discretionary expenses
(remove them) in order to get the value. But you still would need several
years of experience, not just one.

 What is a simple way to determine selling price? 

Hire a professional to assist you with the valuation. This could be a CPA
experienced in this area or a firm like ours. We have done a number of these.

 Do I take the deal on trust?  Never.

If I push for his returns, should I be prepared to walk away? Please help! I
can't decide if he's doing me a great favor or screwing me - last year owner
comp 55k (according to financials)

Probably not trying to deceive you, but is probably a little too sensitive to
get a real deal going unless he is willing to disclose real information. I
think you have a good opportunity here - but you can not enter into this on
trust alone. Hope this helps. I will have one of our staff call you to chat
about your situation. Tom
*****
Subj:   Shop HOURS and Closing Time
From:   Craig
To:     tomcrouser@aol.com

Tom, I just wanted to add a postscript to the discussion several reports back
concerning closing times. We had been open 'til 5:30 for all seven years we've
been open. We thought, like a lot of shops, that we would get people too busy
to get out during the day, corporate on their way home, etc. What we actually
got was nickel & dime sales, frazzled nerves and late for dinner. Despite some
resistance from others in the shop, I said NO MORE! I used your reports as a
reinforcement (see, someone who might actually know something thinks so, too)
and guess what? No difference in sales $, staff says they like it a lot
better, the day isn't quite so long, and I'm not missin' any meals! I wanted
to relay this because I felt like there is probably a couple shop owners out
there who saw those reports on this subject, thought about it, and mistakenly
decided to continue those longer hours. We have made other changes in the shop
like this before (dropped UPS, dropped office supplies, etc) and I can really
say it never had the negative impact we feared and always had the positive
result we hoped for. Don't continue a losing strategy just 'cause you started
it once upon a time. Life is too short! Thanks Craig PS See y'all in Dallas
(this) week!
*****
Thanks for the comments, Craig. And, this was my real point from the beginning
of our discussion (Crouser Report Online, #172 - January 18, 1998; #175 -
February 8, 1998; #176 - February 15, 1998; and #178 - March 1, 1998). For
those of us who are in normal, regular print shops, the concept of staying
open until 5:30 everyday is a martyr thing. Don't do it.

Here's another delayed message on shop hours.
*****
And then there is the Internet, a.k.a. jokenet. Yes, I get the pass along
jokes just like you do, but now and again, there is one where strikes home.
So, here it is. It's How to Know when you have finished Your MBA.

Subj:   Fwd: FW: YOU KNOW YOU HAVE FINISHED YOUR MBA WHEN
From:   TarHeel
To:     TomCrouser

        YOU KNOW YOU HAVE FINISHED YOUR MBA WHEN:

 1. You ask the waiter what the restaurant's core competencies are.
 2. You decide to re-org your family into a 'team-based organization.'
 3. You refer to dating as test marketing.
 4. You can spell 'paradigm.'
 5. You actually know what a paradigm is.
 6. You understand your airline's fare structure.
 7. You write executive summaries on your love letters.
 8. You think it is actually efficient to write a ten-page paper with six
other people you do not know.
 9. You believe you never have any problems in your life, just 'issues' and
'improvement opportunities.'
 10.     You know every single piece of clip art in PowerPoint.
 11.     You calculate your own personal cost of capital.
 12.     You explain to your bank manager that you prefer to think of yourself
as 'highly leveraged' as opposed to 'in debt'.
 13.     You can explain to someone the difference between 're-engineering',
'down-sizing', 'right-sizing', and 'firing people'.
 14.     You actually believe your explanation in number 13.
 15.     You refer to your previous life as 'my sunk costs.'
 16.     Your three meals a day are a 'morning consumption function', a
'noontime consumption function', and an 'evening consumption function.'
 17.     You refer to your significant other as 'my co-CEO.'
 18.     Your favorite stories begin 'Bob Jones, VP of Marketing, sat at his
desk and stared out the window...'
 19.     You start to feel sorry for Dilbert's boss.
 20.     You believe the best tables and graphs take an hour to comprehend.
 21.     You refer to divorce as 'divestiture.'
 22.     Your favorite artist is the one who does the dot drawings for the
Wall Street Journal.
 23.     None of your favorite publications have cartoons.
 24.     You account for your tuition as a capital expenditure instead of an
expense.
 25.     You insist that you do some more market research before you and your
spouse produce another child.
 26.     At your last family reunion, you wanted to have an emergency meeting
about their brand equity.
 27.     You decided the only way to afford a house is to call your fellow
alumni and offer to name a room after them if they help with the down payment.
 28.     Your 'deliverable' for Sunday evening is clean laundry and paid
bills.
 29.     You use the term 'value-added' without falling down laughing.
 30.     You ask the car salesman if the car comes with a whiteboard and
Internet connection.
 31.     You give constructive feedback to your dog.

Until next week, may all of your trails be happy ones. See everyone at our
Production Management Conference in Pittsburgh this week. For the third year,
it's a sell out and we have a bigger room!

Tom and Pamela Crouser