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Gonna Sell This Business!

Copyright Thomas P. Crouser, December 14, 1995 Crouser & Associates - Helping Printers Prosper Since 1985

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Originally transmitted from Charleston, WV

I received an interesting letter from Dave Oswald, Vice President, Development of Insty-Prints, Inc. the other day. In his letter, he references the September 1995 Crouser Report on selling the business. Since we started our Crouser Report OnLine in October, many of you have not received a copy of the September edition. So, here it is. I will forward Dave s comments in a few days. Tom

September, 1995

Dear Friends. . .

I m outta here. My son and I have both agreed that we no longer want to be in the printing business. We re both burnt out. You helped us before, now help me sell this business. Not an uncommon sentiment nor an unnatural desire. However, there s more to selling a business than just having it up to here and calling a broker.

Your first priority is to understand one does not sell the business based on frustration and expect to get a premium price. Sell out of frustration and you loose.

Selling the business cold (to someone unknown to you) at a premium price requires a deliberate strategy for you must sell when everything is going right, not when it is going wrong. Unfortunately, too many of us feel like the invincible 20 year old when everything is going right and see no reason to sell.

I assured my friend that I would be glad to help and he sent me six years of financial statements. I did a quick comparison and saw a high cost of direct materials (which was increasing) and a dramatically increasing cost of labor. This current year saw a drop off in sales to boot, which dropped his income before owner s compensation to about 8% on $300,000 of sales. That s right. The owner is now earning about $24,000 per year. He could get a job and do better, which is why he wants to sell the business.

Additionally, the printer had given consideration to selling previously and had some evaluations made which concluded he should sell for about $200,000. One look at the current income statement and the assets which were being passed along and I projected that he would get no more than $100,000 from a knowledgeable buyer (you can get the most money by selling to an unknowledgeable buyer).

But, and you can probably guess this part, This thing is too valuable to sell for $100,000. Not based on your current performance. Sales have dropped, income has dropped, and by the way, the creeping increases of direct materials and labor as a percentage of sales over the past few years clearly indicates you have a pricing problem. Pricing problem! Let me tell you about the customers around here. They won t pay any more for printing than what I am charging.

Poor printer. Doesn t want to sell it for its present value, but doesn t want to fix it either. Hum. Okay, it appears there are two choices. Put it on the market as is and assume you will receive a depressed price. The second alternative is to fix the problem, then sell it. Of course, if the problems were fixed then who would want to sell? That s the dilemma facing this printer and only he can make this decision.

At What Price?
What price should someone expect for their business? It s all based on earnings. You are only selling the ability to earn a stream of income. What is that stream? Most look at five years of financial statements. If you have earned $100,000 per year for the last five years, then that s a good starting point. If you have earned $5,000, $25,000, $100,000, $21,000 and $4,000, then not only is the stream erratic, but the trend is down. Even though the last example averages to $31,000, don t expect someone to use that number for earnings because the fact is you are only earning $4,000 now. The buyer buys now not in the future or in history.

Well, but all the buyer would have to do is reduce overhead, increase prices, fire someone and get a sales program going and this would be a great business and earn lots of money. Right, Groucho. If that s so easy to do, why haven t you done it? Better yet, why should I pay you $100,000 for an antique car which is rusting away in your back yard? You would say, all I have to do is fix it up and it will be worth $100,000. I say, it s worth $50 as is where is. What I do with it is going to go to my benefit, not yours.

Well, how does one use earnings to appraise a business? Take the business earning $100,000 for the last five years. We would discount earnings for wages for a person filling your role. Don t be disappointed, but $30,000 a year probably would do it. So, deduct $30,000 from $100,000 and we have $70,000. Now, in order to get $70,000 worth of income from a bank account, we would have to be earning 7% on $1 million in income. Now, which is safer? $1 million in the bank earning 7% interest or $1 million in a printing company where you have to work to protect your investment? Obviously, the bank is a surer bet so it would be something less than $1 million.

The buyer s first benchmark is to determine how many dollars earning 7% (or the current rate) in a secure account would they be willing to trade for your business. If you were buying this business, would you trade $500,000? You would be giving up an absolutely positively guarantee of $35,000 income per year for a gamble to oversee a business and earn an additional $35,000 plus $30,000 for your work? Eh. Maybe, but probably not is my guess. This gamble will really have to be attractive.

However, many may give up $250,000 of secured investment ($17,500 of yearly income) for an opportunity to earn that plus $52,500 more and $30,000 for their work. Well, you get the idea. Where the numbers fall depend upon the buyer s risk adversity (risk taker or risk adverse) plus their desire to actually do this deal (be a printer). Find someone who has motive to do the deal, ability to pay, and is a risk taker and you will receive a premium price (like the Doctor who bought a print shop in Tennessee as a job for his son).

A 1994 study of small business sales by Asset Business Appraisal of San Diego and quoted in Inc. magazine (November 1994) found businesses selling for less than $500,000 to go for 2.5 times earnings. The selling price also, coincidentally, represented some 56% of earnings and was about 85% of the original asking price.

How Not To Evaluate Your Business
The same article (The 8 Dumbest Ways to Try to Sell Your Company) also listed the 8 dumbest evaluation methods. They are basing the value on:

And, now, let me add one of my own:

There are several techniques which are used to support an evaluation as there are several methods of evaluating real estate. However, using earnings is the most proper way to establish a fair value. Other methods then can be used to support this method.

Happy Trails,
Tom Crouser

P.S. The success of any sale is based not upon what the customer believes, but what we believe. Anonymous.
1996 CROUSER GUIDE TO ESTIMATING PRINTING IS NOW SHIPPING!
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Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.
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