Small Firms Can Bring In Big Bucks

About once a week I get a call from someone interested in having their company valued. Two weeks ago, it was a 35 year old man from Colorado who needed to have his firm valued. He was going through a divorce and the business was going to be part of the divorce settlement.

“I just want to keep it fair for both of us; no need to stretch the truth or come up with a low number, just give me your best valuation,” he asked. I never told him, but I was extremely impressed by his request to “just keep it fair.”

So what was the bottom line? How much was his company worth?

His company was doing approximately $820,000 in annual sales, and after analyzing three year’s worth of financial statements, net profits, take home salary, his equipment list, and a half dozen other items, I came up with a value of $267,000. He did not seem surprised or hurt that the value came in as low as it did. “It is what it is,” I told him.

It’s now in the hands of the attorneys. At about 32% of annual sales, this firm’s value to sales ratio is a bit lower than some valuations, but not by much.

Values Vary Dramatically

There are great variations in this industry when it comes to valuing firms that are similar in sales. One firm can sell for 35% of sales while another firm can sell for 100% of sales. Many firms don’t sell at all.

About three weeks ago, a friend of mine from North Carolina called. He wanted me to value his firm. Why? Bob has reached the end of his rope—frustrated with his inability to find skilled employees to work in his $950,000 a year business.

Bob would love to sell the business to his own employees, but none of them have expressed the slightest interest. Recently, however, he was approached by two brothers from a nearby town. They have been in printing all their lives and they asked him what he wanted for the business.

Bob is great with his record keeping, and he values his firm on an annual basis, if for no other reason than to keep his statement of personal net worth up to date.

One last thing, Bob has always run his business by the numbers, using the ratios reported for “profit leaders” that appear in NAQP’s biennial Operating Ratio Study. The ratios for Bob’s firm seem like they were copied almost directly from the Profit Leader section of this study.
His numbers are as follows:

• Cost of Goods 24.8%
• Total Payroll Costs (excluding his own pay and benefits) 27.1%
• Overhead Costs 23.9%
• Net Owner’s Compensation 24.1%

Combining these ratios with real world transferable net assets (not those necessarily shown on the balance sheet) valued at $180,000, Bob’s firm was valued at $925,000; one of the highest valuations I have ever personally calculated. In fact, I know of only one other firm in the country that has sold for a slightly higher ratio.

Will the gentlemen he has been talking to see the value in Bob’s business? Will they make a reasonable counter-offer? No one knows. In the meantime, Bob keeps going to work day after day, just hoping for the best.

Small Firm, Big Value

Just before the deadline for this column arrived, I received a call from a relatively young couple in Oregon. The wife called and asked me some general questions. She told me that she and her husband had started their business about seven years ago with a master plan to sell in 10 years.

They are a very organized couple, however, someone has thrown them a curveball and they needed my advice. “What are your annual sales,” I asked.

She said, “$725,000.”

“How many employees?”

“Three, including both of us.”

I almost choked when she said that! “Do you broker a lot,” I asked. I was grasping for justification for a sales per employee (SPE) number twice the national average.

“Very little,” was her answer, as it turned out.

“My God, how many hours do you and your husband work? It must be around the clock,” I said.

“Not really” she responded. “We each work about 50 hours a week and we have one skilled press operator who runs a five-color Heidelberg Speedmaster fed by a CTP platesetter. The press runs most of the day. My husband helps out in bindery and also makes a few sales calls. I work up front doing the billing, etc.

“We charge a lot for what we do and we consider ourselves a very high end shop. We have very little walk-in traffic, and we do a lot of high quality printing for local printers in our area. Even with the recession, we have been very busy.”

Finally, I asked her, “Why are you interested in a valuation?” She said they had been approached by one of their large customers; a printing firm with sales in the $4.3 million range.

“They are a highly specialized digital printing firm, but see the value of what we produce for them and other local printers. And out of the blue they asked us the other day if we would be interested in selling. They seem serious, so we want to get back to them with a price,” she added.

This was the second time within one month that I encountered a firm with such a high value. I calculated their owner’s compensation at 25.8%, and that was after expensing back to the business a fair market salary for one of two spouses.

I valued the business at $690,000, and I advised them that if they had the opportunity to shorten their business plan from 10 years to seven, I would jump at it.

Selling for Top Dollar

You don’t have to be a multi-million dollar firm to sell your company for top dollar. You do, however, have to run your business by the numbers and concentrate on adding value to your firm. And that means a company that can produce excellent cash flow in addition to paying you, the owner, a “living salary.” You can’t sell excuses or potential, only real value.

Key Ratios – This bar chart represents key industry ratios for firms with annual sales in the $600,000 to $999,999 range. Firms in the top quartile can often end up selling for 70-80% of annual sales. Firms falling into the bottom quartile often have little or no value, meaning the owners often just close the doors, walk away from the business, and possibly get 10 cents on the dollar for their old equipment.

This bar chart represents key financial ratios for firms with annual sales between $600,000 and $999,999. Anderson Graphics, is the fictional name for the last firm analyzed in this column.

Note that while their cost of goods was higher than most, their total payroll, even including adjustments made for one of the working owners, was outstanding. Combine that with excellent levels of productivity and you have the makings for a high owner’s compensation, plus a very high valuation in the event this couple wants to sell.

Senior contributing columnist John Stewart owns Paragon Printing & Graphics and is president of Q.P. Consulting Inc. Contact him at 2110 S. Dairy Road, West Melbourne, FL 32904, call 321/727-2444, email [email protected], or visit his website at www.quickconsultant.com.