Cleaning-up Your Balance Sheet

The following comments are taken from a recent post to a list serv to which I subscribe. It occurred to me that there might be a wider audience for these comments and thus they are posted below.

During the course of some recent valuations I noticed a couple of things regarding balance sheets that bothered me.

In one situation the owner (either in the beginning or in recent years) had loaned the company money, and thus this loan now shows up as a long-term liability. That's not unusual or bad by itself - It happens all the time. However, the problems with this loan, as I view it, were really two-fold:

• First, it decreases the net worth of the company on your balance sheet and it is very, very unlikely that it will be an item that will ever be recaptured during the future sale of the business. These types of loans are rarely ever cleaned off the balance sheet, and even CPAs and accountants rarely even mention these types of loans. Remember, if and when you ever sell the typical buyer is not going to be willing to pay off debts you should have taken care off long before the settlement.
• The second concern is an issue of taxation and that is: Given the choice of paying yourself a paycheck of say $5,000 or paying down the company's $5,000 note that it owes you the latter would be preferable since it is not subject to FICA and other payroll taxes, since it is the repayment of a loan. Not only do you save in taxes but your books are cleaned up as well. Of course, ideally, you would like to do both (take a paycheck and have the company pay off its note to you) but if you could only do one or the other (unless you have unlimited cash of course) paying off a company note to you would be the better move, at least in my opinion.
  

By the way, during the course of one recent valuation, even after deducting some of these personal loans made by the owner to his company, the company balance sheet still showed a negative net worth of $(75,000). Despite dismal numbers both on his balance sheet and and his profit and loss statements, the owner was adamant about not even wanting to discuss any offers under $100,000! Amazing. This owner is living in a dreamworld. For the past 5-6 years, this owner has been paying himself a salary equivalent to approximately $14-17 per hour and after that the company showed virtually no profit whatsoever. Simply put, no profit (excess earnings) no value. It is almost as simple as that!

Did not reach 300lb Goal

For those who were wondering whether I made my Christmas goal of benchpressing 300lbs the answer is "no." I got close, but then was forced to go on a diet by my wife just prior to a Thanksgiving Week cruise. I lost 13 lbs. on some stupid diet and have kept most of it off (down to 188), but with that loss I lost a bit of strength as well.... On a good day I can press 280-285 but not the 300lbs I had hoped. Well, assuming I live, I have the next 4-6 months to reach that goal. The nice thing about weightlifting is that there is always a new goal to set and reach.

Many Owners Violate Wage & Hour Regs.

I've just finished a column for the Feb. 2009 issue of Quick Printing magazine titled, "Don't Let 'Salaried' Employees Read this Column." Much of the column was prompted by a recent consulting visit as well as discussions of this topic on Printowners, a list serv to which I subscribe. You can find out more about this list serv by visiting: http://www.PrintOwnersList.com.

In the briefest of summaries, the article notes that a title or pay level is not enough to avoid paying someone overtime. Simply giving these employees the title of "manager," "administrator," "production manager" or "creative professional" does not by itself allow you to avoid paying time and one-half for all hours more than 40 hours per week.

Just because you know of another business where this is done doesn't make it right or legal. There are many professions and industries that have been granted exemptions from the overtime requirements of the Fair Labor Standards Act (FLSA) but printing is not one of those industries. A careful read of the regulations is a must if you want to avoid future audits and fines. Remember, it only takes one disgruntled employee to launch a probe by a state FLSA division or department.

If you have chosen, for whatever reason, to place an employee on an annual salary and that employee occasionally works more than 40 hours per week the chances are better than 50-50 that you are required to pay them overtime. If you don't you are most likely violating the law. Once again, titles or even the pay level have little if anything to do with whether that employee is exempt or not.

There are six primary job categories under FLSA regulations that are exempt from overtime requirements. They are:

1. Executive Employee
2. Administrative Employee
3. Learned Professional
4. Creative Professional
5. Computer Employee
6. Outside Sales

At first glance, you might look at these exempt titles and conclude that you are safe, but a closer look at the requirements for each will most often uncover requirements that would dis-allow your classifying employees as exempt. Typesetters and graphic artists would rarely qualify under eithe the "creative" or the "computer" categories. Press operators who both manage and run a press themselves would rarely qualify under the regulations. Managers who also fill-in and perform many of the same tasks of those they supervise would also not be considered exempt.

For a great article on this subject visit: www.flsalaw.info/flsa_coverage_exemptions.htm

Limiting Union benefits As Well

Much is being said these days about various bailout packages for the Big Three automakers, but a lot less is appearing regarding the UAW's obligations in resolving this current crisis. One news article noted recently that, "Even if lawmakers return to vote, they are likely to insist on numerous conditions on any loans. One possibility is to seek a partial ownership of the companies. Another is to limit salaries of top executives. A third is to prohibit use of the funds for any lobbying." Not a single mention about what we should expect of the unions and their members, past and present. One of the many stipulations being talked about is that the Big Three should present a detailed plan for turning around their respective companies before receiving a loan. What about a stipulation for the unions as well? Did we forget their role in all of this?

The one thing conspicuously absent in almost all of the discussions these days in is an equally stringent call for rollbacks or significant changes in union contracts. At the heart of this entire mess are the high costs of production, and the single largest cost facing Detroit are its labor costs, direct and indirect, as well as short and long-term obligations. The fancy word for the latter is "Legacy Costs." Regardless of what you call it, no company can survive indefinitely if must constantly bank more and more of its meager earnings or profits to fund future obligations.

Sure, management is clearly at fault for giving in to what in hindsight were unreasonable demands, and now it's time for Peter to pay Paul, and that means reexamining the logic and soundness of every single "Legacy" benefit promised to workers in the past 20-25 years. If we don't do that, then indeed it is quite possible that this country could collapse into something most of us dare not even mention.

P.S. So that no one misunderstands my motivation in writing the above, let me make it perfectly clear that I am not anti-union. In fact, in my early days as a newspaper reporter I actually saw the need for a union where I worked and I proceeded to establish the very first Newspaper Guild established in Northern Virginia. Nonetheless, abuse of power can indeed be a dangerous thing and there has been an abundance of abuse within the UAW!

Buyer Offers Advice to Sellers

I just heard from my good friend who is still trying to buy a printing business. After giving it a rest for a couple of weeks, he wrote me and summarized his recent experiences. I think his views are insightful and I wanted to pass them along:

"As I evaluated our experience with trying to purchase a business, I realized that in reality, the owners of the businesses we met, forgot that their real objective was to sell the business. They get all caught up in the mechanics of confidentiality, protecting things which in the end, are just general knowledge, and frankly, create obstacles for the purchasers.... They become their worst enemy when trying to sell a business. They treat the potential purchaser as a spy, an enemy from whom they have to protect themselves. As you very well said, and I actually did when I sold two of my businesses, the first people I told, were the employees, and actually gave them a chance to become the new owners, if they would find somebody to finance them. Anyhow, I just wanted to give you this thought."

Even in the worst of times, there will always be qualified buyers interested in buying a printing business, but sellers need to adopt a new and improved attitude that treats potential buyers as allies rather than a spies or individuals wishing to do them harm!

Feel free to provide your feedback on this as well as other comments.

Purchase of Printing Firm Fails

Despite what I thought were my best efforts, my attempts to assist two clients purchase a printing firm in North Florida collapsed earlier this week. The reasons for the collapse were many, but the two key reasons were (1) the seller's apparent lack of enthusiasm in wanting to really get the deal done, plus (2) the dramatic decline in the U.S. financial markets in recent weeks.

When the owner began balking at requests by the buyers to stay on and assist them one day a week for the next six months (something I thought was very reasonable), the deal began to collapse quickly.

Lessons for sellers - If you're going to sell your business you are going to need to "SELL" your business and that means helping the buyers get all the information they need on a timely basis, and being more than willing to help the buyers succeed after the sale. It also means being enthusiastic and that is the last word you would have used to describe this last seller.

You need to be able to provide to the buyers all the financial information they need and you need to do this in a timely fashion if you hope for a sale to go through.

Politics Provides Weightlifting Impetus

I talked to a client today. He had stumbled across my blog and read the article about my weightlifting. He told he me he was amazed at how much I lifted and how much I had increased in a short period of time. "How do you do it?" he asked.

I said, "Simple. I'm a news junkie and love politics, but I get so upset everyday just reading about the candidates and all the lies they are telling, plus the incredible distortions and plain old dirty politics, that by the end of the day when I head for the gym I am so ticked off that my adrenlin has reached massive dosage levels within my body. And, it is amazing what adrenlin can do. Weights that I previously thought were way beyond my capacity (at my age and weight) are now quite easy."

By the way, weight lifting offers you a great sense of accomplishment when you can compete head-to-head with a 20 or 25-year-old without being offered or requiring any handicaps whatsoever.