News and Notes

Cleaning-up Your Balance Sheet

2009-01-02T08:35:00.000-08:00

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

2008-12-23T09:38:00.000-08:00

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.

2008-12-22T07:19:00.000-08:00

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:

Executive Employee
Administrative Employee
Learned Professional
Creative Professional
Computer Employee
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

2008-11-20T13:00:00.000-08:00

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

2008-11-05T09:23:00.000-08:00

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

2008-10-23T06:17:00.001-07:00

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

2008-10-09T14:02:00.000-07:00

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.

I should reach 300 lbs. by Christmas

2008-09-30T20:02:00.000-07:00

You probably think I am talking about gaining or losing bodyweight, but you would be wrong.

I am talking about setting a new personal best record for bench pressing. As some folks know, I enjoy lifting weights and I have even entered a couple of contests just to test my strength against others in my weight and age group.

Of course, when you reach age 64 and weigh-in at 198 there aren't a lot of old men who enjoy weightlifting, so to win one of these contests I typically only have to beat two or three other crazy old men!

Right now, my best bench press is 290lbs which I can handle pretty consistently. Earlier this spring, I was having difficulty with 225lbs so you can readily see the kinds of improvements that can be brought about through a regular twice-a-week training program geared at increasing strength.

My weightlifting goal is to achieve a 300lb bench press by Christmas.

I am absolutely convinced that weightlifting is a sport for just about anyone at any age, and it is good training for the heart, mind and soul. A good, yet modest weight training program can improve cardio, flexibility, prevent osteoarthritis and a myriad of other problems associated with older Americans.

Shedding light on large LED Signs

2008-09-29T19:50:00.000-07:00

Someone asked me the other day about how I liked our LED Sign that we had installed at our business about 10 months ago. Well, to be honest, the jury is out on its effectiveness. On the one hand, we have an average of 8,500 cars per day driving past our business. The sign is colorful, attractive and almost impossible to overlook as you drive by. We heavily promote all aspects of 4C digital, from fast turn-around, to high quality and low prices. So, while I know we are getting the message out it is very, very difficult to measure how effective it is or imagine what business would be like without the new sign. So, that's it in a nutshell. The jury is still out on our $32,000 investment.

Buyers Receive Little Cooperation

2008-09-29T19:47:00.000-07:00

(Deleted by author)

Defending Higher Valuation To Employee

2008-09-04T07:01:00.000-07:00

In the prior post, I failed to note that while the buy-in costs for a 10% portion of the business has risen from $60,000 to $90,000 so has the value of the stock held by the employee. Yes, we are asking him to pay more (based upon our new valuation approach), but his investment has also increased in value by 50% in the past two years as a result of this new valuation. In theory, if not in practice, the employee should be entitled to sell his initial 10% of stock back to the company for $90,000.

As for future valuations, the method to be used should be agreed upon in advance by both parties. One option is to offer a purchase discount to the employee, so while we may arrive at a specific value for the business, the employee may be entitled to purchase shares or portions at anywhere between a 10-50% discount. That would seem to be a reasonable approach to me!

Low Valuation Now Haunts Owner

2008-09-03T11:50:00.000-07:00

A couple of years ago a printer with sales of $1.2 million sold 10% of his business to a loyal, long-time, hard-working employee. The cost of that 10% to the employee was based upon a valuation conducted by one of the two major printing associations.

In round numbers, the original appraisal came in at approximately $600,000 and thus the buy-in price for 10% of the action was $60,000. The owner thought at the time that the valuation was lower than he had expected but he let it slide. Now, it is time for him to sell another 10% but this time he decided to seek another opinion as to his company's value.

When we looked at the numbers, even wearing our "conservative" hat, we came up with a value of approximately $900,000 or 50% higher than the previous valuation. If anything, our valuations generally tend to be lower when compared with other appraisal methods, but this company was exceptional and is one of the most profitable, best-managed companies we have seen in a long time, and consequently we are extremely confident in our valuation.

Obviously, the owner now has a quandary on his hands. It is now time to sell another 10% of the company to his employee and his employee is expecting it, but how is it going to look when he tells the employee that his next 10% is going to cost him 50% more today than it did less than 24 months ago. By the way, the company is no more or no less profitable today than it was when it was first valued. On the one hand it is sort of like changing the rules in the middle of the game. On the other hand, being generous is one thing, but selling your company for 33% less than it is worth is a whole different situation.

The lesson to be learned here is that you should establish a clear formula or method for valuing the company both now and in the future, and both parties should fully understand and agree to this method.

Bad Attitudes Can Kill A Sale!

2008-08-28T14:14:00.000-07:00

The following is taken from my October 2008 column because my blood pressure still goes off the chart every time I remember this incident:

Arrogance – I was on one of the list servs recently and I was talking about the necessity for setting a realistic price for a business. No sooner had I posted my comments, which were never meant to be confrontational, when a fellow list member responded with: (The quote below is exactly how it appeared – it is not a fictionalized statement designed to help tell a story)

“John, if I decide to sell my business I will set a price and if you don't want to pay my price, you can stick in your ear… If someone doesn't want to pay my price I will haul that $%^& to the city land fill, shut the door and forget about it. I'm not required to sell my business based on your formula or anybody else's formula. It's my friggin business and I can damn well do what I want to with it after spending 30 years operating it. I sure as hell don't need some know it all salesman trying to make a buck off my business telling me what my selling price ‘needs’ to be.”

Wow, now here’s a guy with a reasonable attitude, wouldn’t you agree? What a thoughtful and considerate response from a guy whose wife runs the business 90% of the time while he pursues his favorite hobbies. So after all is said and done, this gentleman says he would rather close the doors than listen to a reasonable offer to purchase, one that is based upon sound business valuation practices. Instead, he will let his childish emotions rule the day and along the way ruin his future or what remains of it.

Sellers being Misled by Brokers!

2008-08-18T07:21:00.000-07:00

In the past few months I have been involved with helping a couple of individuals find a fairly priced printing firm for sale. Yes, there are a number of firms on the market, but the problem is most of them are horrendously over-priced.

It is one thing to ask 10-15% more than you think your business is worth, but it's a far different thing to ask 50-100% more than what the business is really worth, and to ask that simply because you don't know any better.

In real estate we at least have "comparables" to use when setting an asking price. In printing, "comparables" are far and few between and are rarely tied to profitability or excess earnings. Instead, many valuation methods simply use a multiplier or percentage of gross of sales to determine a selling price.

Lacking reliable information for valuing their own firm, owner's often turn to business brokers who end up parroting much of what they have heard over the years. All too often, brokers toss out multiples of earnings like 3, or 4 or even 5 but really can't justify or explain how these multipliers have been arrived at or the logic behind them. Heck, in many cases, they can't even come up with a reliable number for "excess earnings."

The end result is an owner who asks $400,000 for a business doing $587,000 because that's what the broker suggested. Unfortunately, the formula used was not realistic, and a more accurate asking price would be in the $290,000-315,000 range.

So along comes a buyer who believes the the business might be worth in the $290,000 to $315,000 range offers slightly less expecting the seller will make a reasonable counter-offer. Unfortunately, when the buyer makes an offer (although very realistic and fair) that is so far below the initial asking price of $400,000 the seller takes it personally, feels insulted, and quickly turns down what in reality is a very fair offer.

The bottom line if you are thinking about selling your business is to examine the business as if you were buying it instead. Don't let a broker or brother-in-law use "pie-in-the-sky" ratios or formulas to set an asking price for your business. If your asking price is truly fair to all involved your business will sell. If the price is far higher than it should be, then be prepared for either the deathly silence that comes with no offers or the implied insults you will suffer when potential buyers offer you far less than you are asking.

Smoking Update

2008-08-15T13:27:00.000-07:00

Well, as of today it has been about two and one-half months since I last had a cigarette. Yes, of course I would still like to have one, but so far I have resisted the temptation. I actually have half a pack in the center console of my car and another pack back at the house - both left-overs from the Saturday night before I quit. Sounds sort of silly, but I like the thought of them being around even if I don't smoke them anymore.

I remember many a time when I have quit in the past and I would throw a half used pack into the woods as I drove down the driveway, swearing off the habit for good. Later that night, sometimes at 2 a.m. in the morning, I would find myself thrashing through the bushes and undergrowth trying to find the pack I had thrown out a few hours before!

Business Valuation Proves Disastrous!

2008-08-07T11:06:00.000-07:00

Business Valuations by Amateurs Can Prove to be Dangerous - Recently, I was retained to prepare a valuation on a business with annual sales in the $5 million range. The owner wanted to know retrospectively what the business was worth at the end of three different years, 2005, 2006 and 2007. Why?

The reason for the request was complicated but basically it involved the buying out of two partners... one in 2005 and the other one who chose to leave the business in 2007. Although the business was doing about $5 million in 2005, it was not very profitable. In 2005 one of the partners who owned 10% and who had helped the business grow to that level decided he wanted to sell his portion and pursue other interests.

Fine, so far. Well the owner asked a business broker (possibly related to his franchise) to help value the business. With virtually no reliable logic or reason given, the broker valued the business at $4.5 million. Thus the partner's share was worth $450,000 and a note was negotiated with a payout over 15 years.

The real suffering caused by this erroneous valuation would occur about three years later when a second partner who owned 30% of the business also decides to leave - once again the departure was amicable. Assuming he used the same valuation approach as was casually used in 2005, that would mean he would have to pay the 30% partner approximately $1,350,000 and it didn't take much of a genius to realize that when a business like his is in the 5-8% profit range that there is no way in the world that the business can afford to buy this partner out - certainly not based upon a value of $4.5 million. Something was seriously wrong!

Happy ending? Nope. My valuation of the business as of the end of 2005 was approximately $900,000 and $1.3 million at the end of 2007. Yes, the 2007 valuation was much better and higher than for 2005, but both are dramatically (about 80% lower) than the valuations he received in 2005. Profitability can be dramatically improved in this business and thus its value but that's not the issue right now.

I don't know how the original broker ever arrived at the $4.5 million figure, but of course that's water under the bridge... I do know how my valuation was calculated and I am very comfortable with the process... Could my valuations vary by plus or minus $100,000 to $200,000 in either direction, of course they could, but they would still be dramatically below the $4.5 million range everyone has been tossing around. Anyway, I did the valuation, but it is up to the owner to present this to the former partners to see how more realistic valuations can be used in order to repurchase their interests in the business.

Urban Legends & Political Distortion

2008-08-07T10:58:00.000-07:00

A couple of days ago someone forwarded to me one of those typical emails that asks you to read what is enclosed and then pass it on to your friends. I can't stand them because the original author, as well as the person who is forwarding the message, typically has a political agenda designed to distort the truth at almost any cost in the defense of their own political leanings. The email I received was clearly meant as a blatant attack on Barack Obama.

It claimed to list several quotes from Obama's book The Audacity of Hope including this one: 'I will stand with the Muslims should the political winds shift in an ugly direction.' Wow, that sounds pretty damning doesn't it.... Ok, now read it in context and tell me that the above quote wasn't totally distorted and taken out of context:

Actual quote - "Of course, not all my conversations in immigrant communities follow this easy pattern. In the wake of 9/11, my meetings with Arab and Pakistani Americans, for example, have a more urgent quality, for the stories of detentions and FBI questioning and hard stares from neighbors have shaken their sense of security and belonging. They have been reminded that the history of immigration in this country has a dark underbelly; they need specific reassurances that their citizenship really means something, that America has learned the right lessons from the Japanese internments during World War II, and that I will stand with them should the political winds shift in an ugly direction." (page 261).

Quitting Smoking - Update

2008-08-07T10:49:00.000-07:00

Quitting Smoking - It's always sad but funny when someone tells you they've quit smoking and then follow it up with some cute remark about how they have quit 15 times before and started back again. Well, that's sort of me. I figure I probably have smoked about half of my adult life. The longest period I ever quit was for 14 years and it only took a week or so of gradually smoking again to become fully addicted. I followed that up with another nine year stint of no smoking and then the pattern would continue, quitting and then starting again, quitting and starting.

If there is anyone out there who is still smoking I will pass on what has worked for when it has worked, and it has been a combination of Zyban and the patch. Using these two together have been proved by all of the studies to be the most effective. You start taking Zyban and least a week to ten days before your "quit" date. The best day to quit is a Sunday, at least for me since it involves the least pressure. I try to avoid coffee for the first few days as well. The bottom line is you really have to want to quit. Unless you are a smoker you just don't understand how addictive the habit can be. I am wearing the patch right now and take Zyban (actually Wellbutrin which is the very same drug but much, much cheaper) twice a day. It has only been three weeks so far so no big deal, unless you are a smoker, and then it is a lifetime. Enough for now.

Update: My quit date was Sunday June 8th and as of today (Aug. 7th) I have still not had a cigarette... it is a day by day thing... sort of like being an alcoholic.... even if you quit drinking the best you can describe yourself is as a "recovering alcoholic." I will always be a "recovering non-smoker."

Clarifying Sales Per Employee (Once again!)

2008-08-04T18:08:00.001-07:00

Even after all the years of writing about Sales Per Employee and its use as a ratio I still get calls, even from some of the "experts." A consultant called me the other day and asked me to clarify how to treat a sales rep who was not strictly on the payroll and since he wasn't really paid then he shouldn't be counted in the SPE formula which is simply: Total Annual Sales divided by Total Number of FT equivalent employees.

The answer is that Sales Per Employee has nothing whatsoever to do with salaries and wages. If you look at the formula it doesn't even mention that. SPE is a productivity ratio, plain and simple. An average SPE these days is approximately $125,000. Companies in the top quartile in terms of profitability average $135,000 SPE, while those at the bottom average around $118,000. However, a closer look at the industry finds many companies with SPEs of $100,000 or less and that is a disaster.

So back to the original question. Yes, you count the sales reps as one of those bodies. Well suppose you have two sales reps but both are on commission. One is doing really well, but the other one is just terrible, barely making minimum wage... "But hey, why should I count him, since he really isn't costing me anything unless he sells something."

I would strongly disagree. He is costing you all those sales that would be brought in by a more effective, better trained sales person so he is costing you and so long as his sales remain low it will show up as a lower than normal SPE. But even that response is begging the question. The bottom line is that SPE is a simple way of saying how many "bodies" it takes to produce $XXX in sales. We know for a fact that some companies doing approximately $1.2 million in sales are producing those sales with slightly less than 9 FT employees. At the other end of the spectrum we know there are companies producing the same type of sales but employing or utilizing 11-12 employees to produce the very same in sales! Enough said!