Thursday, August 28, 2008

Bad Attitudes Can Kill A Sale!

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.

Monday, August 18, 2008

Sellers being Misled by Brokers!

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.

Friday, August 15, 2008

Smoking Update

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!

Thursday, August 7, 2008

Business Valuation Proves Disastrous!

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

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).

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Quitting Smoking - Update

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."

Monday, August 4, 2008

Clarifying Sales Per Employee (Once again!)

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!