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HOW TO BUY A PRINTING COMPANY

Scoring Your Acquisition

By Stephen J. Kerr

If you have plans to purchase a printing company, or wish to evaluate how your own printing company is doing, this article will give you a score card to calculate the purchase value of almost any graphic arts company. These evaluation criteria will work for color separators, as well as specialty, trade and commercial printers.

In the April issue of "PRINTING JOURNAL", "How To Sell Your Printing Company For The Right Price, Right Now", I gave an example of a hypothetical company's income statements and net worth, XYZ LITHOGRAPHICS. Our example is a full service commercial printer with $1,000,000 in Sales and Total Net Cash Flow of $178,300.

LOOKING AT THE SELLER'S FINANCIAL STATEMENTS

You may be asking why you should put the owner's salary, perks, depreciation and the interest expense back into the company's income statements. This just gives the seller justification of a higher price!

Not when you're through with your adjustments it won’t.

Income statements of privately held companies are compiled to show the IRS the lowest possible tax exposure. You don't care about that. You're not the taxman. What you want to know is this company generating enough cash to: 1. Pay me for my time, or a manager's time to run it; 2. Pay me a return on the capital I am investing into it; and 3. Amortize the debt I will incur in buying it out of future profits. Depreciation is a voluntary deduction the company takes to build capital for future purchases, you will have your own salary and perks (you may not choose to fly to Hawaii twice a year on the company's money) and new interest expense is your choice, depending on how or if you choose to finance the purchase with borrowed money.

BALANCE SHEET ARGUMENTS

Over inflated values for equipment and fixtures, stock, ink, plates and building improvements is one of the most common sources of dispute between buyers and sellers. To resolve these issues before they become deal killers, insist on having the equipment and inventory appraised. Only a detailed appraisal of the shop can satisfy you both.

RATING THE VALUE OF A COMPANY

The following are a list of 10 economic and subjective factors upon which you can define the value of a printing company. We will use the final score to build a multiplier of Excess Earnings.   Rate each factor by a scale of 0 to 6. Zero representing the poorest score and six representing the best possible score.

GROWTH RATING

0    1   2   3   4   5   6

Rate the company's sales and profit trend. If sales have steadily risen at least 2 times the inflation rate, this company may rate a 5 or 6. But look at the net profits and the age of the company, too. It is easy for a young company to show early growth, it's much harder for a mature company to sustain growth. If sales have been declining for years, give this company a 0 or 1.

AGE OF COMPANY RATING

0    1   2   3   4   5   6

If the company is less than 6 years old, rate it a 2 or lower. Up to 12 years old, rate it a 3 or 4, and 13 years plus -up to a 6.

LOCAL ECONOMY RATING

0    1   2   3   4   5   6

If the company is well suited to the community it serves and the economy of this community is growing, then rate it high. Check with your local commercial real estate agents to find out how quickly commercial vacancies are being absorbed by new businesses.

 

LOCATION RATING

0    1   2   3   4   5   6

Look at the building and the surrounding businesses. Is the company well located to expand sales in this environment? Can the building handle an increase in volume without having to move. Industry statistics point out that an efficient printing plant should be able to generate $175 to $250 per square foot in sales. include in this rating the quality and duration of the company's lease. If the company has a long term, under market lease, it's fully assignable to you and there is still room to grow -- rate it higher.

COMPETITION RATING

0    1   2   3   4   5   6

Are the prices charged by the company above or below the competition. It is neither good to be too much above or below the competition's prices. Do your homework. Talk to local ink and paper vendors - they know what is going on in their area. Take a standard job for this printer and shop it at its closest competitors. A zero rating is earned by a company that is fast losing its customers to lower priced competitors and cannot do anything about it. A 6 is earned by a company that consistently underbids the competition (by a fraction) and still makes profits well above industry averages.

QUALITY OF MANAGEMENT AND EMPLOYEES RATING

 

0    1   2   3   4   5   6

Rate the quality of the managers, employees and sales team. Are these people adequately compensated? Will they stay when you take over? What is the employee turnover and what is the availability of talent in the area? Will you need to hire expensive talent to shore up weaknesses?

QUALITY OF EQUIPMENT AND FACILITIES RATING

 

0    1   2   3   4   5   6

Look around. Is the facility well maintained and clean? Look at the service records of the equipment and inspect for wear. It's amazing how a messy and inefficient shop is indicative of its caliber of work.

MARKETING & SALES RATING

 

0    1   2   3   4   5   6

This is one of the most overlooked evaluators. Does this company have a consistent marketing program? Where are sales coming from and are they sustainable? Has this company peaked? A high rating is earned by a company with a motivated and organized sales force, plus an effective direct mail or advertising program.

CLIENT RATING

 

0    1   2   3   4   5   6

Rate this company low if it has a heavy dependence on a small client base and shows rapid client turnover. Rate it high if it has a well diversified and loyal client base. Trade and magazine printers will naturally have fewer and more consistent clients, so you must analyze the client base in relation to the type of business.

DESIRABILITY RATING

 

0    1   2   3   4   5   6

This rating is a combination of all the other factors. Rate your gut level reaction to this company. Is this a clean operation with a strong client base and a great future? Or, is this business a mess, with evaporating clients, no real direction and an ambivalent work force?

Lets look at XYZ LITHOGRAPHICS as a well run and strong company (Rating A) and as a weak and declining company (Rating B). We will then compute a value based on the two ratings.

What you are measuring with these ratings is the level of risk that you will be assuming with the purchase of this company. A 4.5 rating equates to a 22.2% rate of return (100 / 4.5), while a 1.8 rating computes to a 55.5% rate of return. This represents the rate of return that you must realize to equal the risk you are taking with your money.