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HOW TO SELL YOUR PRINTING COMPANY

FOR THE RIGHT PRICE, RIGHT NOW!

By Stephen J. Kerr

Many owners of printing and other graphic arts related companies need to know how much their company is worth but do not know how to go about setting a value on their business. This article will give you some tools from which you may draw an accurate picture of your company's true market value.

If you want to sell your company in the least amount of time for the most money, you must satisfy the three basic needs of most buyers. These are:

1. Pay a fair wage to the owner.
2. Pay a fair return on the capital invested, equal to the risk being taken on the money.
3. Amortize the debt incurred in buying the company out of the net profit generated by the business.

No sale of a company will take place where the deal is inherently unfair to one party or the other (except in cases of distress). If your business is not generating a living wage for you, is not returning an income on the capital you have put into it and making the equipment lease or note payments out of profits - you may have an auction sale on your hands.

Let me show you an easy four step method to find your company's value range and how to test this range against the terms that you are willing to offer a buyer. Note that these formulas will work for almost any small manufacturing or graphic arts related business with a strong asset base.*

Example:

XYZ LITHOGRAPHICS is a moderately successful, full service commercial printer with eight employees, two salesmen and one owner who draws $58,200 annually in salary. Gross sales for XYZ LITHOGRAPHICS for fiscal year ending December 31, 1988 was $1,000,000, with an Income Statement as follows:

STEP 1

We adjust the net income to show the true net cash flow available to the new buyer. By adding back depreciation and the owner's salary, plus perks paid by the company and current interest paid we can show the full income available to the buyer.

Calculations of value take into account the three basic needs of a buyer which are also the three requirements that anyone should have when running a business: A. A living wage, B. Return on invested capital, C. Amortize debt out of profits.

STEP 2

The next item you will need is the Net Worth of the company. This is calculated by subtracting the total liabilities from the total assets (including cash and receivables). The Net Worth should represent your Owner's Equity and Retained Earnings in the business. In this case we will assume that XYZ LITHOGRAPHICS has total assets valued at $380,000 and total liabilities valued at $145,000. The company's Net Worth is $235,000. (If the cash in the company's bank accounts will not go to the buyer with the transfer of the business, deduct the cash from the Net Worth before adding Net Worth and Excess Earnings together.)

STEP 3

The following formula is called The Excess Earnings Method of Value and is the method accepted by most business appraisers and more importantly, by the IRS.

THE EXCESS EARNINGS METHOD
Net Cash Flow	$178,300
A. Living Wage	-50,000
($1,000,000 x 4% + $10,000)
B. Return on Net Worth	- 35,250
(15% x $235,000)
Excess Earnings Value	93,050
Multiplier Range (3 to 5)	x 3		x 5
	$279,150		$467,500
Add Net Worth	+ $235,000		$235,000
(Less Cash if taken)
Approximate Value Range	$514,150	to	$795,550
Of The Business

STEP 4

Once you have determined the approximate value range of the company it is important to test the price you choose by the Buyer's Purchase Plan. Let's say that the seller chooses the average value of $655,000 and is asking $255,000 cash down and is willing to carry back $400,000 for 5 years at 11 % interest. Can a buyer meet his three criteria?

You may agree that 9.4% is a fairly low return on the buyer's cash, given alternate investments he might be able to make with his money, but in all the asking price and terms offered are in the ballpark. Once you understand this formula it is easy to vary the price and terms to suit your needs.

When you add interest received over the 5 year note to the total $655,000 in principal that the seller will get you may notice that this totals $776,870, or 98% of XYZ LITHOGRAPHICS highest selling range.

ASSET SALES VERSUS STOCK SALES

The changes in the IRS rules have made stock sales of printing corporations very unattractive for the buyer. The IRS will no longer allow the new owner to revalue the fixed assets (equipment & fixtures) of the business, instead they must continue the depreciation schedule which you have begun and absorb all the write offs the corporation has taken.

On the seller's side, if yours is a Subchapter "S" corporation, a partnership or a sole proprietorship you can assume that the company will be sold as an asset. The reason that full corporation sellers worry about an asset sale is that it causes double taxation at the corporate and again at the personal level.

SUMMARY

When you use the Excess Earnings Method of valuing your business and test your terms of sale against the Buyer's Purchase Plan, you are effectively removing any objections the buyer might raise about your price or the terms under which you are willing to sell. And that adds up to quick negotiations and a full price offer.