***Advertisment: Ascent Partners 23 June 2010***
More and more vendors are looking to split the sale of their business, Richard Rasmussen advises on why this trend has emerged and why it’s here to stay …
In the past, when printing businesses were more profitable, most business sales were sold as going concerns – i.e. where the purchaser bought the business with all the assets including plant and equipment and goodwill, often taking over the lease of the premises and much of the staff as well.
In today’s climate, many of the business sales are split. This is mainly because the Return on Investment (ROI) is not there, there is less demand for “going concern” sales, and the finance to purchase is not available. Let me elaborate:
The ROI formula is frequently used to value printing businesses. Basically, it is calculated by dividing the ROI percentage into the operating profit. For example if a business has an operating profit of $200,000, and the Return on Investment is 33%, then the business is valued at $600,000, which includes all assets being passed on unencumbered.
The operating profit is calculated after “adjustments” are made to calculate the “real” profit of the business, as opposed to what the accountant provides. The ROI chosen is really dependant on a number of factors such as the size of business, type of clients, and risk. The inverse of the ROI is the much-quoted “multiple”. I.e a 33.3% ROI is a three times multiple – in the example above three times the operating profit = $600,000.
The problem nowadays is that many businesses either don’t have, or have a minimal operating profit. So frequently it doesn’t matter what multiple you use, it will never result in more than the market value of the plant and equipment.
Also, now there is less demand for the going concern business – there are far fewer purchasers willing and capable of buying businesses as going concerns. Most just want the goodwill (client base), and pick and chose the plant and equipment.
So, this has lead to vendors disposing of their equipment and goodwill separately. It is likely that both can be readily sold, and there will be different buyers for each of the components. I.e. part of the plant and equipment could be sold to the goodwill purchaser, but the remainder may be sold privately, through a used equipment dealer or via an auction. Many printers don’t understand the magnitude of the fall in the values of their plant and equipment, so it is best to get a realistic independent valuation and compare this to what equity you have in the machinery, before you embark on a split sale.
The good news is that the goodwill of the business is more easily sold. 95% of printing companies I speak to wants more sales. And despite the fact that in the vendor’s business these sales may not reap much profit, if added to another business’s sales they may result in producing a good profit. So goodwill, or client lists, are in high demand.
The valuation of goodwill is dependent on a number of factors including:
• What’s included? – i.e. client list, job bags, plates, software files, estimating systems, accounting systems
• The size, spread, mix, location, and growth potential of the client list
• Payment terms of clients
• The services offered by the vendor, and how does the customer interact with the vendor
• What artwork is provided, and how is it stored
• What other systems does the vendor have – ie print management, on line ordering, management information system
• What stock is included and how it is valued? – ie paper, pre printed stock, work in progress
• What the transfer period is, and who is included
• What the restraint of trade clauses are
• What staff are taken on, and on what terms
• Who is customer facing in the organisation
• What are the terms of payment – ie cash up front, or deposit, followed by fixed or “tied to performance” payments
• What other assets are purchased
As you can see there are a number of issues to be considered, and this certainly is not an exhaustive list. So when you hear that goodwill is always valued at 10-15% of turnover, be very wary. I’ve seen goodwill sold for free and sold for up to 25% of turnover. I have also never seen goodwill sold for the same price and on the same terms.
There is no doubt that split sales have, and will continue to be more prevalent than going concern sales. And that in many instances that is not a bad thing for vendors. Usually split sales happen a lot faster than going concern sales, and there is a better chance to work vendors into the acquiring business, if that is what they require. It’s often the best way for vendors to slowly exit the industry.
Going concern sales will be harder to achieve, but often it is best to start that way, and if limited responses are attained, switch to plan B and split the sale.
A recent success of ours using the split sale method was long standing pre press trade house, White and Gillespie, in Melbourne. Here we sold off two parts of the business, to two different buyers, sold some major plant and equipment privately and are in the process of assisting in the disposal of the remaining equipment.
Printers need to be realistic in their expectations – understand that selling a business as a going concern may be difficult, take a long time, and the price attained may be less than what they expect. Often a split sale is the only option, and may result in a better overall outcome – it’s certainly worth considering.
Ascent Partners is well-versed in advising which method vendors should adopt - selling businesses as a “going concern” or as a “split sale”. We offer realistic appraisals for all sizes of industry-based businesses around Australia, and then the subsequent service to selling your business, as going concerns or via a split sale.