How & Why to Value Your Business

Do you know what your company is worth? Most likely, the answer is no. While reports are available that document prices paid for printing companies, such information alone is not sufficient to assess a firm's unique value.

Assessing the components of value can aid printing company managers in assessing the health of their firms. Yet, most valuations are the result of events such as selling the company, estate tax planning, shareholder buyouts, or lawsuits.

"When you own a business, your two main objectives are to maximize profits so that you make a good living, and to enhance the value of your company because that is what you own. You don't need a daily accounting of your company's value, but you do need to have some sense of what that figure is," says Harris Margolis, founder of H.R. Margolis Company, Bala Cynwyd, Pa., a certified public accounting firm that focuses on the graphic arts industry.

A comprehensive business valuation is like giving a company a physical, says Brian Enverso, manager of tax and valuation services for H.R. Margolis. He explains, "The valuation can identify a firm's strengths and weaknesses. For example, the process can assess how a firm is utilizing its assets."

However, Margolis and Enverso, a certified valuation analyst, are quick to point out that many companies won't invest in a business valuation unless it's triggered by an event.

The price for a valuation, on average, can range from $3,000 up to $15,000, depending on the amount of work involved. Business valuations are generally conducted by accounting firms, investment banking firms, and valuation firms.

Says Enverso, "A comprehensive valuation is a very detailed report that discloses nearly everything about a company, while a lower-level valuation is more of an estimate or range of value. The less detailed valuation doesn't mean a lot because it doesn't explain the reasoning behind the numbers."

"A comprehensive valuation requires gathering a lot of information about the company, information that includes historical financial data, analysis of management and customers, and more," adds Rick Riesgraf, president of Carlson, Lundquist & Company, Minneapolis, a CPA consulting firm that specializes in the graphic arts.

Business annals are filled with valuation methods and lively debate about which methods apply and which don't. Whatever method is chosen, it should be defendable and reflect the true value of the business entity. For example, a company conducting a valuation for estate tax purposes will tend to skew the report to the low side.

"We've seen companies present a lower valuation for estate tax purposes, then a buyer comes along and they have another valuation completed that yields a higher value. But conflicting valuations may result in the government challenging your valuation," warns Riesgraf.

In the printing industry, a multiple of earnings and adjusted book value are the most commonly used methods in assigning value, reports Harris DeWese, chairman and chief executive of Compass Capital Partners, an investment banking firm in Radnor, Pa.

"In general, for a commercial printing company with annual sales between $5 million and $20 million, the multiples today range from three to four times earnings before interest, taxes, depreciation, and amortization [EBITDA]," says DeWese, "compared to as much as five to six times EBITDA in 1998" when the industry was in the midst of a consolidation frenzy.

DeWese admits to being a little hesitant in providing a multiples range because he says there are always exceptions. Some of the factors that lead companies to command higher multiples include serving a specialty segment, the quality of a company's management, and predictable and sustainable earnings, he continues.

"Historical earnings are important in that they show the progression of earnings and revenues growth, but a company has to demonstrate that all the elements are in place for it to grow as it has in the past," says DeWese.

The best predictor of future earnings power is past earnings, in the view of Bob Rosen, president of R.H. Rosen Associates, Inc., a New York City-based graphic arts consulting firm. "If a company hasn't made money in the past," he says, "it's difficult to extrapolate that all of a sudden it will."

For many printing companies, earnings have lost their sturdiness. The prolonged economic downturn, tremendous production overcapacity, murderous price competition, and declines in print volumes have combined to erode earnings, and few industry experts believe that an economic upturn will bring a return to prior levels.

As a result, says John E. Hyde, managing partner of Rampart Associates LLC, "Potential buyers of printing companies are expanding their value criteria beyond earnings to focus more on the synergies that can come about from putting companies together." Trumbull, Conn.-based Rampart is a consultancy specializing in acquisitions, mergers, and business restructuring in the graphics and printing industries.

Adds Hyde, "The industry is changing so rapidly and economic conditions are so rocky that it's difficult for most businesses to rely on historical cash flows as an accurate indicator of future cash flows."

Meanwhile, the adjusted book value method is used when a company is in financial trouble. DeWese says this approach assigns value to balance-sheet assets such as receivables, inventories, work-in-process, equipment, and real estate. The value of a firm under this method is the difference between the asset side of the balance sheet and the recurrent liabilities and the fixed debt.

"Valuing a company is more an art than a science," contends Riesgraf of Carlson, Lundquist & Company. "Math formulas apply in doing valuations, but you still have to qualitatively assess what makes a business special, which constitutes the art part of the assignment." Those qualitative aspects include a firm's competitive position, market niche, plant capabilities, and technological knowhow.

The qualitative side of value is important because this is where printing company managers can take action to enhance the value of their companies.

The valuation experts contacted for this article offered the following five key areas where managers can harvest value by identifying problems and making improvements.

1. Company management. "The biggest thing we look at when valuing a company is management talent, that is, who the executives are and whether they can lead the company going forward," says Riesgraf.
   Company leadership has always been important, notes Enverso, but this has become a more critical valuation criteria. He says, "The printing and graphic arts companies faring best in this downturn are those with good management systems in place. They've set up systems and methods that enable them to make better and faster business decisions based on relevant facts and figures."
   In his view, successful firms have systems in place to develop people, monitor business health, and efficiently manage operations. "Without these systems and controls, you can't predict financial success, let alone tell if the company is healthy," says Enverso.
2. Earnings quality. The balance sheet tells the story of a company's financial health.
   Sound financial statements are important, says Stuart Margolis, president of H.R. Margolis Company. Many times, he adds, a printing company owner looking to sell will present a prospect with financial statements that are not well prepared.
   "Buyers want to see realistic, well prepared, detailed, and in some cases audited financial statements," says Margolis. "A weak balance sheet or one with too much debt diminishes the company's value because a potential buyer will have to invest money to improve the balance sheet."
   Adds Rosen, "A huge amount of debt relative to cash flow, which represents the ability to pay back the debt, presents the risk that the company won't be able to make its payments in the event of an earnings downturn."
3. Markets served. How desirable are the product markets, geographic markets, and customer markets served?
   Client mix, type of work generated, and ratio of recurring projects to one-time-only jobs are all factors in Enverso's valuations. He explains, "We look at a company's financial statements to see what made up its revenue for the last five years, and we adjust down for activities we don't think will recur. It's all about pinning down the value of a company's future cash flows or earnings."
   Market segments that offer more growth potential command higher multiples because their future earnings power is deemed greater, observes Ron Seavey, a partner of The Open Approach, Westmont, Ill., a consulting firm that works with printing companies and print buyers.
   Seavey continues, "Building value means building better, more secure, and growth-oriented profits that allow the company to grow. Coming up with an offering that is unique, differentiates you from the rest of the marketplace, and provides solutions to customers all add great value to a printing company."
4. Customer base. Do a few large clients dominate a company's customer base? Are customer relationships based solely on price, or on the level of service provided? Are customer relationships continuous or transitory?
   Notes Rosen, "A huge concentration of business from one or two customers subjects a company to normal risks that it could lose those customers, through no fault of its own, from occurrences such as acquisitions, customer relocations, changes in buying policies, or something else."
   A printing company that derives more than 35% of its sales from a single client can expect a downgrade to its valuation of 10% to 35% because it is vulnerable to losing that account, reports DeWese.
   As Rosen advises, printing companies that have a high concentration of business placed in a few clients should keep those customers but develop new business initiatives to add accounts and diversify the client base.
   Good customer relationships go a long way toward enhancing value. "You don't want your client bonds to be based solely on price. Rather, you want your company cemented to the client through a variety of product offerings and services. The stronger these bonds, the more stable the earnings," explains Riesgraf.
   "Also, the better a company knows and really understands its customers and their needs, the stronger those relationships will be," says Bob Cronin, a partner with Ron Seavey of The Open Approach. "The goal is to understand your customer's buying patterns and unique needs so that you can arrange your operations to serve them better than any competitor."
5. Sales effort. How good is the sales force? Is the sales effort dependent on one or two individuals? Is the company's sales success linked to its owner? The point here is that if a company is dependent on one salesperson and that person leaves or becomes unavailable, those sales are vulnerable.
   "I've seen companies acquire firms in which the owner was the most successful and important salesperson," recalls Rosen. "After the deal, the owner left and the sales effort declined. So if you're thinking about retiring or selling your company, be prepared for any buyer to inquire how important you really are."