Hyding Out

Preparing to Buy Assets through a Chapter 7? Here's Real Client Advice

Dear NAME OF CLIENT DELETED,

I am sending you this email to help prepare you for today’s 2 PM meeting with the owner of a distressed printing business. I’ve asked you to identify specific concerns that I may be able to provide guidance on so as to support your negotiations.

Here’s the issues you’ve outlined and my responses:

Q: how does the seller's Chapter 7 filing impact me?

A:  The answer has everything to do with the seller's customers. Under chapter 7, the business can not operate, unlike in chapter 11. Upon the filing, what happens to the customers? Is work immediately going to your shop? Can you handle the in-flow? Who has the customer relationships, the owner? Sales persons? CSRs? Assuming the customers are okay, chapter 7 is good for you because it will cut off the ability of his creditors to come after you.

Q: I’d like to buy the web site, phone number, etc. When, how, and how much?

A: If chapter 7, you’ll have to prepare a written offer that goes to the trustee in bankruptcy. It takes a while for the trustee to get appointed. That does not happen overnight. And, it is unlikely, but there may be other bidders. You should wait on making an offer to avoid getting the trustee mad at you. In the meantime, you should do just like Fed Ex and UPS have done in the demise of DHL: put out communication to his customers offering your service and giving them your web site, contact info etc, and have a special home page to welcome them to your company.  Please understand that the general intangibles of a printing company include the customer list, the job tickets, data files, the estimates, customer supplied artwork, the printer’s phone number, fax, web site……..the good part about chapter 7, it decreases the price of these perishable assets…….make an offer for $XXXXX cash. At worst, you may have to go up to $YYYYY, but you may also be able to make a deal around $ZZZZ. I’d go with X and be ready to make a second offer that bumps it up to Y.  If the case is what I understand, I bet that Y will cover the trustee fee so he/she will be eager to take your money and close the case. Please understand: you want to be sure you secure these assets so no one else buys them (see Bayshore Press bankruptcy litigation for horrible example of not buying the general intangibles)

Q: When and how do I add the former owner to my staff and what comp plan to set up?

A: This is very tricky. If you overpay for his services, the trustee can view it as backdoor payment for general intangibles (customers). The owner would be subject to attack by creditors personally. I can help you to arrive at a workable and fair comp plan based on market standards. That would mitigate risk for all concerned. What money has be made in 07 and 08? What sales are directly his accounts? What role does he play beyond sales? Are you adding a CSR? What sales do you expect to have brought in? More on this…..need facts. Then I’ll prepare for you a contract, or review what your attorney has prepared. Does the owner need medical insurance? He has to be an employee for that to take place. Do you want him under your supervision as an employee? Things to Diiscuss today.

PLEASE BE SURE THAT YOU HAVE A GOOD COMMUNICATION PLAN ON HOW TO CONNECT WITH THE CUSTOMERS……

Let me know if you wish to discuss further.

John

 

 

 

 

 

 

 

 

 

 

 

Year End Financial Statements: What Level --and cost--is Right for Your Print and Graphic Communications Company?

The calendar hits November, and for those of you on a calendar year-end, now's the time to work on financial planning for preparation of the company's annual financial statement.

For owners of "treading water" companies, surely the temptation is to cut accounting costs and downgrade the involvement of the outside CPA or even abandon CPA-prepared financial statement altogether.

For some owners encountering increased scrutiny from the bank, it may seem odd that the bank is "concerned" but doesn't want you to spend less money on financial statements.

Here's what NAPL recommends to client-members:

1. Use an outside CPA for tax guidance and year end financial statements (these are so-called "compliance" requirements, hated by accounting firms because these are based on commodity pricing as opposed to customized consulting services which most CPA firms offer but really aren't good at);

2. an internal staff person should be responsible for preparation of the company's general ledger and related accounting materials such as bank reconciliations, etc;

3. the outside CPA should NOT "do the books" due to independence and cost issues;

4. a mom & pop business can get away with no financial statement, relying on a tax return for the rare outside presentation and internally prepared spreadsheets for financial analysis;

5. a company that borrows money from banks, maintains meaningful supplier relationships, uses leases to procure equipment, and may consider M&A options, should have CPA-prepared "review quality" financial statements (expect 10K to 20K for many privately held printers in the 3-30 million annual sales range);

6. a company that borrows money greater than $3.0 million from banks and engages in regular M&A talks, is best suited to invest in CPA-prepared "audit quality" financial statements (expect 25K to 50K for annual audit fees, assuming $15 million annual sales company with in house controller).

If you have any questions about any aspect of financial reporting, just let me know. I can refer you to accountants we work with or help guide you in managing your CPA.

Owners of "Leading Companies" Push Back Plans for Exit Sale

Owners of "leading companies" in the print and graphic communications industry are pushing back plans for selling their business due to concerns that the weak economy in 2008 has taken a toll on growth rates necessary for a high valuation. According to NAPL, ten percent of the industry is comprised of leading companies who would normally expect to achieve a high price and mostly cash in a sale of their business as a “going entity”. But owners of leading companies realize that current M&A valuations are mostly down due to negative year-over-year profit comparisons from 2006-2007-2008. Upward trending financials support growth assumptions necessary for high earnings multiples.  

 

So these owners are focused on stabilizing and building their business, deferring their own “exit” for another time. Many are using M&A as a growth vehicle, acquiring sales and capabilities from "treading water" companies.