A recent informal scan of several hundred listings on the internet revealed a very serious flaw in how business brokers are advising owners of print and graphic communications companies. Their chosen valuation method means that brokers are inflating the so-called "asking price" of these businesses to levels bearing no sense to reality. Bewildered strategic acquirers get turned off by the unrealistic listing and just stay away. I'd imagine that sellers must be totally frustrated that their expectations are not being met. Brokers who get paid a commission at closing surely can't be making much money these days.
The net effect is that the business broker community at large is contributing to stagnation in the printing industry M&A marketplace.
So what are the business brokers guilty of doing?
Many different valuation flaws were found in my recent scan, but the single biggest is this.....
They are coming up with valuations based on overstated earnings because their calculation almost always fails to account for the market value of services necessary to replace the departing owner's functions. Most private company owners are providing sales, production, financial, or general management services, or some combo thereof. These functions have to be ascertained and replacement services quantified, EVEN IF the new owner is going to "do the work" or even if other employees will pick up the slack. The premise is that the business is being sold as a "going entity", meaning, that all necessary management functions are in place to continue delivering the earnings that are being valued.
Example:
A printing company doing $1.0 million annual sales is providing a nice living for the working owner who is pulling out $150,000 in profits, wages, and perks. The business broker advises the owner that the 150K can serve as the proxy for earnings, so that, in the broker's view, 150 X 5 multiple leads to the broker saying that "at least" 600K is the value for this business. Never mind that he also wants to get value for some of the assets, suggesting an "asking price" of $1.0 million for this business.
My view? The broker listing in the above example is totally unrealistic for any potential strategic acquirer, that's for sure. Maybe some guy out of Corporate Clueless Inc would overpay like this, but don't hold your breath.
For one thing, the replacement cost of the owner's services are probably 100K or so, meaning that only 50K is available for the earnings addback. And I'd be hard pressed to agree that a 5X multiple is appropriate unless this company is a "leader" as defined within the context of the NAPL State of the Industry Report and the related findings of the NAPL Print Consulting Group.
I could go on that broker listings are the wrong way to sell a print and graphic communications businesses, that's another problem......but, the point is: business brokers are overvaluing printing companies in "business for sale" listings.
Beware.
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