Purchasing a company from the buyer’s perspective
Industry Expert Larry Hunt Suggests
Looking for Lower Valued Companies
By John Stewart
We recently turned to our long-time friend, industry expert and author Larry Hunt and asked him for his comments as they might pertain to our recent popular blog post titled, “Excess Earnings” Are Key to High Valuations!”
As readers may recall, we spent a considerable amount of space detailing the definition of “excess earnings” and how that numbers plays such a significant role in determining the value of a company.
Our special report ranked 48 different printing firms based upon their estimated valuation as a percent of sales. While we presented the rankings from high to low, we did not want to suggest that the firms at the top of the list (those with the highest valuation ratios) were necessarily the best to buy. In fact, just the opposite might be suggested, at least according to Hunt.
Larry wrote us and commented, “John, As I remember when we wrote ‘Print Shop for Sale,’ we often discussed the powerful value of Excess earnings. And while Net Assets do carry some value, as you know, I actually put a penalty in our formula for having net assets. My thinking was and still is: I would rather buy a company that can make excess earnings without forcing me to put a bunch of money into hard assets.”
Hunt further expanded his comments with the following, “While this list shows people what they need to do to get a great price for their company, I want to put on my buyer’s hat for a moment. If I were a buyer, I would want to buy a company that does NOT have high excess earnings. If they are already performing at the peak, then I have little I can do to improve on it. They may have been lucky or very good at what they did, but I don’t want to buy a company that is operating at perfection.”
“I would look to buy someone like #31 Copy Masters or #26 Copy Magic,” Hunt adds. “They both have good sales but poor excess earnings. They also don’t have a lot of Net Assets. I should be able to buy either of these companies at a good price and with some decent management effort I should be able to double the value of the company without having to increase sales.”
Once again, I want to thank my friend Larry Hunt for his sage advice and for all his contributions he has made to the industry for more than half a century.