NPRC SPECIAL REPORT – NOV. 2020 “EXCESS EARNINGS” ARE KEY TO HIGH COMPANY VALUATIONS!
5-page valuation report
NPRC is offering, for a limited time, a special report detailing real world valuations for 48 printing firms. The report features four special valuation charts. Each chart features key factors used to arrive at a typical company valuation. The charts examine factors such as – annual sales, excess earnings, excess earnings as a percent of sales, net assets and assigned earnings multipliers.
The valuation charts then summarize the estimated value arrived at for each of the 48 firms in question, as well as the ratio of value to annual sales.
Top & Bottom Firms by Value
When it comes to establishing the value of a printing company, there’s one fact that stands out above all the rest – “The value of a company has little to do with annual sales.” The charts depict that while one firm with sales of $717,000 can be worth almost $676,000 (or 94% of it sales), a similar size firm with almost identical sales of $745,000 can be worth less than $81,000 (less than 11% of sales.) The same comparisons can be made regardless of annual sales volume.
How do you explain these great variations? Most variations in company valuations can be explained by a company’s ability or inability to generate “excess earnings.” What are “excess earnings?” Complete the form below to download your FREE copy of this special report.
Are printers counting on government grants and Loans to survive the Covid-19 crisis? Well, checking out various printing industry list servs, it certainly appears that many printers are indeed doing just that!
Instead of returning to the basics and concentrating on improving key financial ratios such as SPE, payroll and profits per employee many printers seem to be spending the better part of their days worrying how to fine tune loan applications and mastering SBA regulations.
Ironically, more printers appear to have mastered the myriad of new government regulations involved in securing PPP and EIDL loans and grants far better than they have mastered their own financial ratios. To be blunt, I have seen more posts in the past two weeks about how to secure various government loans than I have seen discussions in the past two years regarding achieving higher SPEs and best practices for lowering payroll costs.
Most profit leaders in this industry (the top quartile in terms of profitability) appear well prepared to deal with the challenges that Covid-19 represents. Sure, there will be struggles and bumps along the way, but there is little doubt that they will survive and prosper both in the short term and the long term. Profit laggards, on the other hand, were ill-prepared to weather even a small financial storm, long before Covid-19 even existed. Now they find themselves in a cash and profit crisis mostly of their own making.
Sure, receiving a loan for $20,000, $50,000 or even $100,000 or more sounds great, but if that loan or grant is viewed as making the difference between “closing your doors” and your surviving to see 2021 then I would seriously question the financial strength and stability of your firm, Covid-19 not withstanding!
If you’ve been running a marginal or below average firm for the past two or three years, or possibly even longer, any loan or grant that you receive will end up being nothing more than a small band-aid where a tourniquet is required instead. Covid-19 related loans and grants are not likely to save firms that are foundering financially. At best, the inflow of new money will simply prolong the inevitable.
I talk to profit leaders all the time, and virtually all of them admit to me admit to me that while the loans and grants they have received are certainly helpful, they note that their firms are not dependent upon them for their survival. Some are treating these loans as “icing on the cake.” Ironically, because they are profitable to begin with, the loans and grants these firms will receive will end up making them even stronger in terms of profitability in 2020 and 2021.
Don’t misunderstand mewhen I talk about “icing on the cake.” Yes, even the strongest companies in our industry surely welcome the help, and they will indeed put these grants and loans to good use. Weaker firms, however, will likely use the money to patch holes in a sinking ship – a ship that was sinking long before we ever heard of Covid-19. In fact, many troubled firms will end up using the influx of cash to patch holes above the water line, instead of the more serious ones down below.
Don’t misunderstand mewhen I talk about “icing on the cake.” Yes, even the strongest companies in our industry surely welcome the help, and they will indeed put these grants and loans to good use. Weaker firms, however, will likely use the money to patch holes in a sinking ship – a ship that was sinking long before we ever heard of Covid-19.
Six months from now – I strongly suspect that that many of the troubled firms that so desperately need government grants and loans to survive will have blown through those funds faster than a speeding bullet, and six months from now they will be once again desperate for more loans and grants. As always, this industry, like all industries, has “profit leaders” and “profit laggards.” The difference between the two groups is that the former know there ratios inside and out and recognize that they are indeed in that top quartile. On the other hand, the “profit laggards” are generally poorly informed as to the types of key financial ratios it takes to operate a profitable firm in this industry, and thus struggle along, week to week, month to month.
In turbulent and uncertain times such as we are facing today, it is more important than ever that you understand the kinds of key financial ratios required to survive and prosper. Granted, “increasing profitability” may be a bit “pollyannish” during the Covid-19 era, but the last thing you want to encounter these days is a slow, yet subtle decline in key ratios.
One fact we know for sure– Six months from now “profit leaders” will continue to be “profit leaders,” while many of the “profit laggards” of today will be struggling even more so than they are today, regardless of any loans or grants they may have received.
Granted, “increasing profitability” may be a bit “pollyannish” during the Covid-19 era, but the last thing you want to encounter these days is a slow, yet subtle decline in key ratios.
We’ve been publishing Financial Benchmarking Studiesfor the Printing industry for more than 30 years and we have tracked dozens of key ratios in our industry. Most important of all, we’ve been able to compare and breakdown ratios of of the top firms vs. those at the bottom in terms of profitability. Suffice it to say that the “profit leaders” in our industry seem far better prepared to weather the “storm” than the “profit laggards.”
Below are just a few of the key ratios that we look at closely when analyzing the value of firms and their survivability score. Average sales for the firms in this extraction was $1,100,000. These ratios are extracted from the NPRC 2019-2020 financial Benchmarking Study. The 64-page study is a comprehensive analysis of Key financial benchmarks and ratios for the quick and small commercial printing industry. See page 48 for specific definitions and formulas used to report the following. (Click here to read more about this info-packed study.)
Key Ratios – All Firms by Profitability Quartiles
Key Financial Ratio*
Bottom Profit Qrtl
Top Profit Qrtl
2018 Average Gross Sales
Cost of Goods %
Payroll Expense %
Overhead Expense %
Owner’s Compensation %
Excess Earnings $
Profits Per Employee $
Sales Per Employee $
* Definitions as to specific ratios reported below can be found in 2019-2020 Financial Benchmarking Study
Sales Per Employee can often actas instant indicator of overall financial health. You don’t need a P&L or a Balance sheet and you don’t need the help of a CPA or bookkeeper to calculate it. SPE has nothing directly to do with payroll or wages so you don’t need that info either. Simply divide your annual sales (do not include postage income) by the total number of FT equivalent employees, including all working owners, partners, etc. used to produce those sales. SPE is generally calculated and expressed in annual terms, not monthly, although it can change somewhat from month to month.
By the way,a SPE in the $140-$150,000 range, even though that puts it in the “Profit Leader ” category, does not represent the top of what can be achieved. I know many firms, most of them heavily invested in digital printing, that report achieving SPEs of $160,000 to $180,000 and even more. So don’t be patting yourself on the back too quickly. You can always do better. On the other hand, if your SPE is $130,000 or below you are seriously under-performing in this industry compared to your peers.
Recent SPEs reported by NPRC – SPE varies modestly from report to report. Below are are recent SPEs as reported in various studies:
Study Average Median
2019 Digital Color Pricing Study $139,830 $130,673
2020 Mailing Services Pricing Study $156,179 $142,500
2019 Wage & Benefits Study $139,048 $134,444
2019 Financial Benchmarking Study $139,595 NA
NPRC recently sent out an email offering a free copy of a previously published company valuation chart. The chart compared 35 different offset/digital printing firms in terms of gross sales and estimated value. The chart provides a summary of 35 valuations conducted in the past eight years by QP Consulting, Inc.. The data provided illustrates huge variations in valuations for printing firms reporting similar annual sales.
Click on the chart to view and download the entire chart comparing 35 valuations.
The chart (see above) also clearly notes that there is little relationship between annual sales and the estimated value of the business. When you compare the estimated value of printing firms as they relate to their reported annual sales the results are nothing short of startling.
Download Free Article
Our recent email on valuations also referred readers to an article previously published on this website titled, 10 Suggestions for Increasing Company Value.If you’ve never read the article now’s your chance. We encourage you to visit this website by clicking on the Blog Tab above.
There you will have a chance to explore dozens of valuable articles and posts. Yes, some do promote previous studies and publications, but others are offered to assist fellow printers confronting various challenges in the industry.
Ten New Firms Examined
Spurred on as we examined the data from the previous valuation chart, we decided to pull out some newer folders and examine a random selection of ten valuations conducted in the past 18 months. Below is a chart depicting some of these more recent valuations.
Of special interest is that while the average annual sales of our recent sampling came very close to our previous sample of 35 firms, there was a significant increase in the average estimated value of our newest sampling when expressed as a percent of sales.
In our earlier analysis of 35 firms, the average value as a percent of sales was 49.3% and the median was 44.1%. In our newest extraction of ten firms, the average percent of sale valuation was 62.7% and the median was 63.8%. Put simply, the value or estimated worth of the average company requesting our services appears to have increased.
Recent valuations coming in at higher values relative to annual sales.
Company Values Increase
The far right-hand column below simply indicates value of the firm in question in terms of percent of gross sales. (Example: Our valuation of Anderson Digital estimated that we believed the firm was worth 79.5% of its most recent annual gross sales.) It is critical to note that just because we calculated an estimated value for a firm does not mean that it would likely sell for that amount!
The reality of the market today is that even healthy, profitable firms may not sell for anything close to what the formulas say they are worth. In fact, it is quite possible that despite the best efforts some firms might never sell.
Is there an explanation for this increase? Yes, we believe the increase can be attributed to the fact that the industry continues to shrink in size, and we are indeed looking at a situation of survival of the fittest where only the healthiest of printing firms can survive. Of course that doesn’t mean all of our ten firms are healthy, but it does mean that competition in terms good to excellent financial ratios is improving.
Are Firms More Attractive to Buyers?
As a general rule, firms that continue to survive and prosper today are indeed financially stronger firms. Nonetheless, just because many of these firms appear to be stronger and healthier than those previewed in the past, it does not mean they are necessarily more attractive to potential buyers.
Like it or not, there are not a lot of “newbies” out there looking to buy a printing firm – printing is no longer perceived as a growing industry that one should consider and explore. Most potential buyers are existing printing firms wishing to expand their sales and customer base through acquisitions rather than generating new sales.
“The endowment principle suggests that an owner of an object tends to attribute a higher value to that object because he owns it. Consequently, the owner of a business may think that the business has a higher value than it actually does, merely because he or she started it, nurtured it, etc. You should take this into account if your valuation falls far below the owner’s asking price.” (From Print Shop for Sale, Chapter 1)
I would love to have $10 for every time I have heard an owner tell me that they would rather shut the doors, close the business and walk away before they would accept an offer they consider too low. It is amazing how many owners simply point to the many years they have worked building the business, the sacrifices they have made, and the “blood sweat and tears” they have invested to build their businesses to justify the value they have placed on their business.
Tell owners that they have made a major mistake loading up their small businesses with equipment that really isn’t need, or tell them that after all is said and done they have earned a decent salary over the years but they really haven’t generated any significant “excess earnings” and as a result their business is worth very, very little.
Sadly, many owners wait too late to sit down and attempt to value their business. To be blunt, some put this task off because they suspect the value will not be what they were dreaming of or counting on a few years ago. Other owners simply have little or no idea as to how to arrive at a value for their business, and they are unwilling to take the five or six hours it might take to get a better grasp on valuing a business.
Some make a half-hearted attempt by using some outdated multiplier, while others rely on advice offered by a well-meaning uncle or business broker, most of whom know little about valuations in the printing industry.
Valuations Based Upon Earnings
Most important of all, many of these owners simply do not understand the basic valuation principle that notes that, “for a business to have any real value to a potential buyer, it must be able to produce enough cash flow to pay the new owner a reasonable working salary and then produce enough ‘excess earnings’ for the buyer to be able to purchase the business from the seller over a 4-6 year period of time.”
“For a business to have any real value to a potential buyer, it must be able to produce enough cash flow to pay the new owner a reasonable working salary and then produce enough ‘excess earnings’ for the buyer to be able to purchase the business from the seller over a 4-6 year period of time.”
The biggest mistake made by many owners contemplating the sale of their business is to initially combine the salary and perks paid to both the husband and wife and look at that combined total as the “profit” generated by the business. Once combined, the owners then use some type of multiplier, add a value for assets, and arrive at a final selling price for the business. Oh, if were only that simple!
Let’s clear up something immediately. Combining your salary and perks with whatever is paid to your spouse and then claiming that represents the “net profit” or “net earnings” of the business is simply wrong, wrong, wrong!
Only If You Are Selling Your Spouse
Of course, the only exception to the discussion above would be in the event that you are actually including your spouse (husband or wife) along with the list of other assets that will convey when you sell the business. I know at least some readers are whispering to themselves,“Oh, if I could only do that I would…”
“Ok Mr. Stevens (the new buyer), here is the final paper work for the sale of the business, and you will notice that it includes a Ricoh digital printer, a state-of-the-art estimating system, a Heidelberg folder, padding rack, a Sakuri 40” cutter and my wife. She will stay on with the business until you decide to trade her in or sell her to another print shop.”
The point in the sarcasm noted above is that when a husband and wife sell their business to an individual buyer, it is typically assumed that the buyer will assume some or all of the responsibilities of the primary owner, AND if there is a “working” spouse involved in the business, the new buyer will also have to hire someone to replace that spouse or partner. So the money paid to the spouse that was initially classified, counted or included as part of “net profit” or “owner’s compensation” is really nothing more than payroll that must be assumed by the new buyer.
What about the value of the hard assets that are normally sold and conveyed with the sale of the business? Yes, the value of assets used in the business are also included in most valuations, but in the end, the value of assets are typically modest or minimal compared the value of the business when considering “excess earnings” or profits.
A Disgruntled Client
I once had a client who actually stopped communicating with me (he was acting like a small child) when I told him that his decision to purchase one piece of equipment after another, especially in the past 3-4 years had actually negatively impacted the value of his business. It seemed like he was bent on buying equipment and he bought and bought, using the argument that the more production capability he brought in-house the better and more productive he would be.
Sometimes it is better to broker than to invest in equipment that is only used two or three times a month. Just remember, the very last thing you want to do in the last few years before you sell your business is to start adding a bunch of new assets.
Assets never contribute on a $1 for $1 basis when it comes to valuing a business, but “excess earnings” can easily end up being multiplied by a ratio of 3 to 5 in caluclating the final value of a business.
Buyers Like Profits, Not Assets
Newly acquired assets are quickly depreciated, oftentimes far faster than shown on the balance sheet. To consider the investment cost for a new piece of equipment can or will be recaptured at the time of sale is pure folly. Buyers are not interested in buying shiny new equipment. They can do that on their own without your help.
On the other hand, buyers are interested in buying businesses that produce real “excess earnings,” “cash flow” or “profit” above and beyond what required or necessary to pay a single working owner. The bottom line? Excess earnings are always far more valuable than even the best net assets, no matter all the bells and whistles.