Published in NPSOA Magazine - August 2024
At some point, you as the owner of your print/sign business will have to transition your business. Making sure your business is properly presented both on paper and in person, will get you a higher value. Even if you are transitioning within the family or to a key employee, you need to prepare properly for that sale. Also, if your horizon for selling is years ahead the tips below should be heeded.
1) Clean up your financial statements. I am always amazed at how poor financial records a majority of print/sign businesses keep. The number one item that a buyer analyzes is your financial performance which your financial statements tell the story. Make sure that your profit and loss statement is set up to easily view your business. Expenses should be categorized by cost of goods sold, payroll and general overhead or operating expenses. Buyers want to know your gross margin, your payroll as a percentage of sales and also what are your fixed costs. Make sure that your expenses are correctly categorized and are detailed enough so a buyer doesn’t have to question what goes into each category. If your balance sheet shows any assets for employee or owner accounts receivable or liability for outstanding owner loans, get these cleaned up.
2) Most importantly, make sure that your internal financials match your tax returns. I see too many issues where accountants make changes to the financials when they file taxes and the internal books are not adjusted to match. It’s usually best to file your taxes on an accrual basis vs. a cash basis. Yes, you may save money on your taxes if you file on a cash basis, this will catch up with you later as all you are doing is deferring income or prepaying expenses which will affect a subsequent tax year. Buyers want to see your financials compiled on an accrual basis as this accurately portrays what is really happening especially when in the years near when you are selling.
3) Sales should have a nice breakdown of the type of sales you record. For example, if you are a printer, a buyer wants to know the breakdown of digital printing vs. offset printing. They also want to know the sales breakdown in bindery, pre-press/graphics, mailing etc. A sign company should keep track of the different type of signs they sell. I recommend you also break out sales for graphic design, installation, permitting plus what you outsource. If you outsource a lot of your work, have a breakdown by category of what you outsource. For example, electric signs, routed/routed signs, trade show displays etc.
4) Keep good records of the order and sales history of your clients. The value of your clients is what buyers want. Good records of the clients’ sales history and order history should be kept. Normally, you don’t disclose the client names until you have signed a Letter of Intent but the buyer wants to know that you have good records so they can confirm the information they based their offer. Specific client information is provided during the due diligence process.
5) If your equipment is a high part of the value of the company, get an appraisal. Almost all selling owners believe their equipment has a higher value than buyers do. Use an industry expert to value the equipment vs. a local equipment dealer. A formal appraisal will also help the buyer if they need to get bank financing.
6) Get rid of any equipment that you don’t use at least once a week. I tour many shops where I see equipment that hasn’t been used for a long time. Sell it or if the equipment has little or no value, then dispose of it.
7) Clean up the shop. Buyers will want to tour the shop if they want to make an offer. Make sure its spic and span, looks organized and a pleasant place to work. Get rid of any obsolete inventory, old files, stuff your clients have you hold but will never use, etc. Make sure ceiling tiles are clean and don’t show old roof leaks. Make sure your outside and inside signage looks great. Part of your value is your brand and your image.
8) Let your key employees know you may be selling. I know selling owners are really scared to tell their staff that they are for sale. No one likes surprises. If an employee finds out you are selling and you haven’t told anyone, you look bad. Most employees won’t be shocked you are selling and they will support your decision.
9) If you have any special deals with employees end them. I had a deal go south right before closing because an owner had a special deal with one of his key employees where he deferred income so as to save his employee some taxes and was going to pay them off at a later date. He never told his employee that he was selling. The employee when he found out got concerned that he would not get paid plus it would change his tax situation. The buyer got concerned because the deferred compensation was not recorded which if recorded, reduced their profits on which they based their purchase price. I also see that owners sometimes pay the benefits of key employees a higher percent than the rest of the employees which is contrary to the law.
10) Make sure you track your inventory. Inventory is almost always sold along with the business and its value should be correctly recorded on your balance sheet. Too often, the balance sheet inventory is not correct or even close to the actual inventory. You can also add your work-in-progress inventory but only for the work actually done prior to the sale and valued at cost (materials and direct labor) and not the retail value.
11) Make sure you accurately track employee time off. Usually, the seller is responsible for any accrued vacation, sick or personal time off that have been accrued right up to the sale date. Keep good records and share them with your employees so everyone knows how much time they have left in time off with pay.
12) Keep good records on customer credits and deposits. Both of these are liabilities, and many owners don’t record these in their financial statements. Even if these are recorded, make sure they are accurate. If there are old credits that may never be used, delete them or else you will need to reimburse the buyer for them at closing. Also, any deposits you have on jobs or for postage will go to the buyer so make sure your books accurately reflect the amounts.
13) Make sure you know the tax implications when you sell. Speak to your tax advisor on what taxes you will or may have to pay when you sell. How the sale price is allocated and agreed upon between the buyer and seller makes a difference in taxes. Generally, sellers want as much of the sale allocated so they are liable for capital gain vs. ordinary income treatment.
14) Choose good advisors. Find a good M& A advisor who will help present your company in its best light, find the best buyer, negotiate a deal that you want and work with you right up to the closing. You will need an attorney to either review or prepare the contracts. Chose one who has experience in business transactions and also one that will work to make the deal work vs. be adversarial when the buyer’s attorney. Get a ballpark of the cost when you hire the attorney.
Mitch Evans is a management consultant and trusted advisor who works with graphic company owners, CEOs, and entrepreneurs. Mitch is a managing director at Graphic Arts Advisors LLC which specializes in Mergers & Acquisitions (valuations, buying and selling, mergers and non-bankruptcy orderly wind-downs). Mitch is also a partner with Mike Kind in The Next Level Group which facilitates formal top executive peer groups for leadership, business growth, including revenue growth, improved internal efficiencies, and greater profitability. Please contact him at mitch@graphicartsadvisors.com or call 561-351-6950.
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