supattra suparit
A close-up of a financial businessman holding a pen and pointing
By Joel Salus
Covid-19 has not been kind to companies involved in the reprographics industry, but that does not mean that there aren’t buyers willing to consider the purchase of your company. The key thing is that you should not proceed until you’ve got everything in order to show prospective acquirers!
My Background
Over the past three (plus) years, I’ve been involved in acquisitions in the reprographics industry, sometimes as a consultant to sellers, but mostly as a consultant to buyers. (I gained experience with this sort of work, years ago, when I was one of the owners of two different reprographics enterprises.) By now, I’ve participated in at least 20 different acquisitions and several sales (the latter includes several companies that I was an owner of and includes several companies whose owners hired me to help them sell).
I am an accountant by education and a CPA (inactive license, since I no longer have the need to maintain an active license.) I broke into the reprographics business in 1970, so you should conclude that I have a great deal of experience in our industry, and my experience is on all fronts, including marketing, sales, product development, pricing, account strategy, managed print services, operations management, and accounting and financial management. I also have the experience of taking a reprographics company public.
I still connect, from time to time, with friends who own reprographics companies, both here in the US and in Europe. My first company was one of the five core founders of ReproCAD (which later became ReproMAX and RMX Network.) One of my former team members is the executive director of RSA Corp. I served for nearly a year as the managing director of the IRgA (now the APDSP.) I’ve been privileged to have met a whole lot of people in our industry! In 2009, I founded a blog known as “Reprographics 101.” Over a period of 10 years, I put up more than 2,000 posts on my blog. (Due to being busy with consulting work, my blog has not been very active the past two years.)
Financial Statements
Much of the acquisition work I do involves reviewing and analyzing financial statements.
If you really want to sell your company, consider the importance of providing to prospective acquirers a real true picture of your company’s financial performance (P&L) and financial condition (balance sheet.)
Financial statements prepared on the “cash basis” do not present a real picture of the profitability of a company. Financial statements prepared on the “accrual basis” do, provided that accruals are actually done (reflected in the P&L and on the balance sheet). If your statements are prepared on the accrual basis and you don’t actually, for example, account for accrued expenses, then there is no way for any reader of your financial statements to get a true picture of your firm’s performance or financial condition. The same applies to setting up prepaid expenses. If you’ve prepaid certain expenses, set those up on your balance sheet, as prepaid expenses will present a truer picture of your company’s P&L performance. If your Accounts Receivable includes account balances that have not proven to be collectible, write-off the uncollectible balances. Don’t give readers of your financial statements reasons to doubt the veracity of your P&L or balance sheet.
Use account names on your P&L and balance sheet that will be understandable to someone other than just you!
Debt Obligations
If your company has equipment loan and/or equipment lease obligations, a schedule showing those obligations should be made available with your balance sheet. Some acquirers will offer to assume your equipment loan and lease obligations. Consider, also, that, if all of your company’s equipment loan and lease obligations are not reflected (and reflected accurately) on your balance sheet, then prospective acquirers are not going to be able to accurately assess your company’s financial condition. Also, if the balances (due) on your supporting schedules do not match the balances on your financial statements, that raises questions about the accuracy of everything that’s on your financial statements (P&Ls and balance sheets.) If you want a transaction to go quickly and smoothly, accurately disclosures, right out of the gate, are vital.
PPP Loans
Most of the owners I’ve been in contact with the past year or so did get PPP Loans. As-yet-unforgiven PPP Loans can complicate a purchase/sale transaction. So, if you are considering the sale of your company, don’t procrastinate on the PPP loan forgiveness process. Get to it!
Personal Expenses
Although it is not a good idea to do so, many business owners “run” personal expenses through their businesses. For those who do this, their P&Ls don’t (won’t) give prospective acquirers a true picture of their businesses’ earnings performance. Take the case of a P&L that says that a company had net operating income of $150,000, when the real net operating income was actually $250,000 after taking out the personal expenses the owner ran through her/his P&L. That said, if you do run personal expenses through your business, then be prepared to provide a detailed explanation of the impact personal expenses had on your P&L. Prepare a schedule that shows this (line item by line item.)
Insolvency
If on your company’s balance sheet, your company’s liabilities exceed its assets and if your company isn’t meeting its monthly obligations on a timely basis, then your company is – technical term – insolvent. This doesn’t mean that your company isn’t saleable. It just means that an acquisition transaction may not be a normal one; must follow guidelines set forth by your State’s laws and requirements for the sale/purchase of insolvent companies.
Sales
Covid-19 has not been kind to companies in the reprographics business. For many, that’s putting it mildly. One only has to look at ARC’s P&Ls (2019 vs. 2020 vs. 2021) to gauge the negative impact Covid-19 has had on sales revenues. (I mention ARC because ARC is the largest reprographics services enterprise in the U.S.A., and, inasmuch as ARC has locations in every region of the U.S., ARC’s numbers do provide insight to what’s going on, sales-wise, throughout the industry.) That said, everyone in the reprographics industry knows this, which also means that prospective acquirers are well aware that 2020 sales were considerably off from 2019 sales and that 2021 sales (at least through Q2 2021) aren’t significantly different than 2020 sales. If your sales are off, you don’t really need to explain why.
Covid-19 encouraged city planning departments to move forward with electronic building permitting processes. The electronic building permitting process eliminates the need for permit applicants to visit building permit offices. And, the implementation of an electronic permitting process eliminates the need to print hard-copy plan sets. So, for some reprographers, the downturn in reprographics wasn’t just caused by a slowdown in the real estate development / design / construction market brought on by Covid-19; the downturn was amplified by the elimination of hard-copy plan sets for building permits.
If your company’s sales are off from 2019, that does not mean that prospective acquirers aren’t interested in acquiring your company. It’s my opinion that there will continue to be consolidation in our industry as the demand for prints-on-paper declines. There simply won’t be enough business for all to grow and prosper, and many companies who have strong balance sheets recognize that there are economies of scale to be gained from acquiring (and/or combining with) other companies.
Family Ownership Transition?
When I first started making friends in the reprographics industry, I learned that the ownership of most reprographics companies transfers from one generation to another, rather than the businesses being sold to an outsider. This is still very common in our industry. Before you take this course of action with your company, ask your children if they want to stay in the business. You might be surprised that some children will say “no.” Personally, I found it very easy to make a very nice living in the reprographics business years ago. Growth was assured. As the population of the US grew, growth in the A/E/C industry virtually assured growing sales of prints of paper (printed plan sets). More projects, more prints. Everyone was a happy camper. But, that same thing is not as evident today, for more and more customers in the A/E/C industry are finding ways to reduce (or eliminate) the need for prints-on-paper. I do realize that most reprographics companies have diversified their businesses by adding display graphics (large-format color) services to their offerings. But, even printed display graphics are subject to reduction in demand brought on by digital display graphics technologies. I spend a fair amount of time at a coffee shop in a Simon-owned mall. Most of the display graphics in this particular Simon mall are now electronic. That was not the case ten years ago.
It’s just as easy to give your kids the proceeds of the sale of your company as it is to give them the keys to the store.
Contact Joel Salus at joel.salus@me.com