Purchasing Printing Business (digital only)

[BigSi]

Hi there.

Looking at purchasing a very small business. (customer base only). He is happy to sell his gear separately (I don't want it, I already have the same if not better gear).
Basically I'm just getting phone numbers, website, customer files, thats about it. I know there is normal figures for this sort of thing, but these are not normally times. I can't help feel that I'll be surprised if I manage to retain 50% of his customers. (especially since his location is not that close to me). Has any one out there done this sort of thing where by they pay just a small amount of $$$ (say 10% of turnover) and just a commission on ever job that I get?. ( for say 1-2 years). I'd feel a lot more comfortable doing something like this for obvious reasons. I realise there is quite a bit of trust involved on the other party part but there must be a way where the phone calls email traffic can be monitored on his part.
I hate to fork out 50K and get 10Ks worth of work. Keep in mind this is only a small purchase and not worth spending $1000s in legal cost getting things drawn up.

Your thoughts. thanks.

 

[gazfocus]

I personally wouldn’t bother. Unless his website gets a good amount of traffic (which can be proven), there’s not much else of value if you’re not planning to run the business from his location.

Customers are fickle sometimes. A lot of customers stick with a company because of the person they are dealing with or the quality of the customer service they receive. There’s no guarantee that they’ll get the same from you in their mind so they likely won’t want to just use you because you got their details and files from the previous owner, and will then begin a course of due diligence and shopping around.

If, on the other hand, you were buying a business in its entirety (including its location), one could argue that customers would still use you as it would be much more familiar and convenient.

 

[chriscozi]

Hi - there is at least one way that may make this a worthwhile purchase.

- Make sure you ask for and receive the owner's 'Good Will'. They should be ready to actively HELP retain their customers or at the very least not interfere.
- Set up an initial payment schedule for a year (reasonably) calculated with a base payment PLUS a 'retention' payment sufficient to incentivize the owner to help convince the current customers to use your services. The retention payment should be based on total dollars from the 'new' accounts.

Yes, a lawyer is probably helpful long term but a gentlemen's agreement might suffice.

 

[keith1]

I let it be known to a sometime supplier that I would be retiring soon. That was probably 4-5 years ago. He offered to either give me some money for my accounts, or pay a commission on orders received. Much like a sales commission.
I had a reasonable number of clients at that time but we didn't get into specifics.
You're right. There would be a lot of trust involved with the commission arrangement. I certainly wouldn't have trusted this character and wouldn't have entered into any arrangement with him. And as things turned out, he went out of business before I retired.
By the time I fully retired I had rid myself of clients I no longer wanted—slow payers etc. I offered remaining clients their files upon request so they could turn them over to whoever they chose to be their next printer. I did refer them to a local printer who was trustworthy & knew his stuff but the choice was up to my customer. I wasn't interested in trying to squeeze more money out of what I had. I was done—other than my occasional 2 cent comments to this forum that is.

 

[kslight]

I agree that a lot of the business is relationships, and you risk losing those customers simply because you are not who they know. But at the same time, from their perspective the unknown of working with you is the same as the unknown of working with a competitor. So while the idea is you’re buying the customers, in reality you are just buying the opportunity to impress those customers. Whether that is worth the risk and investment, I guess up to you, your negotiations, and where the current billings are.

Since this sounds like a relatively small amount of potential Billings, I guess it’s worth a further look to see if any of those accounts have any opportunity to grow. If it’s just a bunch of tiny mom and pop accounts that only order small jobs, that doesn’t sound like the business I would even want to attract.

 

[Lorenzo lab guy]

We had a guy we were friendly with a half mile down the road shut down his small offset only shop. We did some of his color digital. His building was worth a lot and he wanted to retire. He gave us for free his customer list and files and also sent his customers a letter recommending us. I think he wanted a clean break and didn't want to make any representations on what we could expect to make. This is kind of like folks who don't want to sell their used car to a private party - especially a friend. We would of paid something if asked, but it would have been hard to calculate. In the end, we kept around half of his customer base which was a very nice bump for us. Here's the main problem: We discovered he was very low priced on his work and a lot of his work was low value - b&w , price oriented. We didn't really want that. We kept the higher value stuff but had to move prices up slowly over 2 or 3 order cycles. So, you kind of need to also know your guy's margins/ pricing to figure out what to pay, I would say.

 

[BigSi]

thanks guys, all very useful stuff. I guess summing up it all comes down to ROI. Pay out a very small amount as a lump sum (more of a goodwill gesture than anything else) and an ongoing amount depending on actual sales. This way worst case scenario is I loose my initial amount and that is all.

 

[Shawnd]

The Asset Based-Tuck In Valuation​

Underperforming companies or companies with low earnings levels should consider the asset based -– tuck in transaction because sometimes the sum of the parts is greater than the whole. Basically you sell off the assets and then sell off the “sales” or customer list. By separating the two, you get a higher value than you would if you tried to sell the company in total to one buyer.

Asset-based valuation begins with a calculation of balance sheet liquidation value. It doesn’t mean you are actually liquidating your company. It means you are just figuring out the market value of your equipment. As we all know, there is excess capacity out there, and used equipment values are considerably lower than they were 2 years ago, so be realistic. To compute this, sum up the Accounts Receivables and assign a probability or percentage of collectability to each. You would do this with all your assets, including equipment, to realistically figure the total value you would receive on your assets.

Once you compute what you are going to receive for you assets, add to that what you can expect from the sale of your sales/customer list or book of business. Asset based transactions make attractive tuck ins, in that buyers are willing to pay good money for your sales because they don’t have to buy your other assets like equipment. In most cases, the sale of the seller’s book of business is arranged through a royalty rate (percentage) that is paid on the actual sales that are produced and sold by the buyer to the sellers customers subsequent to transaction.

The range we are seeing for royalty rate is 4 percent to 7 percent over 2 to 4 years. We typically use 5% for 3 years for calculation purposes. Royalty fees do not tend to exceed 7 percent unless there are extenuating circumstances--for example, if you are not paying a sales commission on some of your revenues, the buyer might consider paying a higher royalty rate.

Royalty fees in an asset-based transaction can sometimes be a source of friction. Some buyers want to put a ceiling on the royalty rates, or commissions, paid to the seller. On the other hand, some sellers want a floor as part of the transaction agreement, whereby the seller receives a guaranteed minimum payment, even if the royalty is less. Our recommendation is that parties avoid the ceiling and floor mentality. But measures conflict with the big picture goal of a tuck in. If the buyer ends up paying more royalty fees than anticipated, it means sales are actually above expectation. The ultimate goal of a tuck in is to achieve higher than projected sales. If royalty commission helps that happen by making customer transitions smoother, it is simply a tool to a successful process. On the other hand, a seller who wants a floor usually requests it so he/she knows the minimum amount they are going to get in order to liquidate the business. But sales are not hard fast and absolute for the buyer to predict. If the buyer thinks he/she is purchasing a company with $3M in sales and only $1M comes in, it doesn’t seem fair for the buyer to pay the floor when he/she is already dealing with an unexpectedly large sales loss. It is a matter of what is fair for all parties.

Tuck in (asset-based) transactions will continue to be popular because they give the buyer the opportunity to take on only variable expense, with no extra fixed expenses, and move into his/her plant and fill up excess capacity – and almost every printer out there wants to fill excess capacity these days.