Case Study - Jack & His
$4.3M $8M Sale
Our Case Study Client
Jack built NE Offset Printers, Inc. 31 years ago. At age 67, it just plain hit him. He was tired. He needed out. Things seemed good and he did not want to go through another 2008-2010. And his wife wanted to travel, and not just to an annual trade show in Florida…
Life was good. Kids were “sort” of off on their own. He took out $300,000 before the “perks”, which probably totaled another $100,000 when you counted helping his daughter (single, divorced mother), travel/vacation with his wife, the cars, & generous expense reimbursements.
So Jack engaged the Private Equity firm “Exit The Family Business” to produce the 7 Pillars Report, which confirmed his Multiple was in the mid 3’s (in a fraction of the time it took his accountant!). He realized he was not going to be able to retire on his own terms unless he more than doubled sales, which probably was unlikely.
The Exit team identified a Multiple of the low to mid 5’s was where he needed to be. What he learned was a bit of earnings growth and boosting the Multiple from mid 3’s to 5-ish would bridge the gap to his objective of getting a price where he could net enough capital to meet his financial goals.
“Exit” prepared a full audit on the company, looking at the business in the eyes of a Buyer. A number of things became apparent, notably:
By referring to the 7 Pillar Report, the Exit planning team and Jack were able to define several clear, measurable goals that would materially improve on the Multiple.
The head Pressman, who had been with the company for 23 years, was made Plant Operations manager, reporting to the new President.
Jack’s new role was to meet with all national accounts and explore deeper market penetration into other product lines these existing customers had in-house and geographically positioned to be served by Jack’s company.
By making this move, the impact on Operational Irrelevancy added .50 to the overall Multiple.
Standard Operating Procedures
All key personnel, from the Plant Manager, Accounting and Administration head, and the President developed specific Standard Operating Procedures protocol defining each task they were responsible for, how it was to be accomplished, who supported them, and who they, in turn, reported to, and how often.
Along with achieving clarity in the overall process, morale was increased and people felt better listened to and supported.
By creating specific job descriptions and procedures, this added .15 to the Multiple.
Building A Deep Bench
With the restructuring and promotion of team members, a clear bench was created, giving a prospective buyer a sense of continuity of the business after the owner has departed.
This action added .1 to the Multiple.
Jack had made his desire to sell the business clear to all members of the team. He also sat down with his new President and Plant Manager and Head of Administration and explained he likely would be required to have a holdback for a period of time, as a requirement by the buyer. He explained he expected this would be for a period of 12 months, though this, of course, had yet to be determined. He explained that upon his receiving this holdback, each of them would receive a bonus of 75% of there current salary, paid by him, as long as they were in good standing with the potential, future buyer.
This action added .10 to the Multiple.
Automated Sales & Customer Service
While important, this area was not thought to be a large factor in increasing the Multiple. Jack did allow updating of a CRM system, billing and inventory control.
This action was generally felt positive to a Buyer’s sense of comfort but was not anticipated to add to the Multiple. It was more defensive in nature, as it was seen as something that should be present but was not up to speed. Little to no benefit to the Multiple was expected by this action. Important, yes, but it was not thought to be “a low hanging fruit”. But again, this would contribute to a Buyer’s sense of confidence in the numbers, as well as the overall feel that the business is running well, and the net earnings should be sustainable. This is the main objective all sellers must strive for.
While not explicitly recurring revenue, an analysis of sales indicated the company probably had as much potential increasing the gross sales with existing customers as it did with the generating of new clients. This would dramatically lower CAC (Customer Acquisition Costs) should this be proven true.
Jack spearheaded a new program with inducements for price savings for national accounts entering into multiple lines of product sales. This proved to be very favorably received, and led to 3 new markets within 3 existing national accounts, increasing overall sales by 22% in the first 9 months of implementation.
Further sales opportunities seemed to be available, which led to the strategy of creating a second shift, should a buyer wish to develop this business to the next level. By receiving letters of interest from these national players, this dramatically increased the growth potential of the business, on paper.
This growth increased the top line sales by 22%, from $13,500,000 to approximately $16,500,000.
This also created a closer relationship with these key customers than ever before and jack created both a financial as well as a strategic relationship with them, which in turn resulted in the signing of long term contracts, something that was difficult at best, prior to this change. This action had the impact of adding to the Multiple by .5.
Margins changed for various reasons.
CAC expense for $3 million in sales dropped as Jack was essentially the “salesperson. Only a customer service representative cost had to be allocated to this new block of business.
The Plant manager was able to improve Quality, Capacity and Efficiency at the press levels with capital expenses of less than $70,000.
Overall customer service increased, as did A/R being reduced by 12 days.
Overall, this had the effect of increasing Net Margins from 8% to 10%, the industry target. This had the impact of adding .4 to the Multiple.
One unintended consequence of all the changes was that sales increased by 8% over projections, essentially thought to due to clarity in the commission schedules and removing any perceived conflict from the “new” President.
1. Overall, Gross Sales increased from $13,500,000 to approximately $17,500,000, 22% due to new sales from existing customers, and 6% above projections from the sales team on new business of their own.
2 . EBITDA grew from 8% on $13,500,000, or $1,080,000* to 10% on $1750,000,000 or $1,750,000.
3. Multiples grew from 3.4X to 5.15X - an addition comprised of:
$13,500,000 w/ 8% Net Income = EBITDA of $1080,000.
After “adjustments”, approximately $1,250,000
Multiple of 3.4X
Company Prospective Value to a Buyer: $4,250,000.
$1,750,000 w/ 10% Net Income = EBITDA of $1,750,000.
No further “adjustments”.
Multiple of 5.15X
Company Prospective Value to a Buyer: $8,925,000.
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